Question

Tendai Inc. sells computer systems. Tendai leases computers to John company on January 1, 2020. the manufacturing cost of the computers was $12 million.

This non-concealable lease had the following terms:

* Lease payments : $2,125,000 semiannually , first payment at January 1,2020, remaining payments at June 30 and December 31 each year through jump 30,2022.

* Lease term : 3 years (6 semi-annual payments)

* No residual value; no bargain purchase option

* Economic life of equipment : 5 years.

* Implicit interest rate and lessee's incremental borrowing rate : 5% semi-annually.

* Fair value of the computers at January 1,2020: $20 million

Collectability of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. there is no transfer of ownership stipulation.

1- Tendai would account for this as : A- Capital lease. B- a direct financing lease. C- a sales type lease. D- an operating lease.

2- John company would account for this as : A- a capital lease. B- a direct financing lease. C- a sales type lease. D- an operating lease.

3- What is the net carrying value of the lease liability in john's June 30,2020 balance sheet, if any? (if not, write "0").

4- What is the net amount that Tandai would report on this lease in its 2020 income statement?

Answer 1

Present value of the lease payments = $2,125,000 * PVF-AD(5%,6) = $2,125,000 * 5.32948 = $11,325,138

Since non of the criteria has been met,

1.Tendai would account for this as an Operating Lease

2. John Company would account for this as an Operating Lease.

3. Net Carrying Value of Lease liability:

Carrying Value as at Jan 1, 2020 = $11,325,138 - $2,125,000 = $9,200,138

Carrying Value as at June 30, 2020 =  $9,200,138 - ($2,125,000- 5% of $9,200,138) = $7,535,145

4.Tendai would report an income of = $$2,125,000 + $2,125,000 = $4,250,000

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