Salaur Company, a risky start-up, is evaluating a lease arrangement being offered by TSP Company for use of a standard computer system. The lease is non-cancelable, and in no case does Salaur receive title to the computers during or at the end of the lease term. TSP will lease the returned computers to other customers. The lease starts on January 1, 2025, with the first rental payment due on January 1, 2025. Additional information related to the lease and the underlying leased asset is as follows.

Accounting

a. Analyze the lease classification tests for this lease for Salaur. Prepare the journal entries for Salaur for 2025.

b. Repeat the requirements in part a, assuming Salaur has the option to purchase the system at the end of the lease for $100.

Analysis

Briefly discuss the impact of the accounting for this lease as a finance or operating lease for two common ratios: return on assets and debt to total assets.

Principles

What fundamental quality of useful information is being addressed when a company like Salaur capitalizes all leases with terms of one year or longer?

Transcribed Image Text:

Yearly rental Lease term Estimated economic life Purchase option Renewal option Fair value at commencement Cost of asset to lessor Residual value: Guaranteed Unguaranteed $3,057.25 3 years 5 years $3,000 at end of 3 years, which approximates fair value 1 year at $1,500; no penalty for nonrenewal; standard renewal clause $10,000 $8,000 Lessor's implicit rate (known by the lessee) Estimated fair value at end of lease -0- $3,000 12% $3,000