Exercise 1, 2


Exercise 1, 2



Rick Kleckner Co recorded a capital lease at $ 200,000 on January 1, 2005. The interest rate is 12 %. Kleckner

Co made the first lease payment of $ 35,947 on January

1, 2005.The lease required 8 annual payments. The equipment has a useful life of 8 years with no salvage value. Prepare Kleckner Co’s December 31, 2005, adjusting entries.


Assume that at December 31, 2005, Kleckner made an adjusting entry to accrue interest expense of $ 19,686 on the lease. Prepare Kleckner’s January, 1, 2006, journal entry to record the second lease payment of $


Answer of Exercise 1, 2

BE. 21-3

Interest Expense

Interest Payable

[($ 200,000 – $ 35,947) x 12 %]



Depreciation Expense 25,000

Accumulated Depreciation

($ 200,000 x 1/8)


BE. 21-4

Interest Payable

Lease Liability





Exercise 3, 4

BE.21.6, Assume that IBMleased equipment that was carried at cost $ 150,000 to Sharon Swander Co. The term of the lease is 6 years beginning January 1, 2005, with equal rental payments of $ 30,677 at the beginning of each year. All executory cost are paid by

Swander directly to third parties. The fair value of the equipment at the inception of the lease is $ 150,000.

The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of

9 %, no bargain purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by Henkel. Prepare IBM’s

January 1, 2005, journal entries at the inception of the lease.

BE.21.7, Assume the direct financing lease was recorded at a present value of $ 150,000. Prepare IBM’s

December 31, 2005, entry to record interest.

Answer of Exercise 3, 4

BE. 21-6

Lease Receivable



PV of rentals (4.88965 x $ 30,677)




Lease Receivable



BE. 21-7

Interest Receivable

Interest Revenue

[($ 150,000 – $ 30,677) x 9 %]



Exercise 5


, Synergetics Inc leased a new crane to M.K. Gumowski

Construction under a 5 year noncancelable contract starting January

1, 2005. Terms of the lease require payments of $ 22,000 each

January 1, starting January 1, 2005. Synergetics will pay insurance, taxes and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of $ 160,000, and a cost to Synergetics of

$ 160,000. The estimated fair value of the crane is expected to be $

45,000 at the end of the lease term. No bargain purchase or renewal options are included in the contract. Both Synergetics and Gumowski adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Gumowski’s incremental borrowing rate is 10 %, and Synergetics implicit rate of 9 % is known by Gumowski.

Instructions a.Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.

b. Prepare all the entries related to the lease contract and leased asset for the year 2005 for the lessee and lessor, assuming the following amounts, Insurance $ 500, Taxes $ 2,000, Maintenance $ 650,

Straight line depreciation and salvage value $ 10,000 c. Discuss what should be presented in the B/S, I/S, and the related notes both the lessee and the lessor at December 31, 2005.

Answer of Exercise 5

(a) Transaksi ini merupakan Operating Lease bagi pembukuan

Lessee dan Lessor, karena:

1. it does not transfer ownership,

2. it does not contain a bargain purchase option,

3. it does not cover at least 75% of the estimated economic life of the crane, and

4. the present value of the lease payments is not at least 90% of the fair value of the leased crane.

$22,000 Annual Lease Payments X PV of annuity due at 9% for 5 years

$22,000 X 4.23972 = $93,273.84, which is less than $144,000.00

(90% X $160,000.00)

At least one of the four criteria would have had to be satisfied for the lease to be classified as other than an operating lease.

Answer of Exercise 5

(a) (b) Lessee’s Entries

Rent Expense 22,000

Cash 22,000

Lessor’s Entries

Insurance Expense

Tax Expense

Maintenance Expense



Cash or Accounts Payable


Depreciation Expense 12,500

Accumulated Depreciation —Crane

[($160,000 – $10,000) ÷ 12]

Cash 22,000

Rental Revenue 22,000



Answer of Exercise 5


(c) M. K. Gumowski as lessee must disclose in the income statement the $22,000 of rent expense and in the notes the future minimum rental payments required as of January 1 (in total, $88,000) and for each of the succeeding four years: 2006 —

$22,000; 2007 —$22,000; 2008—$22,000; 2009—$22,000. Nothing relative to this lease would appear on the lessee’s balance sheet.

Synergetics as lessor must disclose in the balance sheet or in the notes the cost of the leased crane ($160,000) and the accumulated depreciation of $12,500 separately from assets not leased.

Additionally, Synergetics must disclose in the notes the minimum future rentals as a total of $88,000, and for each of the succeeding four years: 2006 —$22,000; 2007—$22,000; 2008—$22,000; 2009—