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French Oil amp; Gas Company is an energy exploration company located in western France. The company has traditionally explored oil and gas in the...
French Oil & Gas Company is an energy exploration company located in western France. The company has traditionally explored oil and gas in the European continent. The company’s board of directors has been debating a major shift in operations in order to meet the growing demand for energy. Due to the relatively high gas prices from Russia, French Oil & Gas Company has decided to explore shale oil starting in France and then moving to Italy and Greece. Shale oil requires specialized equipment that can dig and break hard rock so that oil can be extracted. The only company that leases these specialized equipment is Lease Germ Company, which is a leasing company located in Germany. On January 1,2015, French Oil & Gas Company decided to lease Shale oil machinery from Lease Germ Company. The two companies decided that the lease term is8 years with yearly lease payments of $600,000 starting on January 1, 2015 and then each December 31 thereafter. The details of the agreement indicate that the interest rate agreed upon by the two companies is6%. Additional details suggest that the useful life of the Shale oil machinery is15 years with no residual value. It is important to note that Lease Germ had just recently purchased the machinery for $8,227,975. On the date of signing the contract between the two companies, the directing manager of Lease Germ told the representative from French Oil & Gas Company the following:
“It is interesting that you would want to lease these machines at this time. As you know these are specialized machinery that only a few companies worldwide can use. However, an American company called Texas Shale leased the exact same machinery today. Their lease term agreements are the same as yours. The only difference is that French Oil & Gas Company is located in the France, while Texas Shale is located in the United States.”
Required:
1. With respect to leasing machinery, describe the amount and nature of expense that French Oil & Gas Company and Texas Shale will record for the year 2015.
2. If French Oil & Gas Company and Texas Shale had the choice to select accounting standards to use for this lease transaction, which standards would provide the most benefit to each company? Your discussion should focus only on how choosing a set of standards would affect the leasing situation that is mentioned above
