Question

Grouper Corporation agrees on January 1, 2017, to lease equipment from Packers, Inc. for 3 years. The lease calls for annual lease payments of $19,000 at the beginning of each year. The lease does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. In addition, the economic life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment. Assume that for Packers, Inc., the lessor, the collectibility of the lease payments is probable, and the fair value and cost of the equipment is $150,000.

Prepare Packers’ 2017 journal entries, assuming the company uses straight-line depreciation and no salvage value.

Answer 1

The lease should be clarified as an operating lease because:

It doesn’t transfer the ownership to lease at the end of the lease team.

The lease team is not for more than 75% of the life of anet.

The present value of lease payment is less than 90% of the fair value of the leased anet, and

There is no bargain purchase option (i.e., option to buy the anet at lower price at the end of the lease term)

Journal entries for operating lease in the books of Packer’s are:

On 1/1/17, since the lease rentals are received at the beginning of the period, they will be treated as unearned revenue, till the period they are earned.