Question
CASE 2 Lessee and Lessor Accounting for Leases On January 2, 2017, BART Corporation leases an asset to Tower Corporation under the following conditions (assume
CASE 2 Lessee and Lessor Accounting for Leases
On January 2, 2017, BART Corporation leases an asset to Tower Corporation under the following conditions (assume BART has not early adopted the new lease standard):
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 market 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. BART's implicit interest rate is 12 percent; Tower's incremental borrowing rate is 10
percent.
6. The asset is recorded in BART's inventory at $75,000 just prior to the lease transaction.
Required:
a. What type of lease is this for Tower? Why?
b. Assume BART capitalizes the lease. What financial statement accounts are affected by
this lease, and what is the amount of each effect?
c. Assume BART uses straightline depreciation. What are the income statement, balance
sheet, and statement of cash flow effects for 2017?
d. How should BART record this lease? Why? Would any additional information be helpful
in making this decision?
e. Assume that BART treats the lease as a salestype lease and the residual value is not
guaranteed by Tower. What financial statement accounts are affected on January 2, 2017?
f. Assume instead that BART records the lease as an operating lease and uses straightline
depreciation. What are the income statement, balance
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