Question

Ivanhoe Company leases a building to Metlock, Inc, on January 1, 2025. The following facts pertain to the lease agreement. 1. The lease term is 5 years, with equal annual rental payments of $3,293 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $16,500, a book value to lvanhoe of $9,500, and a useful life of 6 years. 4. At the end of the lease term, Ivanhoe and Metlock expect there to be an unguaranteed residual value of $3,380. 5. Ivanhoe wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Metlock was unaware of the implicit rate used in the lease by Ivanhoe and has an incremental borrowing rate of 9%. Click here to view factor tables. How would Ivanhoe (lessor) and Metlock (lessee) classify this lease? Quanhoe would classify the lease as a lease. How would Ivanhoe initially measure the lease receivable, and how would Metlock initially measure the lease liability and right-of-use asset? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, eg. 5,275.

Answer 1

Ivanhoe would classify the lease as an operating lease. Ivanhoe would measure the lease receivable using the implicit rate of 8%. Metlock would measure the lease liability and right-of-use asset using the incremental borrowing rate of 9% and including initial direct costs.

Step-by-step explanation:

Ivanhoe Company would classify this lease as an operating lease, while Metlock would classify it as an operating lease as well.

To initially measure the lease receivable, Ivanhoe would calculate the present value of the lease payments using the implicit rate, which is 8%. The calculation would involve discounting each annual payment of $3,293 back to the beginning of the lease term.

Metlock would initially measure the lease liability and the right-of-use asset by calculating the present value of the lease payments using their incremental borrowing rate, which is 9%. They would also include the initial direct costs incurred in obtaining the lease.