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The lease provides for eight equal annual payments

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On December 31, 2009, Port Co. sold six-month-old equipment at fair value and leased it back. There was a loss on the sale. Port pays all insurance, maintenance, and taxes on the equipment. The lease provides for eight equal annual payments, beginning December 31, 2010, with a present value equal to 85% of the equipment's fair value and sales price. The lease 's term is equal to 80% of the equipment 's useful life. There is no provision for Port to reacquire ownership of the equipment at the end of the lease term.

Required:1. a. Explain why it is important to compare an equipment's fair value to its lease payments ' present value, and its useful life to the lease term.
b. Evaluate Port's leaseback of the equipment in terms of each of the four criteria for determination of a capital lease.
2. Explain how Port should account for the sale portion of the sale-leaseback transaction at December 31, 2009.
3. Explain how Port should report the leaseback portion of the sale-leaseback transaction on its December 31, 2010 balance sheet.

Reference no: EM13867074

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