CHAPTER 21
SOLUTIONS TO B PROBLEMS
PROBLEM 21-1B
(a) This is a capital lease to Pro since the lease term is equal to or greater
than 75% of the economic life of the leased asset. The lease term is
75% (6 ÷ 8) of the asset’s economic life.
This is a capital lease to Rookie Leasing because collectibility of the
(b) Calculation of annual rental payment:
(c) Computation of present value of minimum lease payments:
PV of annual payments: $73,806 X 4.79079** = $353,589
PV of guaranteed residual value: $50,000 X 0.56447** = 28,224
$381,813
PROBLEM 21-1B (Continued)
12/31/14 Depreciation Expense ……………………. 55,302
Accumulated Depreciation—
Capital Leases
($381,813 – $50,000) ÷ 6……….. 55,302
Interest Payable ……………………… 26,500
[($381,813 – $73,806 –
$43,005) X 0.10]
(e) 1/1/14 Lease Receivable ………………………….. 400,000
Cost of Goods Sold ……………………….. 300,000
PROBLEM 21-2B
(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,
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.
(b) Lessee’s Entries
Rent Expense …………………………..……………………….. 30,000
Cash …………………………………………………………… 30,000
PROBLEM 21-2B (Continued)
(c) Fort Construction as lessee must disclose in the income statement the
$30,000 of rent expense and in the notes the future minimum rental
payments required as of January 1 (in total, $120,000) and for each of
the succeeding four years: 2015—$30,000; 2016—$30,000; 2017—
$30,000; 2018— $30,000. Nothing relative to this lease would appear on
the lessee’s balance sheet.
PROBLEM 21-3B
(a) The lease should be treated as a capital lease by Manatee Industries
requiring the lessee to capitalize the leased asset. The lease qualifies for
capital lease accounting by the lessee because: (1) title to the boats
transfers to the lessee, (2) the lease term is equal to the estimated life
of the asset, and (3) the present value of the minimum lease payments
exceeds 90% of the fair value of the leased engines. The transaction
represents a purchase financed by installment payments over a 8-year
period.
Present Value of Lease Payments
$84,591 X 6.20637* ……………………………………………. $525,000
*Present value of an annuity due at 8% for 8 years, rounded by $3.
(c) Lease Receivable ………………………………………. 525,000
Cost of Goods Sold …………………………..………. 450,000
Sales Revenue ……………………………………. 525,000
Inventory ……………………………………………. 450,000
PROBLEM 21-3B (Continued)
(e) MANATEE INDUSTRIES
Lease Amortization Schedule
Date
Annual
Lease
Receipt/
Payment
Interest on
Receivable/
Liability at 8%
Reduction in
Receivable/
Liability
Lease
Receivable/
Liability
1/1/14
525,000
1/1/14
84,591
84,591
440,409
1/1/15
84,591
49,358
Lessee (December 31, 2014)
Interest Expense ………………………………………. 35,233
Interest Payable …………………………………. 35,233
(f) MANATEE INDUSTRIES
Balance Sheet
December 31, 2014
Property, plant, and equipment:
Current liabilities:
Leased property
$525,000
Interest payable
Lease liability
PROBLEM 21-3B (Continued)
SEA COW INC.
Balance Sheet
December 31, 2014
Assets
Current assets:
Interest receivable …………………………………………….. $ 35,233
Lease receivable ……………………………………………….. 49,358
PROBLEM 21-4B
2. Current liabilities:
$ 29,401 Lease liability
$ 10,599 Interest payable
3. $ 8,247 Interest expense (See amortization schedule)
$ 4,000 Lease executory expense
$ 34,497 Depreciation expense ($172,485 ÷ 5 = $34,497)
4. Current liabilities:
$ 31,753 Lease liability
$ 8,247 Interest payable
PROBLEM 21-4 (Continued)
2. Current liabilities:
$ 29,401 Lease liability
$ 4,416 Interest payable
3. $ 9,619 Interest expense
[($10,599 – $4,416) + ($8,247 X 5/12) =
[$6,183 + $3,436 = $9,619]
$ 4,000 Lease executory expense
$ 34,497 Depreciation expense ($172,485 ÷ 5 = $34,497)
4. Current liabilities:
$ 31,753 Lease liability
$ 3,436 Interest payable ($8,247 X 5/12 = $3,436)
PROBLEM 21-5B
(a) 1. $ 10,599 Interest revenue
2. Current assets:
$ 40,000 Lease receivable $29,401
Interest receivable $10,599
(b) 1. $ 4,416 Interest revenue ($10,599 X 5/12 = $4,416)
2. Current assets:
$ 33,817 Lease receivable $29,401
Interest receivable $4,416
4. Current assets:
$ 35,189 Lease receivable $31,753
PROBLEM 21-6B
Note: This lease is a capital lease to the lessee because the lease term
(5 years) exceeds 75% of the remaining economic life of the asset (6 years).
Also, the present value of the minimum lease payments exceeds 90% of the
fair value of the asset.
$ 167,949 Annual rental payment
X 4.16987 PV of an annuity due of 1 for n = 5, i = 10%
$ 700,326* PV of periodic rental payments
(a) VANCE COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual
Lease
Payment
Plus GRV
Interest (10%)
on Liability
Reduction
of Lease
Liability
Lease
Liability
1/1/14
$750,000
1/1/14
$167,949
$167,949
582,051
1/1/15
167,949
472,307
1/1/16
167,949
1/1/17
167,949
12/31/18
$919,745
$750,000
PROBLEM 21-6B (Continued)
(b) January 1, 2014
Leased Equipment …………………………………………. 750,000
Lease Liability …………………………………………. 750,000
December 31, 2014
Interest Expense ……………………………………………. 58,205
Interest Payable ………………………………………. 58,205
January 1, 2015
Interest Payable …………………………………………….. 58,205
Interest Expense ……………………………………… 58,205
Interest Expense ……………………………………………. 58,205
Lease Liability ……………………………………………….. 109,744
Cash ……………………………………………………….. 167,949
PROBLEM 21-6B (Continued)
(Note to instructor: The guaranteed residual value was subtracted for
purposes of determining the depreciable base. The reason is that at
PROBLEM 21-7B
(a) December 31, 2014
Leased Equipment …………………………………………. 287,447
Lease Liability …………………………………………. 287,447
(b) December 31, 2015
Depreciation Expense ……………………………………. 41,064
Accumulated Depreciation—Capital
December 31, 2015
Interest Expense ……………………………………………. 22,745
Lease Liability ……………………………………………….. 37,255
PROBLEM 21-7B (Continued)
Blue Ocean COMPANY (Lessee)
Lease Amortization Schedule
(Annuity Due Basis)
Date
Annual
Lease
Payment
Interest (10%)
on Liability
Reduction
of Lease
Liability
Lease
Liability
12/31/14
—
—
—
$287,447
12/31/14
$60,000
$ 0
$60,000
227,447
12/31/17
104,132
12/31/19
(c) December 31, 2016
Interest Expense ……………………………………………….. 19,019
Lease Liability …………………………………………………… 40,981
Cash …………………………………………………………… 60,000
PROBLEM 21-7B (Continued)
(d) BLUE OCEAN COMPANY
Balance Sheet
December 31, 2016
Property, plant, and equipment:
Current liabilities:
PROBLEM 21-8B
(a) The $420,000 is the present value of the 5 annual lease payments of
$105,400 less the $8,000 attributable to the payment for taxes, insurance,
and maintenance. In other words, it is the present value of five $97,400
payments to be made at the beginning of each year discounted at 8%,
(b) Leased Equipment ………………………………………….. 420,000
(c) Depreciation Expense …………………………………….. 168,000
Accumulated Depreciation—Capital
Leases …………………………………………………. 168,000
($420,000 X 40% = $168,000)
PROBLEM 21-8B (Continued)
OAK FURNITURE COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual
Lease
Payment
Interest (8%)
on Liability
Reduction
of Lease
Liability
Lease
Liability
1/1/14
$420,000
322,600
(f) OAK FURNITURE COMPANY
Balance Sheet
December 31, 2014
Assets
Liabilities
Property, plant, and equipment:
Current:
Noncurrent: