PROBLEM 21-1
(a) This is a capital lease to Jensen since the lease term is greater than 75% of the
economic life of the leased asset. The lease term is 78% (7 ÷ 9) of the asset’s
economic life.
This is a capital lease to Glaus because collectibility of the lease payments is
reasonably predictable, there are no important uncertainties surrounding the costs yet
to be incurred by the lessor, and the lease term is greater than 75% of the asset’s
economic life. Since the fair value ($700,000) of the equipment exceeds the lessor’s
cost ($525,000), the lease is a sales-type lease.
(b) Calculation of annual rental payment:
= $121,130
**Present value of $1 at 10% for 7 periods.
**Present value of an annuity due at 10% for 7 periods.
(c) Computation of present value of minimum lease payments:
PV of annual payments: $121,130 X 5.23054** = $633,575
PV of guaranteed residual value: $100,000 X .48166** = 48,166
$681,741
**Present value of an annuity due at 11% for 7 periods.
**Present value of $1 at 11% for 7 periods.
1/1/17
(d) Leased Equipment ………………………………………… 681,741
Lease Liability ……………………………………… 681,741
Lease Liability ………………………………………………. 121,130
Cash ……………………………………………………. 121,130
PROBLEM 21-1 (Continued)
12/31/17
Depreciation Expense …………………………………… 83,106
Accumulated Depreciation—
Capital Leases
($681,741 – $100,000) ÷ 7 …………………… 83,106
Interest Expense …………………………………………… 61,667
Interest Payable
($681,741 – $121,130) X .11 ………………… 61,667
1/1/18
Lease Liability ………………………………………………. 59,463
Interest Payable ……………………………………………. 61,667
Cash ……………………………………………………. 121,130
12/31/18
Depreciation Expense …………………………………… 83,106
Accumulated Depreciation—
Capital Leases …………………………………. 83,106
Interest Expense …………………………………………… 55,126
Interest Payable …………………………………… 55,126
[($681,741 – $121,130 –
$59,463) X .11]
1/1/17
(e) Lease Receivable ………………………………………….. 700,000
Cost of Goods Sold ………………………………………. 525,000
Sales Revenue ……………………………………… 700,000
Inventory ……………………………………………… 525,000
Cash ……………………………………………….. 121,130
Lease Receivable ………………………………….
121,130
PROBLEM 21-1 (Continued)
12/31/17
Interest Receivable ……………………………………….. 57,887
Interest Revenue
[($700,000 – $121,130) X .10] ……………… 57,887
1/1/18
Cash ……………………………………………….. 121,130
Lease Receivable …………………………………. 63,243
Interest Receivable ………………………………. 57,887
12/31/18
Interest Receivable ……………………………………….. 51,563
Interest Revenue
($700,000 – $121,130 –
$63,243) X .10 …………………………………………… 51,563
LO: 2, 4, Bloom: AN, Difficulty: Simple, Time: 20-25, AACSB: Analytic, AICPA BB: None,
AICPA FC: Reporting, AICPA PC: None
PROBLEM 21-2
(a) The lease is an operating lease to the lessee and lessor because:
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 (5/12 = 42%) 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.
$33,000 Annual Lease Payments X PV of an annuity-due at 9% for 5 years
$33,000 X 4.23972 = $139,910.76, which is less than $216,000.00 (90% X
$240,000.00).
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.
