Orion leased a computer to the Lenox Silver Company on January 1, 2014, under th

Question

Orion leased a computer to the Lenox Silver Company on January 1, 2014, under these terms:

1. Lease term (fixed and noncancelable) …………………… 3 years

2. Estimated economic life of the equipment ………………..5 years

3. Fair market value at lease inception ……………………... $5,000

4. Lessor’s cost of asset ……………………………………... $5,000

5. Bargain purchase offer ………………………………….….. None

6. Transfer of title …………………………………………………. No

7. Guaranteed residual value by lessee (excess to lessee)

January 1, 2014 ……………………………………………….. $2,000

8. Lessee’s normal depreciation method……………....Straight Line

9. Lessee’s incremental borrowing rate ………………………... 11%

10. Executory costs …………………………………………..… None

11. Initial indirect costs ……………………………………..…. None

12. Collectibility of rental payment ………………………… Assured

13. Performance by lessor …………………………………. Complete

14. Annual rental (1st payment, January 1, 2014) ……….... $1,620

15. Lessor’s implicit interest rate ……………………………… None

Required:

1.Determine what type of lease this is for the lessee.

2.Determine what type of lease this is for the lessor.

3.Provide entries for the lessee and the lessor from January 1, 2014, through January 1, 2015.

4.Provide entries for the lessee and the lessor if the asset is disposed of for $2,100 by the lessee on January 1, 2014. Assume interest has been accrued on December 31.

Explanation / Answer

1) For Lessee:It is an operating lease as there is no bargain purchase option and the lease term is less than 75% of the estimated economic life of the asset.

2)1) For Lessor:It is an operating lease as there is no bargain purchase option and the lease term is less than 75% of the estimated economic life of the asset.

3)

2014 Dr Cr Lessee Books Lease Expenses $1,620 Cash $1,620 Lessor Books Cash $1,620 Lease Rental Revenue $1,620 2015 Dr Cr Lessee Books Lease Expenses $1,620 Cash $1,620 Lessor Books Cash $1,620 Lease Rental Revenue $1,620 Ans 4 Sale and leaseback Lessee Cash 2100 Loss on sale Of Equipment 2900 Equipment 5000 2014 Dr Cr Lessee Books Lease Expenses $1,620 Cash $1,620 Lessor Books Cash $1,620 Lease Rental Revenue $1,620 2015 Dr Cr Lessee Books Lease Expenses $1,620 Cash $1,620 Lessor Books Cash $1,620 Lease Rental Revenue $1,620

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