Biltmore Company leases a copier from Vanderbilt Inc. The following table summarizes information about the lease and
Question:
Biltmore Company leases a copier from Vanderbilt Inc. The following table summarizes information about the lease and the leased asset.
• Lease term – three years, no renewal option
• Economic life of the copier – five years
• Purchase option – None
• Annual lease payments – $500, which includes lessor maintenance for the term of the lease
• Vanderbilt Inc normally leases the same copier for $475 per year and offers a maintenance contract for $75 per year
• Payment date – Annually on January 1
• Biltmore Company’s incremental borrowing rate – 5.5%
• The rate Vanderbilt Inc charges Biltmore Company in the lease is not readily determinable by Biltmore Company
• Title to the copier remains with Vanderbilt Inc upon lease expiration. The fair value of the copier is $2,000; Biltmore Company does not guarantee the residual value of the copier at the end of the lease term
• Biltmore Company pays $100 in legal fees related to the negotiation of the lease, which are treated as initial direct costs
• Vanderbilt Inc does not provide any incentives
• Biltmore Company has not made an accounting policy election to not separate the lease and non lease components for this class of asset
Required:
a. How should Biltmore Company classify the lease?
b. How would Biltmore Company measure and record this lease?
Step by Step Answer:
Financial Accounting Theory And Analysis Text And Cases
ISBN: 9781119577775
13th Edition
Authors: Richard G Schroeder, Myrtle W Clark, Jack M Cathey