21-61
P21-9 (continued)
2. (c) Summary of Lease and Interest Payments
(1)
Murrell
Builders
Benjamin
Company
Date
(2)
Lease
Payment
Required
Lease
Payment
Received
(3)
Interest
Expense
Interest
Revenue
(4)
Balance
of Lease
Obligation
Net
Investmenta
January 1, 2010 $50,000.00
3. Journal entries:
Murrell Builders (Lessee):
21-62
P21-9 (continued)
3. (continued)
Dec. 31 Interest Expense 4,892.60
Accrued Interest on
Capital Lease Obligation 4,892.60
Benjamin Company (Lessor):
2010
Jan. 1 Equipment Leased to Others 50,000
Cash 50,000
Assets
Property, plant, and equipment:
Leased equipment $50,000.00
Less: Accumulated depreciation (12,500.00) $37,500.00
P21-9 (continued)
4. (continued)
BENJAMIN COMPANY
Balance Sheet (Partial)
December 31, 2010
Assets
P21-10
1. Initial direct costs are the costs incurred by the lessor to originate a lease that
(a) result directly from and are essential to acquire that lease and (b) would
not have been incurred had that leasing transaction not occurred. They also
include certain costs directly related to specified activities performed by the
2. To be classified as a sales-type lease, there must be a dealer’s or
manufacturer’s profit. This profit is defined as:
P21-10 (continued)
2. (continued)
3. 2010
Jan. 1 Equipment Leased to Others 24,913.94
Cash 24,913.94
1 Lease Receivable 43,000.00a
P21-11
1. Application of Criteria for Determination
of Lease Classification
Column A Criteria Met Remarks
1. Transfer of ownership No If the bargain purchase is not
at end of lease made, the computer reverts to
the lessor
P21-11 (continued)
1. (continued)
Column A Criteria Met Remarks
4. Present value of lease Yes Since the implicit interest rate
payments is 90% or is 12%, the fair value of the
*PV of lease payments and bargain purchase option:
**The relevant figure here is the bargain purchase option.
The estimated residual value is irrelevant to the problem.
Column B Criteria Met
1. Collectibility assured Yes
2. 2010
Jan. 1 Lease Receivable
P21-11 (continued)
2. (continued)
Note: Since there is a bargain purchase option, the
unguaranteed residual value does not accrue to the lessor;
3. Since the lease contains a bargain purchase option, the unguaranteed
residual value does not accrue to the lessor, and is therefore omitted in both
P21-12
1. Application of Criteria for Determination
of Lease Classification
Column A Criteria Met Remarks
1. Transfer of ownership
at end of lease No
21-67
P21-12 (continued)
1. (continued)
*Present value of lease payments:
$56,100 immediately and at beginning of next 5 years
Column B Criteria Met
1. Collectibility assured Yes
2. Entries for Scuppermong Farms (lessee):
2010
Jan. 1 Leased Equipment 271,154.68
Capital Lease Obligation 271,154.68
21-68
P21-12 (continued)
2. (continued)
Dec. 31 Depreciation Expense:
Entries for Tyrrell Equipment (lessor):
2010
Jan. 1 Equipment Leased to Others 271,154.68
Cash 271,154.68
During Property Taxes Payable 500
the Insurance Payable 350
year Maintenance Expense Payable 250
Cash 1,100
P21-13 (AICPA adapted solution)
Note to Instructor: This problem includes material from Chapter 18 on long-term
construction projects.
DAHLIA COMPANY
Income Statement
For the Year Ended December 31, 2010
Operating revenues:
Operating (loss) $ (857,660)
Other income (Schedule 5) 334,325
(Loss) before income taxes $ (523,335)
Schedule 1: Computation of Sales from Lease Recorded as a Sale
$3,593,250
Schedule 2: Computation of Revenues Recognized on Long-Term Contracts
Costs incurred in 2009 $1,500,000
21-70
P21-13 (continued)
Schedule 3: Computation of Cost of Sales on Long-Term Contracts
Schedule 4: Computation of Selling, General, and Administrative Expenses
Operating Leases:
Depreciation on leased equipment:
Schedule 5: Computation of Other Income
Interest Income from Lease Recorded as a Sale:
21-71
P21-14
1. Criteria for Lease Classification
Applicable Column A Criteria* Met
1. Transfer of ownership at end of lease No
2. Bargain purchase option No
Column B Criteria
1. Collectibility assured Yes
2. The “lease term 75% of economic life” criterion can’t be used because land has
no limited life. Since lease payments on land represent only interest or interest