Reference no: EM132892043
Problem - Initial Direct Costs and Related Issues - On January 1, 2019, Amity Company leases a crane to Baltimore Company. The lease contains the following terms and provisions:
The lease is noncancelable and has a term of 10 years.
The lease does not contain a renewal or bargain purchase option.
The annual rentals are $4,000, payable at the beginning of each year.
Baltimore agrees to pay all executory costs directly to a third party.
The cost of the equipment to the lessor is $24,913.94. The fair value of the equipment is $26,400.
Amity incurs initial direct costs of $1,364.98.
The interest rate implicit in the lease is 12%.
Amity expects to collect all lease payments from Baltimore.
Amity estimates that the fair value at the end of the lease term will be $3,000 and that the economic life of the crane is 12 years. This value is not guaranteed by Baltimore.
Required -
1. What are initial direct costs? Discuss the accounting treatment of these costs. Are they treated in the same manner for (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease?
2. From the lessor's viewpoint, is the preceding lease a sales-type or direct financing lease? Give reasons to support your conclusion.
3. Prepare the journal entries for Amity for 2019.
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