Image Maker Company enters into a lease of nonspecialized digital imaging equipment with Agee Equipment Inc on
Question:
Image Maker Company enters into a lease of nonspecialized digital imaging equipment with Agee Equipment Inc on January 1, 2020. Image Maker Company is a manufacturer of digital imaging equipment that uses both direct sales and leases as a means of selling its products. The following table summarizes information about the lease and the leased assets.
• Lease term – five years, no renewal option
• Economic life of the leased equipment – six years
• Purchase option – None
• Annual lease payments – $1,100
• Payment date – Annually on January 1 (first payment is made at lease commencement)
• Fair value of the leased equipment – $5,000
• Image Maker Company’s carrying value of the leased equipment – $4,500
• Interest rate implicit in the lease – 7.04%
• The present value of the lease receivable is $3,722
• The present value of the unguaranteed residual asset is $178.
• Title to the asset remains with Image Maker Company upon lease expiration
• Agee Equipment Inc does not guarantee the residual value of the equipment at the end of the lease term and Image Maker Company does not obtain any third-party residual value insurance
• Estimated fair value of the equipment at the end of the lease term is $250
• Agee Equipment Inc pays for all maintenance of the equipment separate from the lease
• There are no initial direct costs incurred by Agee Equipment Inc
• Image Maker Company does not provide any incentives
• Image Maker Company determines that the lease is a sales-type lease
Required:
a. How would Image Maker Company measure and record this lease?
b. How would Image Maker Company account for the leasing transaction after lease commencement?
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