Last day of the OFFER FLAT 20% off & $20 sign up bonus Order Now

Last day of the offer FLAT 20% off & $20 sign up bonus

us

Free Resources

  • icon 75000+ Completed Assignments
  • icon 1500+ PhD Experts
  • icon 100+ Subjects we cater
  • icon 100% Secure Payment

ACCT 5102 Intermediate Accounting II

Published : 07-Oct,2021  |  Views : 10

Question:

This assignment consists of two independent situations that require students to research Lease Accounting (Topic 842) in the Financial Accounting Standards Board’s (FASB) Codification.

When answering the questions in the two situations use the rules of Accounting Standards Update (ASU) No. 2016-02 dated February 2016, which becomes effective during 2019.  Do not use existing lease rules to answer the questions.

In each of the two situations, fully explain your calculations to Winslow’s management.  This is a writing assignment as well as a research assignment.  No credit will be given for calculations that are not fully explained. 

Answer:

According to the proposed accounting standard updates on Leases (842-10-25-2) presented by FASB, a lessee is required to classify the lease transactions from the commencement date. As per the ASC 842 Glossary, leasing date is considered as the date on which underlying assets are available for use of lessee. In addition, a lease transaction is required to be classified as finance lease if the lease transaction meets any of the five criteria as specified under ASC 842 (Fasb.org, 2017). In case the transactions does not comply any of the criteria, then the lease will be classified as an operating lease under the regulation 842-10-25-3. Accordingly, the lease transaction will be considered as finance lease by testing the following criteria on the date of commencement under 842-10-25-2:

  • Ownership of the underlying asset will be transferred to the lessee at the end of term of lease
  • The lease transaction involves an option to lessee for purchasing the leased or underlying asset which is certainly exercised by lessee
  • The tern of lease constitutes for key part of the economic life of the asset that is remained to use
  • The present value of lease payments or residual value that is guaranteed by lessee equals or exceeds the fair value of underlying asset. However, the present value of the lease payments should not be reflected in the payments determined as per the regulations of 842-10-30-5(f)
  • The underlying asset should of specialized nature, which means there is no substitute use available to the lessor after the end of lease term (org, 2017).

Accordingly, in the present situation 2, lease transaction would be considered as an operating lease since the transfer of ownership of underlying asset has not been indicated together with the option of purchase. In addition, the situation does not indicate the specialization nature of the asset for its alternative utility to the lessor while the lease 33% is not equal to or excess to 75% of the outstanding economic life of the asset.

Further, present value of the payments using discount rate 5% reflects the following value that is calculated as in the following table:

Year

Payment $

Discounting factor @6%

Present Value of Payment $

20x1

12,000

0.94

11,280

20x2

12,000

0.89

10,680

20x3

12,000

0.84

10,080

20x4

12,000

0.79

9,480

20x5

12,000

0.75

9,000

20x6

12,000

0.7

8,400

20x7

12,000

0.63

7,560

20x8

12,000

0.56

6,720

20x9

12,000

0.39

4,680

20x10

12,000

0.31

3,720

Total

120,000

 

81,600

The present of all the payments amounted to $81,600 while measuring $81,600/$140,000 reflects 58%, which does not satisfy the 90% criteria hence the lease is to be classified as operating lease (Propheter & Hatch, 2015). In the present case, Winslow leased equipment from Queen Anne during the year 20x1 with total amount to $120,000 along with the related costs of $20,000 with the useful life 30 years. Further, Winslow tested the asset for impairment during the year 31 December 20x2 as the estimated future cash flows reflected lower value than the fair value of asset amounted to $60,000.

Journal entry

 

 

 

Impairment of underlying asset

 

 

 

Date

Particulars

 

Debit

Credit

31.12.20x2

Impairment A/c

Dr.

360

 

 

To Asset A/c

 

 

360

 

(Being impairment for the asset has been recognized for the year 20x2)

 

 

 

31.12.20x2

Profit & Loss A/c

Dr.

360

 

 

To Impairment A/c

 

 

360

 

(Being impaired value for the asset has been transferred to profit and loss A/c for the year 20x2)

 

 

 

Entries to be recorded for the lease during 20x3

 

Date

Particulars

 

Debit

Credit

20x3

Right to use the asset

Dr.

59,640

 

 

To Lease Liability

 

 

59,640

 

(Being the asset acquired on lease during the year 20x1 recognized in the current year)

 

 

 

20x3

Depreciation expenses

Dr.

4,667

 

 

To Leasehold asset

 

 

4,667

 

(Being depreciation has been recognized for the leased asset as per the economic life 3 years

 

 

 

20x3

Interest expenses

Dr.

4,896

 

 

Lease liability

Dr.

7,104

 

 

Amortization expenses

Dr.

10,200

 

 

To right to use the asset

 

 

10,200

 

To cash

 

 

12,000

 

(Being interest amount and lease liability as well as the amortization expenses for remaining 8 years recognized against the right to use the asset for the current year)

 

 

 

References

Ajupov, A. A., Mishina, M. S., & Ivanov, M. E. (2014). Method of valuation of financial factors influencing the implementation of liquidity risk for leasing companies. Mediterranean Journal of Social Sciences, 5(24), 154.

Bohušová, H. (2015). Is Capitalization of Operating Lease Way to Increase of Comparability of Financial Statements Prepared in Accordance with IFRS and US GAAP?. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 63(2), 507-514.

Buchman, T. A., Harris, P., & Liu, M. (2016). GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.

Fasb.org. (2017). FASB: Financial Accounting Standards Board. Retrieved 5 March 2017, from http://www.fasb.org

Fitó, M. À., Moya, S., & Orgaz, N. (2013). Considering the effects of operating lease capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista Española de Financiación y Contabilidad, 42(159), 341-369.

Penner, J. W., Kreuze, J. G., & Langsam, S. A. (2016). Impairment Analysis: Comparison of Impairment of Long-Lived Assets between Us Gaap and Ifrs. Academy of Educational Leadership Journal, 22(1), 97.

Propheter, G., & Hatch, M. E. (2015). Evaluating lease-purchase financing for professional sports facilities. Urban Affairs Review, 51(6), 905-925.

Samarathunga, S. M. D. S. S., & Perera, H. A. P. L. (2017). Improper Recognition of Incremental Rent Expense under the Operating Lease. Journal of Case Studies in Accounting, 3.

Our Amazing Features

delivery

No missing deadline risk

No matter how close the deadline is, you will find quick solutions for your urgent assignments.

work

100% Plagiarism-free content

All assessments are written by experts based on research and credible sources. It also quality-approved by editors and proofreaders.

time

500+ subject matter experts

Our team consists of writers and PhD scholars with profound knowledge in their subject of study and deliver A+ quality solution.

subject

Covers all subjects

We offer academic help services for a wide array of subjects.

price

Pocket-friendly rate

We care about our students and guarantee the best price in the market to help them avail top academic services that fit any budget.

Not sure yet?

Get in touch with us or

get free price quote.

Get A Free Quote