Lessee; balance sheet and income statement effects; Type A lease; Type B lease
Response to the following problem:
On June 30, 2016, Papa Phil Inc. leased 200 pizza ovens for its chain of restaurants from IC Leasing Corporation. The lease agreement calls for Papa Phil to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December 31, with the first payment on June 30, 2016. IC calculated lease payment amounts using a 10% interest rate. IC purchased the 200 pizza ovens from Pizza Inc. at their retail price of $3 million.
Required:
1. Determine the present value of the lease payments at June 30, 2016 (to the nearest $000) that Papa Phil uses to record the right-of-use asset and lease payable.
2. What amounts related to the lease would Papa Phil report in its balance sheet at December 31, 2016 (ignore taxes)?
3. What pretax amounts related to the lease would Papa Phil report in its income statement for the year ended December 31, 2016 (ignore taxes)?
4. Assume the retail price is $5 million, so we assume the risks and rewards are not transferred to the lessee. What amounts related to the lease would Papa Phil report in its income statement for the year ended December 31, 2016 (ignore taxes)?