FAR 12.04 - NON-OPERATING LEASE Flashcards
FAR 12.04 - NON-OPERATING LEASE
A lessor entered into a lease on December 31, 20X2 that will be accounted for as a direct financing lease.
The lease calls for 10 payments, beginning on December 31, 20X3, of $4,000 each.
The lessee’s incremental borrowing rate is 6% and the present value of an ordinary annuity of $1 at 6% for 10 periods is 7.360.
The machine has a 10 year life and cost the lessor $30,000.
How much profit or loss will be recognized by the lessor in 20X2 and how much depreciation expense will be recognized by the lessee in 20X3, assuming the machine is depreciated on a straight-line basis?
The lessor will recognize no gain or loss in 20X2 and the lessee will recognize depreciation expense of $2,944 in 20X3.
The lessor will recognize a loss of $560 in 20X2 and the lessee will recognize depreciation expense of $3,000 in 20X3.
The lessor will recognize a loss of $560 in 20X2 and the lessee will recognize depreciation expense of $2,944 in 20X3.
The lessor will recognize no gain or loss in 20X2 and the lessee will recognize depreciation expense of $3,000 in 20X3.
The lessor will recognize no gain or loss in 20X2 and the lessee will recognize depreciation expense of $2,944 in 20X3.
EXPLANATION:
Since the lease is a direct financing lease, the lessor will not recognize any gain or loss on the sale of the leased asset
and will only recognize interest income over the term of the lease, using the rate implicit in the lease.
The lessee will record the asset at its present value using the lessee’s incremental borrowing rate, resulting in a cost of $29,440 ($4,000 x 7.360).
Over a 1 year useful life (and lease term), straight-line depreciation will be $2,944 per year.
