Morgan Corp enters into a lease of nonspecialized equipment with Hoffman Corp. The following is information about
Question:
Morgan Corp enters into a lease of nonspecialized equipment with Hoffman Corp. The following is information about
the lease:
• Lease term five years, no renewal option
• Economic life of the equipment six years
• No purchase option
• Annual lease payments $11,000
• Payment date annually on January 1
• Morgan Corp’s incremental borrowing rate is 7%
• The interest rate Hoffman Corp charges Morgan Corp in the lease is not readily determinable by Morgan Corp.
• Title to the asset remains with Hoffman Corp upon lease expiration
• The fair value of the equipment is $50,000
• Morgan Corp does not guarantee the residual value of the equipment at the end of the lease term
• Morgan Corp pays for all maintenance of the equipment separate from the lease
• There are no initial direct costs incurred by Morgan Corp
• Hoffman Corp does not provide any incentives
Required:
a. How should Morgan Corp classify the lease?
b. How would Morgan Corp measure and record this lease?
c. How would Morgan Corp measure the right-of-use asset and lease liability over the lease term?
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