Question

Case 13-2 Lessee and Lessor Accounting for lease (Modified)

On January 2, 2020, Grant Corp. leases an asset to Pippin Corp. under the following conditions (Assume new lease accounting standard (ASC 842) are effective for both companies).    

1. Annual lease payments are $10,000 for 20 years.

2. At the end of the lease term, the asset is expected to have a value of $2,750.

3. The fair value of the asset at the inception of the lease is $92,625

4. The estimated economic life of the lease is 30 years.

5. Grant’s implicit interest is 12 percent: Pippin’s incremental borrowing rate is 10 percent.

6. The asset is recorded in Grant’s inventory at $75,000 just prior to the lease transaction.

7. Both companies use the straight-line depreciation method for all assets.

Required:

a. What type of lease is this for Pippin? Why?

b. Assume Pippin classifies the lease contract as the financial lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year 2020 and 2021?

c. Assume Pippin classifies the lease contract as the operating lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of the year 2020 and 2021?

d. What type of lease is this for Grant? Why?

e. Assume Grant classifies the lease contract as the sales-type lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year 2020 and 2021?

f. Assume Grant classifies the lease contract as the operating lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of the year 2020 and 2021?

Answer 1

a. It's a finance lease. Because underlying assets transfer ownership to the lessee at the end term .

b. Capita lease is effect the financial statements account .

c.operating lease doesn't effect in the balance sheet so it's not effecting the financial statements account.

d. Operating lease , because the grant crop is use the asstes to their operating function .

e.if the grant crop is sales type lease the it's effect the capital lease and capital lease is effect the financial statements account.

f. If grant crop is operating lease so the operating lease doesn't effect the financial statements account .