Direct Financing Lease On January 1, Year 1, Stimpson Company leases non-specialized equipment with a fair value of $115,000 from Tomei Inc. The lease agreement specifies annual payments of $20,000 per year. Additional information pertaining to the lease is as follows: The lease term is for 6 years. Payments are due on January 1, beginning January Year 1. The annual payment is set by Tomei to earn a 8% rate of return on its net investment. Stimpson is aware of this rate. Stimpson's incremental borrowing rate is 6%. At the end of the 6-year lease term, the machine is expected to be worth $24,000. This residual value is not guaranteed by Stimpson. However, a third party provides a $10,000 residual value guarantee. The equipment was purchased by Tomei for $106,155.90. The estimated useful life of the machine is 10 years. The collectability of all amounts due to the lessor is probable. Required: Question Content Area 1. What is the proper classification of the lease for the lessor? Criteria Met Determination of Lease Classification 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is for a major part of its economic life 4. Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value 5. Specialized nature of the asset Additional Lease Classification Criteria 1. Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value 2. Probable that the lessor will collect the lease payments plus an amount to satisfy the residual value guarantee Question Content Area 2. Prepare the journal entries to be made by the lessor the first 2 years. Round your answers to the nearest cent and use the rounded answer for the subsequent calculations. Year 1Jan. 1 Jan. 1 Jan. 1 Dec. 31 Year 3Jan. 1 Dec. 31

Direct Financing Lease On January 1, Year 1, Stimpson Company leases non-specialized equipment with a fair value of $115,000 from Tomei Inc. The lease agreement specifies annual payments of $20,000 per year. Additional information pertaining to the lease is as follows: The lease term is for 6 years. Payments are due on January 1, beginning January Year 1. The annual payment is set by Tomei to earn a 8% rate of return on its net investment. Stimpson is aware of this rate. Stimpson's incremental borrowing rate is 6%. At the end of the 6-year lease term, the machine is expected to be worth $24,000. This residual value is not guaranteed by Stimpson. However, a third party provides a $10,000 residual value guarantee. The equipment was purchased by Tomei for $106,155.90. The estimated useful life of the machine is 10 years. The collectability of all amounts due to the lessor is probable. Required: Question Content Area 1. What is the proper classification of the lease for the lessor? Criteria Met Determination of Lease Classification 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is for a major part of its economic life 4. Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value 5. Specialized nature of the asset Additional Lease Classification Criteria 1. Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value 2. Probable that the lessor will collect the lease payments plus an amount to satisfy the residual value guarantee Question Content Area 2. Prepare the journal entries to be made by the lessor the first 2 years. Round your answers to the nearest cent and use the rounded answer for the subsequent calculations. Year 1Jan. 1 Jan. 1 Jan. 1 Dec. 31 Year 3Jan. 1 Dec. 31

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 3E: Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides...

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Question Content Area

1. What is the proper classification of the lease for the lessor?

	Criteria	Met
Determination of Lease Classification
1.	Transfer of ownership at end of lease
2.	Bargain purchase option
3.	Lease term is for a major part of its economic life
4.	Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value
5.	Specialized nature of the asset
Additional Lease Classification Criteria
1.	Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value
2.	Probable that the lessor will collect the lease payments plus an amount to satisfy the residual value guarantee

Question Content Area

2. Prepare the journal entries to be made by the lessor the first 2 years. Round your answers to the nearest cent and use the rounded answer for the subsequent calculations.

Year 1 Jan. 1

Jan. 1

Jan. 1

Dec. 31

Year 3 Jan. 1

Dec. 31

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