Discuss the nature of this lease to fal company

Assignment Help Accounting Basics

Reference no: EM13683405

I. Teri Inc., in its first year of operations, has the following differences between the book
basis and tax basis of its assets and liabilities at the end of 20x0.

Book Basis Tax Basis

Equipment (net) $400,000 $340,000
Estimated warranty liability $200,000 $ -0-

It is estimated that the warranty liability will be settled in 20x1. The difference in equipment (net) will result in taxable amounts of $20,000 in 20x1, $30,000 in 20x2, and $10,000 in 20x3. The company has taxable income of $520,000 in 20x0. As of the beginning of 20x0, its enacted tax rate is 34% for 20x0-20x2, and 30% for 20x3. Teri expects to report taxable income through 20x3.

a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 20x0.
b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 20x0 (long-term or current?).

II. The following facts pertain to a noncancelable lease agreement between Shel Company, a lessor and Fal Company, a lessee.

Inception date: 5/1/x1
Annual lease payment on May 1,
beginning with 5/1/x1 $20,987.83
Bargain purchase option at the end of lease term $4,000.00
Lease term 5 years
Economic life of equipment 10 years
Lessor's cost $65,000.00
Fair value of asset at 5/1/x1 $90,000.00
Lessor's implicit rate 10%
Lessee's incremental borrowing rate 10%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. Both companies use the straight-line depreciation method.
a) Discuss the nature of this lease to Fal Company. What kind of lease and why?
b) Discuss the nature of this lease to Shel Company. What kind of lease and why?
c) Prepare the journal entries on the lessor's books to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 20x1 and 20x2. Shel's annual accounting period ends on December 31

Reference no: EM13683405

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