Synergetics Inc. leased a new crane to Gumowski Construction under a six-year, non-cancellable contract starting February 1, 2011. The lease terms require payments of $21,500 each February 1, starting February 1, 2011. Synergetics will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of $160,000, and a cost to Synergetics of $160,000. The crane’s estimated fair value is $50,000 at the end of the lease term. No bargain purchase or renewal options are included in the contract. Both Synergetics and Gumowski adjust and close books annually at December 31 and use IFRS. Collectibility of the lease payments is reasonably certain and there are no uncertainties about unreimbursable lessor costs. Gumowski’s incremental borrowing rate is 8% and Synergetics’ implicit interest rate of 7% is known to Gumowski.
Instructions
(a) Identify the type of lease that is involved and give reasons for your classification. Also discuss the accounting treatment that should be applied by both the lessee and the lessor.
(b) Would the classification of the lease have been different if Synergetics and Gumowski had been using private enterprise GAAP?
(c) Prepare all the entries related to the lease contract and leased asset for the year 2011 for the lessee and lessor, assuming the following executory costs: insurance of $450 covering the period February 1, 2011, to January 31, 2012; taxes of $200 for the remainder of calendar year 2011; and a one-year maintenance contract beginning February 1, 2011, costing $1,200. Straight-line depreciation is used for similar leased assets. The crane is expected to have a residual value of $20,000 at the end of its useful life.
(d) Identify what will be presented on the balance sheet and income statement, and in the related notes, of both the lessee and the lessor at December 31, 2011.