Question
Bills Company entered into a non-cancelable lease agreement with Chiefs Company for a certain machine. Chiefs primary business is leasing. Bills will lease the machine
Bills Company entered into a non-cancelable lease agreement with Chiefs Company for a certain machine. Chiefs primary business is leasing. Bills will lease the machine for a period of 3 years, which is 60% of the machines economic life. Chiefs will take possession of the machine at the end of the initial 3-year lease and lease it to another smaller company that does not need the most current version of the machine. Bills does not guarantee any residual value for the machine and will not purchase the machine at the end of the lease term. Bills incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Bills has no way of knowing the implicit rate used by Chiefs. Using either rate, the present value of the lease payments is between 90% and 100% of the fair value the machine at the date of lease agreement. Chiefs is reasonably certain that Bills will pay all lease payments.
Questions: use number while answering the questions.
- What type of lease has been entered into by Bills? Explain the reason of your answer.
- How should Bills compute the appropriate amount to be recorded for the lease or asset acquired?
- What accounts will be created or affected by this transaction, and how will the lease of assets and other costs related to the transaction to be recorded in earnings by Bills?
- What type of leasing agreement has been entered into by the Chiefs (lessor)
- How should this lease by recorded by the Chiefs, and how are the appropriate amounts determined?
- How should Chiefs determine the appropriate revenue to be recognized from each lease payment?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started