On April 1, 2010, a regional bus operation, Cross Country, Inc. (Cross Country or CCI), enters into a non-cancelable lease agreement with a leasing company, Please Lease, Inc. (Please Lease), to lease five new buses for a period of eight years. The following is additional information in regards to this lease agreement:
- The economic life of these types of buses is 11 years on average, assuming no residual value.
- The lease term will commence once the buses have been delivered to the depot of Cross Country and have been accepted by an independent inspection company that will test whether the buses meet the minimum conditions. This is expected to take place on April 1, 2010.
- CCI has a purchase option at expiration of the lease agreement at an exercise price of 17% of the fair value of the buses at inception.
- On April 1, 2010, the fair value of the buses is estimated at $1.05 million for the five buses.
- CCI will pay total monthly lease payments of $12,000 for all five buses at the beginning of each month.
- There is a significant market for second-hand buses that allows Cross Country to estimate what the expected residual value of the buses is, which is 20% of the fair value at April 1, 2010.
- CCI's incremental monthly borrowing rate is .447%.
- Please Lease discloses the monthly implicit interest rate on the lease to be .46%
- The buses are delivered on April 1, 2010, and are accepted by Cross Country, tested, and found to be in conformity with specifications.
Required
- Obtain and review ASC 840, Leases, and IAS 17, Leases.
- In a group of three to five, review and discuss the following. Be prepared to support your opinions as appropriate with reference to the standards.
- What interest rate should CCI use to determine the PV of MLP under US GAAP? Does this rate differ for IFRS?
- Based on the rate determined above, calculate the PV of the MLP under both US GAAP and IFRS for the purposes of the capitalization criteria.
- Determine the classification of the lease for US GAAP? Does the classification differ for IFRS? If so, why? Provide comments where any judgment by CCI's management would be necessary.
- For the month of April 2010, what journal entries does CCI record under US GAAP and IFRS (rounded to the nearest dollar)?
- CCI prepares a classified balance sheet as of December 31 for financial reporting purposes for both US GAAP and IFRS. What amounts, if any, would be reflected on this balance sheet?