Question
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
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, 2020, with the first rental payment due on January 1, 2020. Additional information related to the lease and the underlying leased asset is as follows.
Yearly rental | $3,057.25 |
Lease term | 3 years |
Estimated economic life | 5 years |
Purchase option | $3,000 at end of 3 years, which approximates fair value |
Renewal option | 1 year at $1,500; no penalty for nonrenewal; standard renewal clause |
Fair value at commencement | $10,000 |
Cost of asset to lessor | $8,000 |
Residual value: | |
Guaranteed | 0 |
Unguaranteed | $3,000 |
Lessor's implicit rate (known by the lessee) | 12% |
Estimated fair value at end of lease | $3,000 |
Accounting
a. Analyze the lease classification tests for this lease for Salaur. Prepare the journal entries for Salaur for 2020.
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.
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