Lessee Accounting Issues
Response to the following problem:
The Timmer Company signs a lease agreement dated January 1, 2010 that provides for it to lease equipment from Landau Company beginning January 1, 2010. The lease terms, provisions, and related events are as follows:
The lease is noncancelable and has a term of five years. The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. The Timmer Company agrees to pay all executory costs at the end of each year. In 2010, these were insurance, $3,760; property taxes, $5,440. In 2011: insurance, $3,100; property taxes, $5,330. There is no renewal or bargain purchase option.
Timmer estimates that the equipment has a fair value of $300,000, an economic life of five years, and a zero residual value. Timmer's incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straight-line method to record depreciation on similar equipment.
Required:
1. Calculate the amount of the asset and liability of the Timmer Company at the inception of the lease. (Round to the nearest dollar.)
2. Prepare a table summarizing the lease payments and interest expense.
3. Prepare journal entries on the books of Timmer for 2010 and 2011.
4. Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2010.
5. If the lease term is three years and the annual payment is $120,000, how would Timmer Company classify the lease under (a) U.S. GAAP and (b) IFRS?