On January 1, 2016, Breshing Company enters into a noncancelable lease, with no renewal option, to lease a new piece of equipment from Edwards Leasing Company. The lease term is for three years and the lease payments are made on December 31 of each year.
The equipment cost Edwards $250,000, it has a fair value of $300,000 and a useful life of four years with no residual value. The equipment reverts to Edwards upon termination of the lease. Breshing guarantees a $100,000 residual value at the end of the lease term.
Both Breshing Company and Edwards Company depreciate all machinery that they own on a straight-line basis. Breshingâs incremental borrowing rate is 8 percent per year and Breshing Company does not have knowledge of the 5 percent implicit rate used by Edwards.
Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.
Required:
1.Determine the annual lease payments, as set by the lessor.
2.Determine the amount of the minimum lease payments that will be capitalized by the lessee.
3.What type of lease is this to Breshing Company? Be specific in justifying your answer.
4.What type of lease is this to Edwards Company? Be specific in justifying your answer.
5.Prepare any necessary journal entries on January 1, 2016, for both parties.
6.Prepare any necessary journal entries on December 31, 2106 for both parties.
7.Which party will depreciate the asset? What is the amount of depreciation expense that will be recognized by that party?Be sure to show all calculations.
8.How would your answer change if the residual value were unguaranteed? (You just need to provide a narrative explanation of its impact on both parties. I am not looking for calculations with the new assumptions).
Please show all your calculations, thanks.
On January 1, 2016, Breshing Company enters into a noncancelable lease, with no renewal option, to lease a new piece of equipment from Edwards Leasing Company. The lease term is for three years and the lease payments are made on December 31 of each year.
The equipment cost Edwards $250,000, it has a fair value of $300,000 and a useful life of four years with no residual value. The equipment reverts to Edwards upon termination of the lease. Breshing guarantees a $100,000 residual value at the end of the lease term.
Both Breshing Company and Edwards Company depreciate all machinery that they own on a straight-line basis. Breshingâs incremental borrowing rate is 8 percent per year and Breshing Company does not have knowledge of the 5 percent implicit rate used by Edwards.
Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.
Required:
1.Determine the annual lease payments, as set by the lessor.
2.Determine the amount of the minimum lease payments that will be capitalized by the lessee.
3.What type of lease is this to Breshing Company? Be specific in justifying your answer.
4.What type of lease is this to Edwards Company? Be specific in justifying your answer.
5.Prepare any necessary journal entries on January 1, 2016, for both parties.
6.Prepare any necessary journal entries on December 31, 2106 for both parties.
7.Which party will depreciate the asset? What is the amount of depreciation expense that will be recognized by that party?Be sure to show all calculations.
8.How would your answer change if the residual value were unguaranteed? (You just need to provide a narrative explanation of its impact on both parties. I am not looking for calculations with the new assumptions).
Please show all your calculations, thanks.
