Question

OrioleInc. leased a new crane to Cheyenne Construction under a 5-year, non-cancelable contract starting January 1, 2020. Terms of the lease require payments of $46,000 each January 1, starting January 1, 2020. The crane has an estimated life of 7 years, a fair value of $230,000, and a cost to Oriole of $230,000. The estimated fair value of the crane is expected to be $45,000 (unguaranteed) at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. Both Oriole and Cheyenne adjust and close books annually at December 31. Collectibility of the lease payments is probable. Cheyenne’s incremental borrowing rate is 8%, and Oriole’s implicit interest rate of 8% is known to Cheyenne.

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Identify the type of lease involved and give reasons for your classification.

The lease is classified as an                                                                       sales-type leaseoperating leasefinance lease.

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Prepare all the entries related to the lease contract and leased asset for the year 2020 for the lessee and lessor, assuming Cheyenne uses straight-line amortization for all similar leased assets, and Oriole depreciates the asset on a straight-line basis with a salvage value of $12,000. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25125 and the final answer to 0 decimal places e.g. 58,972.)

Date	Account Titles and Explanation	Debit	Credit
	Lessee’s Entries
1/1/20
	(To record lease.)
1/1/20
	(To record lease payment.)
12/31/20
	(To record interest and amortization expense.)
	Lessor’s Entries
1/1/20
	(To record the receipt of payment.)
12/31/20
	(To record depreciation.)
12/31/20
	(To record lease revenue.)

Answer 1

Answer is given below

A Lease is a Finance Lease if any of the following conditions is fulfilled a) - The asset must be transferred to the lessee at the end of the term b) - The lessee has an option to purchase the asset at the end of the term below its fair value c) - The lease term covers the significant period of the asset's useful life (at least 75% or more) e) - The present value of future lease payments covers the substantial part of asset cost (at least 90%) f) - The leased asserts is of specialised nature and suits the needs of lessee only a) This criteria is not met b) No renewal options. Hence criteria is not met c) Lease term is 5 years Economic life of asset is 7 years So it is 71% of total life of asset. Hence criteria is not met d) Calculation of present value of lease payments Year Lease Amount $46,000 PV factor PV of Lease at 8% payments 4.3121) $198,358 Total Fair value at the inception of the lease PV of lease payment as % of fair value $230,000 86% Since the PV of lease payment is 86% criteria is not met (threshold is 90%) e) Asset is not of specialized nature. Hence criteria is not met Therefore the lease is accounted as operating Lease

Credit Lessee Books Date Account Titles and Explanation 01.01.2020 Rent Expense To Cash (Being payment of lease rental) Debit $46,000 $46,000 Credit Debit $46,000 $46,000 Lessor Books Date Account Titles and Explanation 01.01.2020 Cash To Rent in Advance (Being receipt of payment recorded) 31.12.2020 Depreciation To Accumulated Depreciation- Crane (Being Depreciation on Crane recorded) 31.12.2020 Rent in advance To Rent Income (Being payment of lease rental) $31,143 $31,143 $46,000 $46,000