Question

Wildhorse Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $730052 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $2050000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Wildhorse depreciates all machinery it owns on a straight-line basis. (d) Wildhorse’s incremental borrowing rate is 9% per year. Wildhorse does not have knowledge of the 7% implicit rate used by Yates.

If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease? $730052 $2050000 $2190156 $1319948

Answer 1

Under direct finance lease, the lessor buys the asset and leases them to the lesee to earn revenue from the lease over the lease period.

When the lessor treats a lease as direct lease it replaces the book value of the asset with lease receivable amount.

In the given case the fair value of the machine as on the leasing date January 1, 2021 is $2,050,000.

If Yates treats this lease as direct finance lease, then it would reord fair value of machine $2,050,000 on the date of lease as Lease Receivables.