Lessee Accounting Issues

Sax Company signs a lease agreement dated January 1,2013, that provides for it to lease computers from Appleton Company beginning January 1,2013. The lease terms, provisions, and related events are as follows:

1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.

2. The computers have an estimated life of 5 years, a fair value of $300,000, and a zero estimated residual value.

3. Sax agrees to pay all executory costs.

4. The lease contains no renewal or bargain purchase option.

5. The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate, which is equal to its borrowing rate.

6. Sax uses the straight -line method to record depreciation on similiar equipment.

1.Determine what type of lease this is for Sax.

2. Bargain purchase option

3. Lease term is 75% or more of econimic life

4. Present value of lease payments is 90% or more of fair value

Determine what type of lease this is for Sax.

2. Calculate the amount of the asset and liability of Sax at the inception of the lease. When required, round your answers to the nearest dollar.

3. Prepare a table summarizing the lease payments and interest expense. Enter all amounts as positive numbers. If required, round your answers to decimal places. Round your amswer to the nearest cent and use the rounded answers in subsequent computations. If an amount is zero, enter "0".

Lease payments and Interest expense Summary

2013-2017

Lease Interest Expense Reduction Balance of

Payment at 12% of lease Obligation

January 1, 2013 Obligation

December 31, 2013

December 31,2014

December 31, 2015

December 31,2016

December 31, 2017

4. Prepare journal entries for Sax for the years 2013 and 2014. If required, round your answers to the nearest cent. For compound entries, if an amount box does not require an entry, leave it blank.

2013 Jan 1 Leased Equipment

Recognize Lease Capital Lease Obligation

Dec. 31 Capital Lease Obligation

Payment Interest Expense

Cash

Depreciation Depreciation Expense:Leased

Accumulated Depreciation: Le

2014 Dec.31 Capital Lease Obligation

Payment Interest Expense

Cash

Depreciation Depreciation Epense: Leased

AccumulatedDepreciation:Le

5.If the lease term is 3 years and the annual payment is $110,000, how would Sax classify the lease under U.S. GAAP and IFRS?

U.S. GAAP IFRS

a. Capital Finance

b. Capital Operating

c. Operating Finance

d. Operating Operating