Question

On January 1, 2020, Eagle Inc. signed a Four-year non-cancelable lease with Falcon Company. The lease calls for four payments of $34,560 to be made at the end of each year. Eagle Inc cannot renew the lease, there is no bargain purchase option, and ownership of the leased asset reverts to Falcon at the lease end. The leased asset has an expected useful life of four years, and Eagle Inc. uses straight-line depreciation for financial reporting purposes. Its incremental borrowing rate is 11%. Seven Wonders uses a calendar year for financial reporting purposes. Both companies use ASC 840 to account for leases.

a)    Calculate the lease value.

b)    Identify the type of lease. Justify your answer.

c)     Prepare an amortization schedule for the lease liability

d)    How much would be total Lease Liability as on 31.12.2022?

e)     How much would be current portion of liability and how much would be non-current portion of the liability as on 31.12.2022?

Answer 1

Ans: (B) Since , in the given case , Lease ownership is transferred by Eagle Inc to Falcon at the year end , so this will be a Financial Lease .

In financial lease , asset is transferred at the end of the life of asset to lessee with all the risks & rewards.

(A) Calculation of Lease Value

Year	Lease Rent	Discounting factor@ 11%	Amount	TOTAL
2020	34560	.9009	31135
2021	34560	.8116	28048
2022	34560	.7311	25266
2023	34560	.6587	22764	107213

TOTAL= $ 107213

(C) Depreciation of Leased Asset as per Straight Line method

Total amount/No. of Years of life

107213/4 = 26803 p.a.

(D) Total Liability till 31.12.2022 will be 3 years rental

i.e. (31135+28048+25266) = $ 84449

(E) Current portion of liability is when it falls within 12 months of the year & Non Current will be beyond 12 months liability i.e. Long term Liability.