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Nature of the lease arrangement

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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.

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

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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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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 ...

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