Disclosure of Leases and Related Issues
Response to the following problem:
United Manufacturing Company manufactures and leases computers to its customers. During 2010, the following lease transactions take place:
1. On January 1, a computer is leased to Superior Microelectronics Industries and is guaranteed by United against obsolescence. The present value of the lease payments is greater than 90% of the fair value of the computer to both United and Superior.
2. Also on January 1, a computer is leased to Pitt Steel Company. Because of Pitt's unstable financial condition, its incremental borrowing rate is substantially greater than United's rate implicit in the lease (which Pitt did not know and could not estimate).
Required:
1. For the first transaction, explain on whose financial statements the leased computer is shown.
2. Explain under what conditions in the second transaction the computer could fail to be shown on either United's or Pitt Steel's balance sheets at December 31, 2010.