tial Direct Costs and Related Issues On January 1, 2019, Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions: • The lease is noncancelable and has a term of 10 years. • The lease does not contain a renewal or bargain purchase option. • The annual rentals are $3,870, payable at the beginning of each year. • Baltimore agrees to pay all executory costs directly to a third party. • The cost of the equipment to the lessor is $24,177.54. The fair value of the equipment is $25,700. • Amity incurs initial direct costs of $1,310.90. • The interest rate implicit in the lease is 12%. • Amity expects to collect all lease payments from Baltimore. • Amity estimates that the fair value at the end of the lease term will be $3,100 and that the economic life of the crane is 12 years. This value is not guaranteed by Baltimore. Required: 1. Next Level What are initial direct costs? Discuss the accounting treatment of these costs. Are they treated in the same manner for (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease? 2. From the lessor’s viewpoint, is the preceding lease a sales-type or direct financing lease? Give reasons to support your conclusion. 3. Prepare the journal entries for Amity for 2019.
tial Direct Costs and Related Issues On January 1, 2019, Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions: • The lease is noncancelable and has a term of 10 years. • The lease does not contain a renewal or bargain purchase option. • The annual rentals are $3,870, payable at the beginning of each year. • Baltimore agrees to pay all executory costs directly to a third party. • The cost of the equipment to the lessor is $24,177.54. The fair value of the equipment is $25,700. • Amity incurs initial direct costs of $1,310.90. • The interest rate implicit in the lease is 12%. • Amity expects to collect all lease payments from Baltimore. • Amity estimates that the fair value at the end of the lease term will be $3,100 and that the economic life of the crane is 12 years. This value is not guaranteed by Baltimore. Required: 1. Next Level What are initial direct costs? Discuss the accounting treatment of these costs. Are they treated in the same manner for (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease? 2. From the lessor’s viewpoint, is the preceding lease a sales-type or direct financing lease? Give reasons to support your conclusion. 3. Prepare the journal entries for Amity for 2019.
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter20: Accounting For Leases
Section: Chapter Questions
Problem 1P: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases...
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Initial Direct Costs and Related Issues
On January 1, 2019, Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions:
• | The lease is noncancelable and has a term of 10 years. |
• | The lease does not contain a renewal or bargain purchase option. |
• | The annual rentals are $3,870, payable at the beginning of each year. |
• | Baltimore agrees to pay all executory costs directly to a third party. |
• | The cost of the equipment to the lessor is $24,177.54. The fair value of the equipment is $25,700. |
• | Amity incurs initial direct costs of $1,310.90. |
• | The interest rate implicit in the lease is 12%. |
• | Amity expects to collect all lease payments from Baltimore. |
• | Amity estimates that the fair value at the end of the lease term will be $3,100 and that the economic life of the crane is 12 years. This value is not guaranteed by Baltimore. |
Required:
1. | Next Level What are initial direct costs? Discuss the accounting treatment of these costs. Are they treated in the same manner for (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease? |
2. | From the lessor’s viewpoint, is the preceding lease a sales-type or direct financing lease? Give reasons to support your conclusion. |
3. | Prepare the |
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