Reference no: EM132968064

Question - On January 1 of 2021, Matrix Co. signed a license agreement with Private Jet Co. Under the agreement Matrix would, for the next 5 years, have complete possession and use of a Gulfstream G4 Jet. On the Signing date, Private Jet, delivered the Jet Plane to Matrix's Hangar at an airport near Matrix's corporate office. Under the agreement, for the next 5 years, Matrix would be have full use of this particular Jet Plane. Matrix would be responsible for all costs relating to operating and using the plane (ie. Fuel, pilots, crew, maintenance, repair, etc.). In exchange for the license to use the Jet, Matrix will make 5 annual payments of $400,000 due at the first of each year, with the first payment due upon signing. At the end of the 5th Year (Dec 31, 2025), Matrix would return the Jet Plane to Private Jet. Assume the economic life of the Jet Plane is15 years, and its fair value is $ 1.9 million. Joe Smith, the CFO of Matrix Co. has asked you to research the Accounting Standards Codification (ASC) and help him think about the best way to account for this license agreement.

Additional information:

-Matrix's incremental borrowing rate is 5%.

-Matrix's fiscal year ends on December 31.

-Matrix uses the straight-line method of depreciation.Question:

a. Copy and paste an appropriate paragraph form the Accounting Standards Codification (ASC) that would help you decide if this agreement contains a lease or not. Provide the appropriate numerical reference for this paragraph

b. Find and quote the appropriate part of the ASC that determines whether the contract contains an operating or finance lease. Provide the correct numerical reference to the ASC.

c. Does this contract contain an operating or finance lease? Why?

d. Based on the appropriate codification, what is the value of the lease asset and lease liability at end of the first and second year of the lease (Dec 31, 2021, and Dec 31, 2022)? Show relevant calculations.