PROBLEM 22-8
(a)
The $370,000 is the present value of the five annual lease payments of
$94,372 less the $6,000 attributable to the payment for taxes,
insurance, and maintenance. In other words, it is the present value of
five $88,732 payments to be made at the beginning of each year
discounted at 10%, the lower of the implicit or incremental rates
(since the lessee knows the implicit rate). The cost of taxes,
insurance, and maintenance represents periodic services to be
performed in the future by the lessor and should not be capitalized.
The amount capitalized represents the completed service element by
the lessor company in that it has made the property available; the
taxes, insurance, and maintenance represent the uncompleted,
unrendered services of the lessor.
(b)
Leased Equipment Under Capital Leases ...........................
Obligations Under Capital Leases ..............................
($88,732 X Annuity Due Factor for 5 years
at 10% = $88,732 X 4.16986 = $370,000)
370,000
Taxes, Insurance, and Maintenance Expense ....................
Obligations Under Capital Leases .......................................
Cash ..............................................................................
6,000
88,732
Depreciation Expense ..........................................................
Accumulated Depreciation—Capital Leases .............
($370,000 X 40% = $148,000)
148,000
Interest Expense ...................................................................
Interest Payable ...........................................................
28,127
Taxes, Insurance, and Maintenance Expense ....................
Interest Payable ....................................................................
Obligations Under Capital Leases .......................................
Cash ..............................................................................
6,000
28,127
60,605
(c)
(d)
(e)
370,000
94,732
148,000
28,127
94,732
PROBLEM 22-8 (Continued)
CHARLIE DOSS COMPANY (Lessee)
Lease Amortization Schedule
Date
1/1/02
1/1/02
1/1/03
1/1/04
Annual
Lease
Payment
88,732
88,732
88,732
(f)
Interest
Expense
at 10%
28,127
22,066
Change
in Lease
Obligation
Balance
of the Lease
Obligation
88,732
60,605
66,666
$370,000
281,268
220,663
153,997
CHARLIE DOSS COMPANY
Balance Sheet
December 31, 2002
Assets
Property, plant, and equipment:
Leased property
under capital leases
$370,000
Less: Accumulated
depreciation
148,000
222,000
Liabilities
Current:
Interest payable
Obligations under
capital leases
Noncurrent:
Obligations under
capital leases
*See Lease Amortization Schedule in part (e) above.
$ 28,127
60,605*
220,663
PROBLEM 22-10
(a)
The lease is a sales-type lease because: (1) the lease term exceeds
75% of the asset’s estimated economic life, (2) collectibility of
payments is reasonably assured and there are no further costs to be
incurred, and (3) Thomas Hanson Company realized an element of
profit aside from the financing charge.
1.
Gross investment is $320,000 (10 annual lease payments of
$30,000 each, plus the unguaranteed residual value of $20,000).
2.
Unearned interest revenue, $109,518, is the gross investment of
$320,000 less $210,482, the fair market value of the asset and the
initial present value of the investment, computed as follows:
Annual lease payment
Present value of an annuity due of $1 for
10 periods discounted at 10%
Present value of the 10 rental payments
Add present value of estimated residual
value of $20,000 in 10 years at 10%
($20,000 X .38554)
Initial present value
3.
Sales price is $202,771 (the present value of the 10 annual lease
payments); or, the initial PV of $210,482 minus the PV of the
unguaranteed residual value of $7,711.
4.
Cost of sales is $127,289 (the $135,000 cost of the asset less the
present value of the unguaranteed residual value).
$ 30,000
x 6.75902
202,771
7,711
$210,482
PROBLEM 22-10 (Continued)
(b)
THOMAS HANSON COMPANY (Lessor)
Lease Amortization Schedule
Annuity Due Basis, Unguaranteed Residual Value
Beginning
of Year
Initial PV
1
2
3
4
5
6
7
8
9
10
End of 10
Annual Lease
Payment Plus
Residual Value
Interest
(10%) on Net
Investment
Net
Investment
Recovery
(a)
—
$ 30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
20,000
$320,000
(b)
—
—
*$ 18,048*
* 16,853*
* 15,538*
* 14,092*
* 12,501*
* 10,751*
*
8,827*
*
6,709*
*
4,380*
*
1,819*
*$109,518*
(c)
—
$ 30,000
11,952
13,147
14,462
15,908
17,499
19,249
21,173
23,291
25,620
18,181
$210,482
Net
Investment
(d)
$210,482
180,482
168,530
155,383
140,921
125,013
107,514
88,265
67,092
43,801
18,181
0
*Rounding error is $1.00.
(a)
(b)
(c)
(d)
(c)
Annual lease payment required by lease contract.
Preceding balance of (d) X 10%, except beginning of first year of
lease term.
(a) minus (b).
Preceding balance minus (c).
Beginning of the Year
Lease Payments Receivable ................................................
Cost of Sales .........................................................................
Sales..............................................................................
Computer Inventory .....................................................
Unearned Interest Revenue—Leases .........................
(To record the sale and the cost of sales
in the lease transaction)
320,000
127,289
202,771
135,000
109,518
PROBLEM 22-10 (Continued)
Selling Expense .............................................................................
Cash ..............................................................................
(To record payment of the initial direct
costs relating to the lease)
Cash ..........................................................................................
Lease Payments Receivable ..........................................
(To record receipt of the first lease
payment)
End of the Year
Unearned Interest Revenue—Leases .....................................
Interest Revenue—Leases .............................................
(To record interest earned during the
first year of the lease)
4,000
4,000
30,000
30,000
18,048
18,048
PROBLEM 22-11
(a)
The lease is a capital lease because: (1) the lease term exceeds 75%
of the asset’s economic life and (2) the present value of the minimum
lease payments exceeds 90% of the fair value of the leased asset.
Initial Obligation Under Capital Leases:
Minimum lease payments ($30,000) X PV of an
annuity due for 10 periods at 10% (6.75902)
(b)
$202,771
FLYPAPER AIRLINES (Lessee)
Lease Amortization Schedule
(Annuity due basis and URV)
Beginning
of Year
Initial PV
1
2
3
4
5
6
7
8
9
10
Annual
Lease
Payment
Interest (10%)
on Unpaid
Obligation
Reduction
of Lease
Obligation
(a)
—
$ 30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
$300,000
(b)
—
—
*$17,277*
* 16,005*
* 14,605*
* 13,066*
* 11,372*
* 9,510*
* 7,461*
* 5,207*
* 2,726*
*$97,229*
(c)
—
$ 30,000
12,723
13,995
15,395
16,934
18,628
20,490
22,539
24,793
27,274
$202,771
*Rounding error is $1.
(a)
(b)
(c)
(d)
Annual lease payment required by lease contract.
Preceding balance of (d) X 10%, except beginning of first year of
lease term.
(a) minus (b).
Preceding balance minus (c).
Lease
Obligation
(d)
$202,771
172,771
160,048
146,053
130,658
113,724
95,096
74,606
52,067
27,274
0
PROBLEM 22-11 (Continued)
(c)
Lessee’s journal entries:
Beginning of the Year
Leased Equipment Under Capital Leases ...........................
Obligations Under Capital Leases ..............................
(To record the lease of computer
equipment using capital lease method)
202,771
Obligations Under Capital Leases .......................................
Cash ..............................................................................
(To record the first rental payment)
30,000
End of the Year
Interest Expense ...................................................................
Interest Payable ...........................................................
(To record accrual of annual interest on
lease obligation)
Depreciation Expense ..........................................................
Accumulated Depreciation—Leased Assets .............
(To record depreciation expense for
first year [$202,771 ÷ 10])
202,771
30,000
17,277
17,277
20,277
20,277