Pierce Company leases an automobile from Appling Company on January 1, 2021. The following summarizes the information
Question:
Pierce Company leases an automobile from Appling Company on January 1, 2021. The following summarizes the information about the lease and the leased asset.
• Lease term – three years, no renewal option
• Economic life of the automobile – six years
• Purchase option – Pierce Company has the option to purchase
the automobile at fair market value upon expiration of the lease. Monthly lease payments $500 (first payment made at lease commencement)
• Payment date – Beginning of the month Pierce Company’s incremental borrowing rate – 6%
• The rate Appling Company charges Pierce Company in the lease is not readily determinable by Pierce Company
• Title to the automobile remains with Appling Company upon lease expiration – The fair value of the automobile is $30,000; Pierce Company does not guarantee the residual value of the automobile at the end of the lease term
• Pierce Company pays for all maintenance of the automobile separate from the lease. There are no initial direct costs incurred by Pierce Company, Appling Company does not provide any incentives
Required:
a. How should Pierce Company classify this lease?
b. How would Pierce Company measure and record this lease at its inception?
c. How would Pierce Company measure the
Step by Step Answer:
Financial Accounting Theory And Analysis Text And Cases
ISBN: 9781119577775
13th Edition
Authors: Richard G Schroeder, Myrtle W Clark, Jack M Cathey