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Lease contract and leased asset for Synergetics Inc.

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Synergetics Inc. leased a new crane to Gumowski Construction under a five-year, non-cancelable contract starting September 1, 2008. The lease terms require payments of $22,000 each September 1, starting September 1, 2008. Synergetics will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of $160,000, and a cost to Synergetics of $160,000. The crane's estimated fair value is $45,000 at the end of the lease term. No bargain purchase or renewal options are included in the contract. Both Synergetics and Gumowski adjust and close books annually at December 31. Collectability of the lease payments is reasonably certain and there are no uncertainties about non-reimbursable lessor costs. Gumowski's incremental borrowing rate is 10% and Synergetics' implicit interest rate of 9% is known to Gumowski.

a) Identify the type of lease that is involved and give reasons for your classification. Also discuss the accounting treatment that should be applied by both the lessee and the lessor.

b) Prepare all the entries related to the lease contract and leased asset for the year 2008 for the lessee and the lessor, assuming the following executory costs: insurance of $500 covering the period September 1, 2008, to August 31, 2009; taxes of $200 for the remainder of the calendar year 2008; and a six month maintenance contract beginning September 1, 2008, costing $650. Straight line amortization is used for similar leased assets. The crane is expected to have a residual value of $10,000 at the end of it's useful life

c) Identify what will be presented on the statement of financial position and income statement, and in the related notes, of both the lessee and the lessor at December 31, 2008.

Solution Summary

Lease contract and leased assets for Synergetics Inc is examined.

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