Chapter 21

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CHAPTER 21

Accounting for Leases

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 21-1
The lease does not meet the transfer of ownership test, the bargain purchase test, or the economic life test [(5 years ÷ 8 years) < 75%]. However, it does pass the recovery of investment test. The present value of the minimum lease payments ($31,000 X 4.16986 = $129,266) is greater than 90% of the FV of the asset (90% X $138,000 = $124,200). Therefore, Callaway should classify the lease as a capital lease.

BRIEF EXERCISE 21-2
Leased Equipment150,000
Lease Liability150,000
Lease Liability 43,019
Cash 43,019

BRIEF EXERCISE 21-3
Interest Expense 29,530
Interest Payable [($300,000 – $53,920) X 12%] 29,530 Depreciation Expense 37,500
Accumulated Depreciation—Capital Leases
($300,000 X 1/8) 37,500

BRIEF EXERCISE 21-4
Interest Payable [($300,000 – $53,920) X 12%] 29,530
Lease Liability 24,390
Cash 53,920

BRIEF EXERCISE 21-5
Rent Expense 35,000
Cash 35,000

BRIEF EXERCISE 21-6
Lease Receivable (4.99271 X $30,044)150,000
Equipment150,000
Cash30,044
Lease Receivable 30,044

BRIEF EXERCISE 21-7
Interest Receivable 9,596
Interest Revenue [($150,000 – $30,044) X 8%]9,596

BRIEF EXERCISE 21-8
Cash15,000
Rent Revenue 15,000
Depreciation Expense10,000
Accumulated Depreciation—Capital Leases
($80,000 X 1/8)10,000

BRIEF EXERCISE 21-9
Leased Equipment202,921*
Lease Liability202,921
*PV of rentals$40,000 X 4.79079$191,632
[PV of guar. RV$20,000 X .56447 11,289
$202,921
Lease Liability 40,000
Cash 40,000

BRIEF EXERCISE 21-10
Lease Receivable202,921
Equipment202,921
Cash40,000
Lease Receivable 40,000

BRIEF EXERCISE 21-11
Lease Receivable ($40,800 X 4.03735)164,724
Sales Revenue164,724
Cost of Goods Sold110,000
Inventory110,000
Cash40,800
Lease Receivable 40,800

*BRIEF EXERCISE 21-12
Cash33,000
Trucks 28,000
Unearned Profit on Sale—Leaseback 5,000
Leased Equipment 33,000*
Lease Liability 33,000

*($8,705 X 3.79079; $1 difference due to rounding.)
Depreciation Expense 6,600
Accumulated Depreciation—Capital Leases
($33,000 X 1/5) 6,600

Unearned Profit on Sale—Leaseback 1,000
Depreciation Expense ($5,000 X 1/5) 1,000

Interest Expense ($33,000 X 10%) 3,300
Lease Liability 5,405
Cash 8,705

SOLUTIONS TO EXERCISES

EXERCISE 21-1 (15–20 minutes)
(a)This is a capital lease to Adams since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 831/3% (5 ÷ 6) of the asset’s economic life. (b)Computation of present value of minimum lease payments:

$9,968 X 4.16986* = $41,565
*Present value of an annuity due of 1 for 5 periods at 10%. (c)1/1/12Leased Equipment41,565
Lease Liability41,565
Lease Liability 9,968
Cash 9,968
12/31/12Depreciation Expense 8,313
Accumulated Depreciation—
Capital Leases8,313
($41,565 ÷ 5 = $8,313)
Interest Expense 3,160
Interest Payable3,160
[($41,565 – $9,968) X .10]
1/1/13Lease Liability 6,808
Interest Payable 3,160
Cash 9,968

EXERCISE 21-2 (20–25 minutes)
(a)To Brecker, the lessee, this lease is a capital lease because the terms satisfy the following criteria: 1.The lease term is greater than 75% of the economic life of the leased asset; that is, the lease term is 831/3 % (50/60) of the economic life. 2.The present value of the minimum lease payments is greater than 90% of the fair value of the leased asset; that is, the present value of $10,515 (see below) is 96% of the fair value of the leased asset: (b)The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual...
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