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Chapter 21: Q 2IFRS (page 1263)
Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for leases.
Answer
Both U.S. GAAP and IFRS share the same objective of recording leases by lessees and lessors.
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Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of \(137,899 (including the executory costs of \)6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at \(6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at \)550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage鈥檚 incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.
Instructions
(d) Prepare the journal entry to record the interest expense for the year 2017.
(Lessee Accounting and Reporting) On January 1, 2017, Evans Company entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Evans by the end of the lease term. The term of the lease is 8 years. The minimum lease payment made by Evans on January 1, 2017, was one of eight equal annual payments. At the inception of the lease, the criteria established for classification as a capital lease by the lessee were met.
Instructions
(b) How should Evans account for this lease at its inception and determine the amount to be recorded?
Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of \(72,000 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017, is \)440,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of \(10,000. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark鈥檚 incremental borrowing rate is 12% per year. The lessor鈥檚 implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes \)2,471 of executory costs related to taxes on the property.
Instructions
Prepare the journal entries on the lessee鈥檚 books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Kimberly-Clark鈥檚 corporate year-end is December 31.
Question: The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee.
Inception date | January 1, 2017 |
Annual lease payment due at the beginning of each year, beginning with January 1, 2017 | \(124,798 |
Residual value of equipment at end of lease term, guaranteed by the lessee | \)50,000 |
Lease term | 6 years |
Economic life of leased equipment | 6 years |
Fair value of asset at January 1, 2017 | \(600,000 |
Lessor鈥檚 implicit rate | 12% |
Lessee鈥檚 incremental borrowing rate | 12% |
The lessee assumes responsibility for all executory costs, which are expected to amount to \)5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straightline depreciation method for all equipment.
Instructions
(b) Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee鈥檚 annual accounting period ends on December 31 and reversing entries are used when appropriate.
Question: The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee.
Inception date | January 1, 2017 |
Annual lease payment due at the beginning of each year, beginning with January 1, 2017 | \(124,798 |
Residual value of equipment at end of lease term, guaranteed by the lessee | \)50,000 |
Lease term | 6 years |
Economic life of leased equipment | 6 years |
Fair value of asset at January 1, 2017 | \(600,000 |
Lessor鈥檚 implicit rate | 12% |
Lessee鈥檚 incremental borrowing rate | 12% |
The lessee assumes responsibility for all executory costs, which are expected to amount to \)5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straightline depreciation method for all equipment.
Instructions
(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
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