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On 12-1-03 Digger corp entered into a noncancelabl...

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On 12-1-03 Digger corp entered into a noncancelable agreement to lease mining equipment from dynamite company for 5 years. Under the terms of the agreement, Digger is to pay $1,023,000 to Dynamite Co each Dec 1, March 1, June 1, and Sept 1 of each year beginning 12-1-03. Dynamite will pay certain insurance costs and taxes on the equipment during the lease term. Those insurance and tax costs are expected to total about 23,000 per quarter and require payment at the end of each quarter. Digger has an option to renew the lease for another 5 years at the end of the original lease term. Also, Digger has an option to purchase the equipment at the end of the original 5 year lease term of an agreed upon price of $100,000. The residual value at the end of the original 5 year lease is expected to be apporximately $3,800,000. There are not any residual value gaurantees. The total economic life of the mining equipment being leased is approximately 10 years. Digger expects to use the equipment as long as possible. The Lessor's implicit reate of interest on the lease is 8% per year compounded quarterly. Digger's incremental borrowing rate is 10% compounded quarterly. Digger knows Dynomites implicit rate. The recorded value of the equipment on Dynamites books is $ 17,000,000. Dynamite incurred $130,000. of costs such as commission, attorneys fees, etc. to consumate the lease agreement with Digger. December 31 is the year end for both companies. A. How should Digger classify this lease? Show tests for all 4 lease criteria even if more than one is met. B. Explain the additional lease criteria that must be met for a lessor to treat a lease as other than operating Assume that these criteria are met in this lease agreement. How should Dynamite classify this lease? Explain why and show all supporting computations. C. Prepare all entries required for Digger to account for the lease in 03 and 04. Assume that all expected costs are incurred and paid in cash and that all amounts owed to Digger during these 4 years are paid per the lease agreement. Regardless of your findings in A assume that the lease is a capital lease. D. Prepare all entries required for Dynamite to account for the lease in 03 and 04. Assume that all expected costs are incurred and paid in cash and that all amounts due from Digger during these years are received per the lease agreement. Regardless of your findings in A assume that the lease is a capital lease.

 

Paper#5490 | Written in 18-Jul-2015

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