Accounting treatment of leases
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On Jan 1, 2004, Haden company [ lessor] entered into a non-cancelable cancelable lease agreement with Sandy company[ lessee] for machinery was carried on the accounting records of Haden at $4,530,000 and had a market value of $4,800,000. Minimum lease payments under the lease agreement which expires on December 31, 2013 total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2004 when the lease agreement was finalized. The interest rate of 10 % which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Sandy expects the machine to have a ten year life with no salvage value, and to be depreciated on as straight-line basic. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.
Instructions
[a] [1]From the lessee's viewpoint. What kind of lease is the above agreement? Give reasons and supporting calculations
[a] [2] From the lessor's viewpoint. What kind of lease is the above agreement? Give reasons and supporting calculations
[b] What should be the income before income taxes derived by Haden from the lease for the year ended December 31, 2004? Show supporting calculations
[c] Ignoring income taxes, what should be the expenses incurred by Sandy from this lease for the year ended December 31, 2004? Show supporting calculations.
[d] What journal entries should be recorded by Sandy company on January 1, 2004?
[e] What journal entries should be recorded by Haden company on January 1, 2004?
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Solution Summary
The solution classifies the lease, caculates the income before income taxes, expense and provides the journal entries for the lease.
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