Question

Problem- B16 (Direct financing lease-lessor)
Assume that Samim leased equipment that was carried at a cost of Tk. 2,00,000 to Sadman Co. The term of
the lease is 5 years beginning January 1, 2016 with equal rental payments of 42,360 at the beginning of each
year including executory costs of Tk. 4,000. The fair value of the equipment at the inception of the lease is
Tk. 2,00,000. The equipment has a useful life 5 years with no salvage value. The lease has an implicit
interest rate of 10%, no bargain purchase option and no transfer of title collectibility is reasonably assured
with no additional cost to be incurred by Sadman Co.
Prepare Journal entries for 2016 in the books of Samim Co.​

Answer 1

Answer:

Explanation:

Question 1

A company enters into a lease agreement to acquire the use of some equipment for three years beginning on January 1, 2014. The lease requires 3 annual payments of $13,472, commencing on January 1, 2014. The useful life of the equipment is 3 years, its salvage value is $0, and its fair value is $75,000. The company accounts for the lease as a finance lease, and uses straight-line depreciation.

The amount reported on the balance sheet as a leased asset on January 1, 2014, and December 31, 2014 are closest to:

A. January 1, 2014: $75,000; December 31, 2014: $50,000

B. January 1, 2014: $0; December 31, 2014: $13,472

C. January 1, 2014: $50,000; December 31, 2014: $25,000

Solution

The correct answer is A.

The amount initially reported as a leased asset on January 1, 2014 is $75,000. Depreciation expense each year is [($75,000-$0)/3 years] = $25,000. Therefore, on December 31, 2014, the carrying amount of the leased asset = initial recognition amount – accumulated depreciation = $75,000 – $25,000 = $50,000.

Question 2

XYZ company leased a machine with a value of $100,000 at the beginning of the year. The machine has an expected lifetime of 5 years with no residual value. If the company leased that machine under an operating lease contract, it should report at the end of that year:

A. A depreciation expense of $20,000.

B. A rent expense equal to the annual rent payment for the machine.

C. None of the above.

Solution

The correct answer is B.

Under an operating lease contract, the company using the asset should report only the rent expense paid to the lessor. Under finance lease contracts, the company reports the asset’s value on its balance sheet and reports depreciation expense of the asset.

Reading 30 LOS 30h:

Determine the initial recognition, initial measurement, and subsequent measurement of finance leases

Answer 2

Problem- B16 (Direct financing lease-lessor)

Assume that Samim leased equipment that was carried at a cost of Tk. 2,00,000 to Sadman Co. The term of

the lease is 5 years beginning January 1, 2016 with equal rental payments of 42,360 at the beginning of each

year including executory costs of Tk. 4,000. The fair value of the equipment at the inception of the lease is

Tk. 2,00,000. The equipment has a useful life 5 years with no salvage value. The lease has an implicit

interest rate of 10%, no bargain purchase option and no transfer of title collectibility is reasonably assured

with no additional cost to be incurred by Sadman Co.

Prepare Journal entries for 2016 in the books of Samim Co.