Case 13-2 Lessee and Lessor Accounting for lease (Modified)

On January 2, 2020, Grant Corp. leases an asset to Pippin Corp. under the following conditions (Assume new lease accounting standard (ASC 842) are effective for both companies).

1. Annual lease payments are $10,000 for 20 years.

2. At the end of the lease term, the asset is expected to have a value of $2,750.

3. The fair value of the asset at the inception of the lease is $92,625

4. The estimated economic life of the lease is 30 years.

5. Grants implicit interest is 12 percent: Pippins incremental borrowing rate is 10 percent.

6. The asset is recorded in Grants inventory at $75,000 just prior to the lease transaction.

7. Both companies use the straight-line depreciation method for all assets.

Required:

a. What type of lease is this for Pippin? Why?

b. Assume Pippin classifies the lease contract as the financial lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year 2020 and 2021?

c. Assume Pippin classifies the lease contract as the operating lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of the year 2020 and 2021?

d. What type of lease is this for Grant? Why?

e. Assume Grant classifies the lease contract as the sales-type lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year 2020 and 2021?

f. Assume Grant classifies the lease contract as the operating lease, what financial statement accounts are affected by this lease? What is the amount of each effect for the year of the year 2020 and 2021?