After reading the prior problem and looking at your accounting for the lease contract with Company B,
Question:
After reading the prior problem and looking at your accounting for the lease contract with Company B, Company A decides that the FINANCE LEASE format under the new lease accounting rules does not offer a favorable outcome. Company A is particularly concerned about the Front End loading of lease expenses that threatens to ruin its Income Statement in Year 1.
Company B agrees to modify the lease contract. Company A will lease the asset for 2 years, and the annual lease payments will be increased to $ 15,000 but paid at the END of each year. Company B states in the lease contract that its “implied lease rate” will remain 4% despite the change in terms.
The lessor points out that the sum of the lease payments under both arrangements will be $30,000. But Company B agrees with Company A that the accounting may be more favorable because the lease expense will be the same number every year.
1. What is the Present Value of the new two year lease for Company A as the Lessee:
2. What will be the annual lease expense on Company A’s Income Statement under this arrangement for each of the two years?
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones