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Chapter 21: Q1Q (page 1239)

What are the major lessor groups in the United States? What advantage does a captive have in a leasing arrangement?

Short Answer

Expert verified

The major lessor groups in the United States are banks, captives, and independents. The captive (lessor) has the product knowledge which gives it an advantage when financing the parents鈥� product.

Step by step solution

01

Meaning of Lease Agreement

A lease arrangement refers to a lease contract recognizing a similar arrangementfor a specified period in which the lessee is expected to pay the lessor, in whole or in part, for the use of the lease for a specified.

02

Explaining the major lessor groups in the United States and the advantage a captive has in a leasing arrangement.

Lessors in the United States are primarily divided into three groups: banks, captives, and independents. A captive's point-of-sale advantage makes it easier to find leasing clients. As soon as a parent receives a potential order, its leasing subsidiary may devise a lease financing plan.

As an added advantage, the captive (lessor) has product expertise, allowing it to finance parents' goods more easily. The focus of captives is increasingly more on the company's products than on the broad lease financings.

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Most popular questions from this chapter

Rick Kleckner Corporation recorded a capital lease at \(300,000 on January 1, 2017. The interest rate is 12%. Kleckner Corporation made the first lease payment of \)53,920 on January 1, 2017. The lease requires eight annual payments. The equipment has a useful life of 8 years with no salvage value. Prepare Kleckner Corporation鈥檚 December 31, 2017, adjusting entries.

Use the information for IBM from BE21-6. Assume the direct-financing lease was recorded at a present value of \(150,000. Prepare IBM鈥檚 December 31, 2017, entry to record interest.

Assume that IBM leased equipment that was carried at a cost of \)150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of \(30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is \)150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM鈥檚 January 1, 2017, journal entries at the inception of the lease.

Outline the accounting procedures involved in applying the operating method by a lessor.

(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

(d) How should Evans report the lease transaction on its December 31, 2017, balance sheet?

Alice Foyle, M.D. (lessee), has a noncancelable 20-year lease with Brownback Realty, Inc. (lessor) for the use of a medical building. Taxes, insurance, and maintenance are paid by the lessee in addition to the fixed annual payments, of which the present value is equal to the fair value of the leased property. At the end of the lease period, title becomes the lessee鈥檚 at a nominal price. Considering the terms of the lease described above, comment on the nature of the lease transaction and the accounting treatment that should be accorded it by the lessee.
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