Question

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?
2. How should Noel record this transaction under FASB ASC 842?

Answer 1

PV of lease payments = $56,557
Fair value of leased phone = $65,000

% of PV = 56557/65000 = 87.01%

Since, the present value of minimum lease payments is less than 90% of the fair value of asset as on the date of inception of lease, this lease shall be classified as Operating Lease.

Following Journal entries to be passed every month in the books of Noel Company (lessee)

Date	General Journal	Debit	Credit
Every month	Lease Rental expense Dr	$1,700
	To Cash		$1,700
	(To record cash paid for lease)