Question

On January 1, 2021, Worchester Co. leased non-specialized machinery under a 6-year lease. The machinery has a 10-year economic life. The present value of the monthly lease payments is determined to be 70% of the machinery's fair value. The lease contract includes neither a transfer of title to Worchester nor a bargain purchase option. Worchester will record straight-line lease expense:

a.neither using U.S. GAAP nor IFRS.

b.if using U.S. GAAP, but not IFRS.

c.if using IFRS, but not U.S. GAAP.

d.if using either U.S. GAAP or IFRS.

Answer 1

Worchester Co. will record straight-line lease expense under both U.S. GAAP and IFRS for a non-specialized machinery lease without title transfer or a bargain purchase option.

Step-by-step explanation:

Worchester Co. will record lease expense under a 6-year lease on machinery, without a transfer of title or a bargain purchase option, is d. if using either U.S. GAAP or IFRS. Under both U.S. GAAP (ASC 842) and IFRS (IFRS 16), lessees are required to recognize a right-of-use asset and a lease liability at the commencement of the lease term for most leases, including non-specialized equipment. This asset is typically amortized on a straight-line basis over the lease term, which results in recognizing straight-line lease expense, unless the lease payments are structured to increase over time.

IFRS and U.S. GAAP have converged in many aspects of lease accounting, particularly in eliminating the distinction between operating and capital leases for lessees, which would require straight-line expense recognition for both types of leases. Therefore, Worchester Co. will record lease expense uniformly under both accounting standards provided the lease does not contain variable payments that depend on usage or performance.