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Case 13-1 Recording an Operating lease Noel Company leases 25 cell phones for three years. The...

Case 13-1 Recording an Operating lease

Noel Company leases 25 cell phones for three years. The rent for the phones is $1,700 a month for 36 months ($61,200 in total). The fair value of the leased phones is $65,000. Noel’s has an 5.5% incremental borrowing rate and the PV of the lease payments is $56,557.

Required:

  1. How would Noel have recorded this transaction under SFAS No. 13?
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Homework Answers

Answer #1

Given that at a 5 .5% incremental borrowing rate, the present value of the lease rentals is $56,557.

Fair Value of Leased Phones is $65,000

Therefore, present value of lease rentals is amounting to 87% (56,557 / 65,000) of the Fair value of Leased phone i.e., less than 90%. So above lease can be classified as Operating Lease (provided all other conditions are deemed to be satisfied).

Accounting Treatment:

As per new provisions of SFAS No.13, Lease liability for operating lease shall also be recognised and shown in the balance sheet. So right to use the asset (cell phones) shall be debited and Lease Obligation account shall be credited for the amount of $56,557 (being the present value of cashflows).

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