What are the implications of this accounting event to the companies share price? Show your calculation and
Question:
What are the implications of this accounting event to the companies share price? Show your calculation and work.
An agreement was signed by ABC company on September 1, 2015 to lease a machine from GFH Company. The agreement has the following terms:
1. The lease is 5 years. It is noncancellable. It will have a residual value of $14,000 (not guaranteed).
2. The asset has a life of 7 years. Its fair value at September 1, 2015 is $160,000
3. The leasing assumes direct responsibility for the executory costs
4. The asset will revert to GFH corp at the end of the lease term. At this time the asset is expected to have a residual value of $14,000 (not guaranteed).
5. The lessor's implicit rate is 10% and is known to ABC corp
6. Annual equal payments of $36,286 is required beginning on September 1, 2015
ABC company originally recorded this as an operating lease and expensed the annual payment during the fiscal year.
Fundamental financial accounting concepts
ISBN: 978-0078025365
8th edition
Authors: Thomas P. Edmonds, Frances M. Mcnair, Philip R. Olds, Edward