Financial Accounting Explanations
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1. Note: The following problem requires present value information
On January 1, 2006, Price Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for:
a. Price to make annual payments of $60,000 at the end of each year (starting Dec. 31, 2006) for five years. Price must return the equipment to the lessor end of this period.
b. The machinery has an estimated useful life of 6 years and no expected salvage value.
c. Price uses the straight-line method of depreciation for all of its fixed assets.
d. Price's incremental borrowing rate is 8%
e. The fair value of the asset at January 1, 2006 is $275,000.
Required:
1. Discuss whether Price should account for the lease as an operating or capital lease and why.
2. Using the above information determine how the lease would effect Price's Financial statements in 2007. Use the balance sheet equation below to show the effects.
C + N$A = L + CC + AOCI + RE.
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1.
There are four criteria to determine whether a lease should be classified as operating lease or capital lease. 1) the lease term is greater than 75% of the asset's useful life; 2) the lease contains a bargain purchase option; 3) ownership is transferred to the lessee at the end of the lease term; 4) the present ...
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