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Nature of the lease arrangement

Jacobsen Leasing Company leases a new machine that has a cost and fair value of $75,000 to Stadler Corporation on a 3-year noncancelable contract. Stadler Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2011. Jacobsen Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.

Instructions

Discuss the nature of the lease arrangement and the accounting method that each party to the lease should apply.

Solution Preview

The lease meets the capital lease criteria since the term of the lease is greater than 75% of the useful life of the asset. The useful life is 3 years and the term of the lease is also 3 years. Thus the nature of the lease is a capital lease for the lesse. In terms of the lessor, assuming collectibility of the rents is reasonably assured ...

Solution Summary

The solution discusses the nature of the lease arrangement and the accounting method that each party to the lease should apply.

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