Brief Exercise 21-1 (Essay)
Callaway Golf Co. leases telecommunications equipment. Assume the following data for equipment leased from Photon Company. The lease term is 5 years and requires equal rental payments of $31,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $138,000, an estimated useful life of 8 years, and no residual value. Callaway pays all executory costs directly to third parties. Photon set the annual rental to earn a rate of return of 10%, and this fact is known to Callaway. The lease does not transfer title or contain a bargain-purchase option.
How should Callaway classify this lease?
Brief Exercise 21-1 (Essay)
Callaway Golf Co. leases telecommunications equipment. Assume the following data for equipment leased from Photon Company. The lease term is 5 years and requires equal rental payments of $31,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $138,000, an estimated useful life of 8 years, and no residual value. Callaway pays all executory costs directly to third parties. Photon set the annual rental to earn a rate of return of 10%, and this fact is known to Callaway. The lease does not transfer title or contain a bargain-purchase option.
How should Callaway classify this lease?
Related questions
Pharoah Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement.
| 1. | The lease term is 5 years, with equal annual rental payments of $3,587 at the beginning of each year. | |
| 2. | Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. | |
| 3. | The building has a fair value of $16,800, a book value to Pharoah of $9,800, and a useful life of 6 years. | |
| 4. | At the end of the lease term, Pharoah and Walsh expect there to be an unguaranteed residual value of $2,450. | |
| 5. | Pharoah wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. |
Using the original facts of the lease, show the journal entries to be made by both Pharoah and Walsh in 2017.
