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Q13P_a(1).

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### Intermediate Accounting (Kieso)

Book edition 16th
Author(s) Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Pages 1552 pages
ISBN 9781118743201

# Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be$15,000. The hospital will pay rents of $60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of$250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.Instructions(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.Lease receivable at inception of the lease. The present value of minimum lease payments is$411,324.

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## Meaning of sale-type lease

In a sales-type lease, the lessor is assumed to be selling a product to the lessee, which necessitates the reporting of a profit or loss on the sale. As a result, at the lease's start date, the following accounting is applied: (a) Recognize assets. (b)Recognize net investment.

## Explaining the nature of the lease in relation to the lessor

The non-cancelable lease is a sales-type capital lease because:

1. the lease term is for 83 percent (1012) of the economic life of the leased asset,
2. the present value of the minimum lease payments exceeds 90 percent of the fair value of the leased property,
3. the collectability of the lease payments is reasonably predictable, and there are no uncertainties as to reimbursable costs yet to be incurred by the lessor, and
4. The lease provides the lessor with manufacturing capabilities.

## Computation of the amount of lease receivable at the inception of the lease

 Present value of annual payments of $60,000 made at the beginning of each period for 10 years$405,541 Present value of guaranteed residual value 5,783 Present value of minimum lease payments $411,324 Working notes: Calculation of present value of annual payments Note: PV of an annuity due @ 10% Calculation of guaranteed residual value Note: PV of$1 at 10% for 10 years

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