Why is this considered an operating lease and not a sales type lease if the usef
ID: 2391453 • Letter: W
Question
Why is this considered an operating lease and not a sales type lease if the useful life is equal to the economic life of the asset?
Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2018. Edison purchased the equipment from International Machines at a cost of $119.552. Ev of$1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use approprlate factor(s) from the tables provided.) Related Information: Lease term Quarterly rental payments Economic life of asset Fair value of asset Implicit interest rate (Also lessee's incremental borrowing rate) 2 years (8 quarterly periods) $16,808 at the beginning of each period 2 years $119,552 8% Requlrec Prepare a lease amortization schedule and approprlate entries for Manufacturers Southern from the beginning of the lease through January 1, 2019. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis. Answer is not complete Complete this question by entering your answers in the tabs below Amort Schedule General Journal Record the appropriate entries for Manufacturers Southern from the beginning of the lease through January 1, 2019 Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in millions. Round your intermediate and final answers to nearest whole dollar.) Show lessA No Date General Journal Debit Credit January 01 2018 Right-of-use asset Lease payableExplanation / Answer
Note: As per IAS 17, this is an operating Lease, therefore the "lease high tech electronic equipment" will be recorded in the books of Lessor i.e. Edison Leasing and depreciation/amortisation will be enjoyed by Lessor. As per IAS 17,a lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases. Therefore it is an operating Lease as in this case the asset's legal owner is Edison Leasing (lessor) and at the end of the lease, the asset will be returned to the lessor.
In the Books Of Edison Leasing( Lessor) Date Asset Value Amortisation/Depreciation for the year Closing Book Value 01-01-2018 1,19,552 31-12-2018 1,19,552 59,776 59,776 31-12-2019 59,776 59,776 - In the Books Of Manufacturers Southern( Lessee) Journal Entries Sl No Date Journal Debit ($) Credit($) Year 1 1 01-01-2018 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 2 01-04-2018 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 3 01-07-2018 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 4 01-10-2018 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 5 31-12-2018 Profit & Loss A/c 64,000 To Lease Rent PaidA/c 64,000 (Being Payment for the year tranfered to Profit & Loss Account) Year 2 6 01-01-2019 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 7 01-04-2019 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 8 01-07-2019 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 9 01-10-2019 Lease Rent Paid A/c 16,000 To Bank A/c 16,000 9 31-12-2019 Profit & Loss A/c 64,000 To Lease Rent PaidA/c 64,000 (Being Payment for the year tranfered to Profit & Loss Account)Note: As per IAS 17, this is an operating Lease, therefore the "lease high tech electronic equipment" will be recorded in the books of Lessor i.e. Edison Leasing and depreciation/amortisation will be enjoyed by Lessor. As per IAS 17,a lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases. Therefore it is an operating Lease as in this case the asset's legal owner is Edison Leasing (lessor) and at the end of the lease, the asset will be returned to the lessor.
Lease Amortisation Schedule-Lessee Date Annual Lease Payment Interest Reduction of Lease Liability Lease Liability 01-01-2018 16,000.00 - 16,000.00 83,300.00 (99300-16000) 01-04-2018 16,000.00 6,664.00 9,336.00 73,964.00 (83300*8%) (16000-6664) (83300-9336) 01-07-2018 16,000.00 5,917.12 10,082.88 63,881.12 (73964*8%) 01-10-2018 16,000.00 5,110.49 10,889.51 52,991.61 01-01-2019 16,000.00 4,239.33 11,760.67 41,230.94 01-04-2019 16,000.00 3,298.48 12,701.52 28,529.41 01-07-2019 16,000.00 2,282.35 13,717.65 14,811.77 01-10-2019 16,000.00 1,184.94 14,811.77 - Note: As per IAS 17, Lease liability for lessee = Present Value of minimum lease payment. Therefore Lease Liablity = Annual Lease Payment*Present Value Annuity Factor(8%, 8 periods) = 16000(i.e annual lease paid at the beginning of the year) + 16000*Present Value Annuity factor(8%, 7periods) = 16000 + 16000*5.2063 = $99300 (approx)Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.