Reference no: EM133512681

 Case Study: cancelable lease arrangement with Breton Leasing for a certain machine. Breton's primary business isleasing. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine's economiclife. Breton will take possession of the machine at the end of the initial 3-year lease and lease it toanother, smaller company that does not need the most current version of the machine. Sylvan doesnot guarantee any residual value for the machine and will not purchase the machine at the end of thelease term. Sylvan's incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Sylvanhas no way of knowing the implicit rate used by Breton. Using either rate, the present value of thelease payments is between 90% and 100% of the fair value of the machine at the date of the leaseagreement. Breton is reasonably certain that Sylvan will pay all lease payments.

Instructions

Question a. With respect to Sylvan (the lessee), answer the following.

1. How should Sylvan compute the appropriate amount to be recorded for the lease or asset acquired?

2. What accounts will be created or affected by this transaction, and how will the lease or asset and other costs related to the transaction be recorded in earnings?

3. What disclosures must Sylvan make regarding this leased asset?

Question b. With respect to Breton (the lessor), answer the following

1. What type of leasing arrangement has been entered into? Explain the reason for your answer.

2. How should this lease be recorded by Breton, and how are the appropriate amounts