CHAPTER 21
SOLUTIONS TO B EXERCISES
E21-1B (15–20 minutes)
(a) This is a capital lease to Manor since the lease term (6 years) is greater
than 75% of the economic life (6 years) of the leased asset. The lease
term is 100% (6 ÷ 6) of the asset’s economic life.
(c) 1/1/14 Leased Machine Under Capital
Leases …………………………………………. 250,000
Lease Liability …………………………... 250,000
Lease Liability …………………………………. 54,291
Cash …………………………………………. 54,291
E21-2B (20–25 minutes)
(a) To Jupiter, 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
(b) The minimum lease payments in the case of a guaranteed residual value
by the lessee include the guaranteed residual value. The present value
therefore is:
(c) Leased Property Under Capital Leases ………………. 102,168
Lease Liability ……………………………………………. 102,168
E21-3B (20–30 minutes)
Capitalized amount of the lease:
Yearly payment …………………………………………………….. $81,680.00
Executory costs …………………………………………………… (1,563.19)
Minimum annual lease payment…………………………….. $80,116.81
Present value of minimum lease payments:
12/31/14 Depreciation Expense ………………….. 66,666.67
Accumulated Depreciation—
Capital Leases
($400,000 ÷ 6) ……………………. 66,666.67
12/31/15 Depreciation Expense ………………….. 66,666.67
Accumulated Depreciation—
Capital Leases ………………….. 66,666.67
E21-3B (Continued)
Schedule 1
Yard Waste Corp.
Lease Amortization Schedule
(Lessee)
Date
Annual
Payment Less
Executory
Costs
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
E21-4B (20–25 minutes)
Computation of annual payments:
Cost (fair market value) of leased asset to lessor ………………. $325,000.00
Less: Present value of salvage value
E21-4B (Continued)
POWER TOP LEASING (Lessor)
Lease Amortization Schedule
Date
Annual Payment
Less Executory
Costs
Interest
on Lease
Receivable
Recovery
of Lease
Receivable
1/1/14
12/31/14
12/31/15
(a) 1/1/14 Lease Receivable ………………….. 325,000.00
Equipment …………………….. 325,000.00
(b) 12/31/17 Cash ……………………………………. 25,000.00
Lease Receivable …………… 25,000.00
E21-5B (15–20 minutes)
(a) Because the lease term is longer than 75% of the economic life of the
asset, it is a capital lease to the lessee. Assuming collectibility of the
rents is reasonably assured and no important uncertainties surround the
amount of unreimbursable costs yet to be incurred by the lessor, the
lease is a direct financing lease to the lessor.
The lessor should adopt the direct financing lease method and replace
the asset cost of $225,000 with Lease Receivable of $225,000. (See
schedule on next page.) Interest would be recognized annually at
a constant rate relative to the unrecovered net investment.
Cost (fair market value of leased asset) …………………………... $225,000
E21-5B (Continued)
(b) Schedule of interest and amortization:
Rent Receipt/
Payment
Interest
Revenue/
Expense
Reduction of
Principal
Receivable/
Liability
1/1/14
—
—
—
$225,000
12/31/14
$62,417
*$27,000*
$35,417
189,583
12/31/15
149,916
EXERCISE 21-6B (15–20 minutes)
(a) $41,747 X 4.7908 = $200,000 (rounded by $1)
12/31/14 Interest Receivable …………………………….. 15,825
Interest Revenue
[($200,000 – $41,747) X 0.10] …….. 15,825
E21-7B (20–25 minutes)
(a) Computation of annual rental payment:
(b) This is a capital lease to Local since the lease term is 75% of the asset’s
economic life (6/8 = 75%). Also, the present value of the minimum lease
payments is more than 90% of the fair value of the asset.
(c) 1/1/14 Leased Equipment Under Capital
Leases ……………………………………… 317,112
12/31/14 Depreciation Expense …………………… 52,852
Accumulated Depreciation
($317,112 ÷ 6 years) ……………. 52,852
E21-7B (Continued)
(d) 1/1/14 Lease Receivable ………………………… 320,000*
Cost of Goods Sold …………………….. 249,799**
Sales …………………………………… 304,799***
E21-8B (20–30 minutes)
(a) The lease agreement has a bargain purchase option and thus meets the
criteria to be classified as a capital lease from the viewpoint of the lessee.
The present value of the minimum lease payments also exceeds 90% of
the fair value of the assets.
(b) The lease agreement has a bargain purchase option. The collectibility of the
E21-8B (Continued)
(c) Computation of lease liability:
$ 31,415.63 Annual rental payment
X 5.21236 PV of annuity due of 1 for n = 6, i = 6%
NEW MOON COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual Lease
Payment Plus
BPO
Interest (6%)
on Liability
Reduction
of Lease
Liability
Lease
Liability
10/1/14
$167,274.37
10/1/14
10/1/15
10/1/16
10/1/17
10/1/18
10/1/19
E21-8B (Continued)
(d) 10/1/14 Leased Equipment Under
Capital Leases ……………………….. 167,274.37
Lease Liability …………………….. 167,274.37
1/1/15 Interest Payable ………………………….. 2,037.88
Interest Expense ………………….. 2,037.88
10/1/15 Interest Expense …………………………. 8,151.52
Lease Liability …………………………….. 23,264.11
Cash ……………………………………. 31,415.63
12/31/15 Interest Expense …………………………. 1,688.92
Interest Payable …………………… 1,688.92
($6,755.68 X 3/12 = $1,688.92)
(Note: Because a bargain purchase option was involved, the leased asset
is depreciated over its economic life rather than over the lease term.)