SOLUTION:
Finance lease - It is a lease, which transfers
substantially all the risk and rewards incidental to ownership of
an asset to the lessee by the lessor but not the legal
ownership.
a) In the financial lease, a lessee has an option to buy the leased asset at the end of term at price, which is lower than its expected fair value but if there is no bargain purchase than after the end of the lease term the lessee will not have an option to buy the leased asset.
b) When there is a bargain purchase option lessee will have an option to buy the leased asset at the end of the lease term.
c) In respect of lessee - Guaranteed residual value is such part of the residual value which is guaranteed by or on behalf of the lessee.
In respect of lessor - Such part of the residual value, which guaranteed by or on behalf of or on behalf of the lessee or by an independent third party.
If there is no bargain purchase than there will be no guaranteed residual value because the lessee is not purchasing the machine at the end of the lease term.
d) Unguaranteed residual value - The difference
between the residual value and guaranteed residual value.
Unguaranteed residual value = Residual value - Guaranteed
residual value
If there is an unguaranteed residual value but no bargain
purchase in this case if there is no bargain purchase only then the
concept of unguaranteed value will also not arise.
e) The lessee uses the lessor's
implicit rate for computing the lease payables this is
because when the lessor gives an asset on lease(particularly on
finance lease), the total amount, which he receives over a lease
period by giving the asset on lease, includes the element of
interest plus payment of principal amount of asset. The rate at
which the interest amount is calculated can be simply called
implicit rate of interest.
Under a sales-type lease without an operating profit, how is the lessor’s cost (i.e., the initial...
Under a finance lease, how is the lessee’s cost (i.e., the initial Lease Payable account) computed: When there is no bargain purchase option or residual value? When there is a bargain purchase option? When there is no bargain purchase option but there is a guaranteed residual value? When there is no bargain purchase option but there is an unguaranteed residual value? Which discount rate does the lessee use in computing the lessee’s cost (Lease payable)—the lessor’s implicit rate or the...
The following facts pertain to a noncancelable lease agreement between Sandhill Leasing Company and Teal Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $19,373.99 Bargain-purchase option price at end of lease term $4,400 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $62,000 Fair value of asset at May 1, 2017 $85,000 Lessor’s implicit rate 9 % Lessee’s incremental borrowing rate...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 Fair value of asset on May 1, 2022 ...
Executory costs include a) maintenance, interest and property taxes. b) interest, property taxes and depreciation. c) insurance, maintenance and property taxes. d) maintenance, insurance and income taxes. Which of the following is a correct statement regarding one of the ASPE capitalization criteria? a) The lease transfers ownership of the property to the lessor. b) The lease must contain a bargain purchase option. c) The lease term is 75% or more of the leased property’s estimated economic life. d) The fair...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 Fair value of asset on May 1, 2022 ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May 1, 2017 $91,000 Fair value of asset on May 1, 2022 ...
The following facts pertain to a non-cancelable lease agreement between Ford and NextCar, a lessee. Lease Origination Date May 1, 2017 Annual lease payments due at the beginning of each lease year $20.471.94 Bargain purchase option price at the end of lease term $4,000 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000 Fair value of asset on May...