Rodriguez Corporation leases a building to Olaf, Inc. on January 1 , 2 0 2 5
Question:
Rodriguez Corporation leases a building to Olaf, Inc.
on January The following facts pertain to the lease agreement:
The lease term is years with equal annual rental payments of $ at the end of each year.
Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and
the asset is not of a specialized nature.
The building has a fair value of $ a book value to Rodriguez of $ and a useful life
of years.
At the end of the lease term, Rodriguez and Olaf expect the residual value of the building to be
$ and this amount is guaranteed by Financial, Inc., a third party.
Rodriguez wants to earn a return on the lease, and collectibility of the payments is probable.
Instructions
Round all numbers to the nearest dollar.
a Describe the nature of this lease to both Rodriguez and Olaf.
b Assume the present value of lease payments and thirdparty guarantee is $ and the rate of
return to amortize the net lease receivable to zero is Prepare the amortization schedules
Rodriguez would use to amortize the net lease receivable to zero.
c Prepare the journal entries to record the entries for Rodriguez for and
d Prepare the journal entries for Olaf the lessee for and assuming the rate implicit in the
lease is known to Olaf.
e Suppose the leased asset had a shorter economic life of years, the lease agreement was only for years,
and the residual value of $ guaranteed by Financial, Inc. remained the same. Would the rate of
return required to amortize the net lease receivable to zero increase, decrease, or stay the same? Explain.
f Suppose, instead of Financial, Inc., Olaf guarantees the residual value itself. How would this affect
the classification of this lease agreement for both Rodriguez and Olaf? Describe the impact that any
change in classification would have on revenue recognition for Rodriguez.
Intermediate Accounting
ISBN: 978-1119503668
17th edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfiel