Lessee Accounting Issues
Response to the following problem:
The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provisions, and related events are as follows:
1. The lease term is five years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.
2. The computers have an estimated life of five years, a fair value of $300,000, and a zero estimated residual value.
3. Sax Company agrees to pay all executory costs.
4. The lease contains no renewal or bargain purchase option.
5. The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate.
6. Sax Company uses the straight-line method to record depreciation on similar equipment.
Required:
1. Determine what type of lease this is for Sax Company.
2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar)
3. Prepare a table summarizing the lease payments and interest expense.
4. Prepare journal entries for Sax Company for the years 2010 and 2011.
5. If the lease term is 3 years and the annual payment is $110,000, how would Sax Company classify the lease under (a) U.S. GAAP and (b) IFRS?