Reference no: EM133380048
Focuses on accounting for leases. This problem focuses on using the FASB Codification to determine the classification of the lease described below and how it should be recorded. If you were researching an accounting issue for a client (or for your supervisor) your conclusions would need to be supported by citations from the FASB Codification.
Problem:
Assume that you have been asked by your supervisor to present your conclusions in a memo-like format as to how the lease described below should be classified by the lessee and how the lessee should record the lease (i.e. what are the debits and credits made by Dawgs on the date the lease is entered into).
Facts:
On 1/1/22, Rand Manufacturing completed a custom piece of machinery and then leased it to Dawgs. The custom machine included a number of specialized features necessary for Dawgs' use, which resulted in the machine having no further use to Rand when the lease was up (i.e. Rand had no other customers that would be interested in the specialized machinery). Rand estimated the value of the machine was $200,000, with an estimated life of seven years. The machine was leased to Dawgs for five years with annual payments of $35,500 due each January 1st, beginning immediately (1/1/22). Dawgs computed the present value of the payments to be $185,000. There are no restrictions on Dawgs' use of the equipment during the rental period and Dawgs has no contractual option to purchase the equipment at the end of the lease.
Identify, correctly cite and quote relevant GAAP (without including cites/GAAP information not relevant to the question)
Explain how the GAAP and case facts are related to the decision
Provide an explicit answer to the case question i.e. lease classification and entry to record lease