Question

Reporting Operating Lease-Lessee Renewable Co. uses leasing as a secondary means of selling its products. The company contracted with Green Corporation to lease a machine with an economic life of 12 years to be used by Green Corporation in its operations. The fair value of the asset at the inception of the lease was $400,000; it cost Renewable Co. $360,000 and is carried as equipment at that value. Payments of $44,925 are to be made by Green Corporation at the beginning of each of the eight years of the lease. Renewable Co.'s implicit interest rate is 6% per year, which is not known by Green Corporation. Green Corporation's incremental borrowing rate is 7%. Renewable Co. estimates the residual value of the leased asset to be $166,217 at the end of the lease term. The residual value is not guaranteed by Green Corporation. Renewable Co. will depreciate the equipment on a straight-line basis (assume no salvage value). a. How would Green Corporation classify the lease? Operating Lease b. What balances (account titles, amounts) appear on Green's balance sheet at the end of the first year, related to the lease? Note: Round your final answers to the nearest whole dollar. Balance Sheet End of Year One Assets Noncurrent Assets Lease Receivable XS0 X Liabilities Current liabilities x$ 0x Lease Receivable Noncurrent liabilities Accrued Legal Expense XS 0x c. What balances (account titles, amounts) appear on Green's income statement for the first year, related to the lease? Income Statement Year One Expenses Cost of Goods Sold Check Partially correct

Answer 1

b. Since it is a operating lease for the Green Corporation, hence it will not record anything in its Balance Sheet. Since the Green Corporation will not become the owner of the machine, hence no recording would be done in the Green Corporation Balance Sheet. Only the Renewable Co. will be able to record the entries in its Balance Sheet.

c. In the Income statement, the expense will be recorded as the Lease Rent paid.