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.

Principles

What fundamental quality of useful information is being addressed when a company like Salaur capitalizes all leases with terms of one year or longer?