[goforCPA]

Hi All,

Not sure if I am alone but everytime I come across the Lease Accounting questions I get a mental block. I feel it’s one of the difficult areas within FAR for me. So, with the following question I need help.

On January 1, Year One Jones Company (the company is neither a manufacturer nor dealer) buys equipment for $34,000 in cash. This asset is immediately leased for 8 years, its entire life. Annual payments are $5,800 to be made each January 1 beginning on January 1, Year One. Assume that the implicit interest rate profit built into the contract by Jones was 10%. However, the lessee’s incremental borrowing rate was only 8% per year. What amount of income should Jones recognize for Year One?

Now in Becker they teach that the LESSER of rate implicit in the contract or Lesee’s incremental borring rate should be used, which in this case would be the 8%. So taking the beg. cost $34,000 – 5,800 = 28,200 x 8% = $2,256. Howvwe the answer is $28,200 x 10% = 2,820 and the explanation says that the Lessor always uses the implicit interest rate built into the contract regardless of the amount of the lessee’s incremental borrowing rate. So which one is correct? Should we use the LESSER of these rates or the rate in the contract?

Thanks

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[jeff]

Hey – sign up here and I'll send flashcards covering Leases right away:

https://www.another71.com/cpa-exam-study-plan/

AUD - 79
BEC - 80
FAR - 76
REG - 92

Jeff Elliott, CPA (KS)
NINJA CPA | NINJA CMA | NINJA CPE | Another71

[FARfromCPA]

Becker must be saying the “Lessor” always uses the incremental borrowing rate. The “lesser” rule comes in with the “Lessee” interest rate. The lessee will use the incremental borrowing rate of the lessor if it is known and lower than the incremental borrowing rate. With that said, I've failed FAR twice and have no idea what I'm talking about most of the time.

FAR 05/31/12 - 69 08/22/12 - 72 11/30/12 - 78
AUD 05/21/2013 - 77
REG 08/29/2013 - 77
BEC 10/17/2013

Ethics - Nailed it.

[Lidis]

Gofor

The rule of thumb is use the lower of the two.

[rupert]

In this case, Jones is the lessor. Jones bought the equipment for $34,000 (so this indicates it's FMV) and is now leasing the equipment to another party. The rate for the lessor is always the implicit rate.

Lessor's rate = implicit rate

Lessee's rate = lesser of incremenetal borrowing rate or implicit rate (but only if known to the lessee).

FAR 90 Oct. 6, 2012
AUD 96 Dec. 8, 2012
REG 93 May 30, 2013
BEC 84 Aug. 31, 2013

NIU CPA Review Correspondence and Wiley Test Bank

[Author]

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