Rocky Corporation leased industrial equipment to Indian Manufacturing on January 1, 2019. The following facts pertain to
Posted: Mon May 02, 2022 7:33 am
Rocky Corporation leased industrial equipment to
Indian Manufacturing on January 1, 2019. The following facts
pertain to the lease:
1. The lease term is 4 years.
2. The annual lease payment is due at the beginning of each year
starting on January 1, 2019. Each annual lease payment is
$269,282
3. Ownership does not transfer at the end of the lease term and
there is no bargain purchase option.
4. The asset is not of a specialized nature.
5. The industrial equipment has a fair value of $1,000,000, a
book value to RockyCorporation of $900,000, and a useful life of 5
years. Indian Manufacturing depreciates similar equipment using the
straight-line method.
6. The lease contains a guaranteed residual value of $50,000.
The expected residual value is greater than $50,000.
7. Rocky Corporation wants to earn a return of 8% on the lease,
and collectability of the payments is probable. This rate is known
by Indian Manufacturing.
8. Indian Manufacturing’s incremental borrowing rate is 6%.
Instructions:
(a) How would Rocky Corporation (lessor) and American
Manufacturing (lessee) classify this lease? Explain your answer
with support.
(b) Prepare the Lease Amortization Schedule for Indian
Manufacturing (Lessee).
Lease
Payment
Interest on
Lease Liability
Reduction of
Lease Liability
01/01/2019
Indian Manufacturing on January 1, 2019. The following facts
pertain to the lease:
1. The lease term is 4 years.
2. The annual lease payment is due at the beginning of each year
starting on January 1, 2019. Each annual lease payment is
$269,282
3. Ownership does not transfer at the end of the lease term and
there is no bargain purchase option.
4. The asset is not of a specialized nature.
5. The industrial equipment has a fair value of $1,000,000, a
book value to RockyCorporation of $900,000, and a useful life of 5
years. Indian Manufacturing depreciates similar equipment using the
straight-line method.
6. The lease contains a guaranteed residual value of $50,000.
The expected residual value is greater than $50,000.
7. Rocky Corporation wants to earn a return of 8% on the lease,
and collectability of the payments is probable. This rate is known
by Indian Manufacturing.
8. Indian Manufacturing’s incremental borrowing rate is 6%.
Instructions:
(a) How would Rocky Corporation (lessor) and American
Manufacturing (lessee) classify this lease? Explain your answer
with support.
(b) Prepare the Lease Amortization Schedule for Indian
Manufacturing (Lessee).
Lease
Payment
Interest on
Lease Liability
Reduction of
Lease Liability
01/01/2019