PROBLEM 21-9B
Entries on September 1, 2014:
(1) Leased Equipment ……………………………………… 1,044,315
Lease Liability ……………………………………… 1,044,315
Explanation and computation: This is a capital lease because the lease
term exceeds 75% of the asset’s useful life.
(2) Maintenance and Repairs Expense …………….. 2,000
Lease Liability …………………………………………… 23,000
Cash …………………………………………………… 25,000
Explanation: This entry is to record the September 1, 2014, first
Entries on September 30, 2014:
(1) Interest Expense …………………………..…………… 10,213
Interest Payable ………………………………….. 10,213
Explanation and computation: Interest accrued on the unpaid balance
(2) Depreciation Expense ……………………………….. 17,405
Accumulated Depreciation—Capital
Leases ……………………………………………. 17,405
Explanation and computation: Depreciation is recorded for one month of
PROBLEM 21-10B
(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) George Company realized an element of profit aside from the
financing charge.
1. Present value of an annuity due of $1 for
10 periods discounted at 8% ……………………………….. 7.24689
2. Sales price is $449,307 (the present value of the 10 annual lease
3. Cost of sales is $361,472 (the $380,000 cost of the asset less the
present value of the unguaranteed residual value).
PROBLEM 21-10B (Continued)
(b) SKITOWN COMPANY (Lessor)
Lease Amortization Schedule
Annuity Due Basis, Unguaranteed Residual Value
Beginning
of Year
Annual Lease
Payment Plus
Residual Value
Interest (8%)
on Lease
Receivable
Lease
Receivable
Recovery
Lease
Receivable
(a)
(b)
(c)
(d)
Initial PV
—
—
—
$467,835
1
$ 62,000
—
$ 62,000
405,835
2
62,000
*$ 32,467
29,533
376,302
3
62,000
30,104
31,896
344,406
4
309,958
5
62,000
24,797
37,203
272,755
6
21,820
40,180
232,575
7
189,181
8
62,000
15,134
46,866
142,315
9
62,000
11,385
50,615
*$192,165
*Rounding error is $1.
(a) Annual lease payment required by lease contract.
(b) Preceding balance of (d) X 8%, except beginning of first year of lease term.
(c) Beginning of the Year
Lease Receivable ……………………………………………. 467,835
Cost of Goods Sold ………………………………………… 361,472
Sales Revenue …………………………………………. 449,307
PROBLEM 21-10B (Continued)
Cash …………………………..……………………………………. 62,000
Lease Receivable ……………………………………….. 62,000
PROBLEM 21-11B
(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.
(b) ALPINE SKI RESORTS (Lessee)
Lease Amortization Schedule
(Annuity due basis and URV)
Beginning
of Year
Annual Lease
Payment
Interest (8%)
on Lease
Liability
Reduction
of Lease
Liability
Lease
Liability
(a)
(b)
(c)
(d)
Initial PV
—
—
—
$449,307
1
$ 62,000
—
$ 62,000
387,307
2
62,000
$ 30,985
31,015
356,292
3
62,000
28,503
33,497
322,795
4
62,000
36,176
286,619
5
62,000
39,071
247,548
6
62,000
19,804
42,196
205,352
7
62,000
45,572
159,780
8
62,000
49,218
110,592
9
62,000
53,155
*Rounding error is $1.
(a) Annual lease payment required by lease contract.
PROBLEM 21-11B (Continued)
(c) Lessee’s journal entries:
Beginning of the Year
Leased Equipment …………………………………………. 449,307
End of the Year
Interest Expense …………………………..……………….. 30,985
Interest Payable ………………………………………. 30,985
(To record accrual of annual interest on
lease obligation)
PROBLEM 21-12B
(a) DUDE TRANSPORTATION COMPANY
Schedule to Compute the Discounted Present Value
of Terminal Facilities and the Related Obligation
January 1, 2014
Present value of first 10 payments:
Immediate payment ……………………………….. $ 570,000
Present value of an ordinary annuity for
9 years at 6% ($570,000 X 6.80169) ………. 3,876,963 $4,446,963
(Note to instructor: The student can compute the $4,446,963 by using
the present value of an annuity due for 10 periods at 6% (7.80169 X
(b) DUDE TRANSPORTATION COMPANY
Journal Entries
2016
(1) (1/1/16)
Interest Payable …………………………..……………… 311,148
PROBLEM 21-12B (Continued)
Partial Amortization Schedule
(Annuity Due Basis)
Date
Executory
Costs
Interest
(6%) on
Lease
Liability
Lease
Liability
1/1/14
—
—
$6,000,000
1/1/14
$58,000
$ 0
5,430,000
1/1/15
1/1/17
4,652,565
(2) (12/31/16)
Depreciation Expense ……………………………………. 200,000
Accumulated Depreciation—Capital
Leases …………………………………………………. 200,000
(3) (12/31/16)
Interest Expense …………………………..……………….. 295,617
Interest Payable ………………………………………. 295,617
PROBLEM 21-13B
(a) The noncancelable lease is a sales-type lease because: (1) the lease
term is for 80% (8 ÷ 10) of the economic life of the leased asset,
1. Lease Receivable:
Present value of annual payments of $50,000
2. Sales price is the same as the present value of
minimum lease payments ……………………………………… $321,124
PROBLEM 21-13B (Continued)
(b) DANFORTH INC. (Lessor)
Lease Amortization Schedule
(Annuity due basis, guaranteed residual value)
Beginning
of Year
Annual Lease
Payment Plus
Residual Value
Interest (8%)
on Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
(a)
(b)
(c)
(d)
Initial PV
—
—
—
$321,124
1
$ 50,000
—
$ 50,000
271,124
2
50,000
$ 21,690
28,310
242,814
4
5
50,000
35,663
143,555
6
7
8
50,000
44,925
*Rounding error is $2.
(a) Annual lease payment required by lease contract.
(c) Lessor’s journal entries:
Beginning of the Year
Lease Receivable …………………………………………… 321,124
PROBLEM 21-13B (Continued)
Cash …………………………………………………………………. 50,000
Lease Receivable ………………………………………… 50,000
(To record receipt of the first lease
payment)
PROBLEM 21-14B
(a) The noncancelable lease is a capital lease because: (1) the lease term is
for 80% (8 ÷ 10) of the economic life of the leased asset and (2) the
present value of the minimum lease payments exceeds 90% of the fair
market value of the leased asset.
Initial obligation under capital lease ………………………….. $321,124
(b) CHAMBERLAIN AIRPORTS (Lessee)
Lease Amortization Schedule
(Annuity Due Basis, GRV)
Beginning
of Year
Annual Lease
Payment Plus
GRV
Interest (8%)
on Unpaid
Liability
Reduction
of Lease
Liability
Lease
Liability
(a)
(b)
(c)
(d)
Initial PV
—
—
—
$321,124
1
$ 50,000
—
$ 50,000
271,124
2
50,000
$ 21,690
28,310
242,814
3
212,239
4
179,218
5
50,000
35,663
143,555
6
105,039
7
8
50,000
44,925
$420,000
$321,124
*Rounding error is $2.
(a) Annual lease payment required by lease contract.
PROBLEM 21-14B (Continued)
(c) Lessee’s journal entries:
Beginning of the Year
Leased Equipment ………………………………………….. 321,124
Lease Liability ………………………………………….. 321,124
End of the Year
Interest Expense …………………………..………………… 21,690
Interest Payable ……………………………………….. 21,690
(To record accrual of annual interest on
lease obligation)
PROBLEM 21-15B
Memorandum Prepared by: (Your Initials)
Date:
ATLATNIV, INC.
December 31, 2014
Reclassification of Leased Truck
As a Capital Lease
While performing a routine inspection of the client’s garage, I found a used
life (6 years).
I advised the client to capitalize this lease at the present value of its minimum
lease payments: $21,532 (the present value of the monthly payments), plus
$1,552 (the present value of the guaranteed residual). The following journal
entry was suggested:
PROBLEM 21-15B (Continued)
Finally, this vehicle must be depreciated over its lease term. Using straight–
line, I computed annual depreciation of $4,117 (the capitalized amount,
PROBLEM 21-16B
(a) The lease agreement satisfies both the 75% of useful life and 90% of
(b) January 1, 2014
Lessee:
Leased Equipment …………………………………………. 162,511
Lease Liability …………………………………………. 162,511
($26,500 X 5.86842 = $155,513)
($15,000 X 0.46651 = 6,998)
= $162,511)
December 31, 2014
Lessee:
Interest Expense …………………………..……………….. 13,601
Interest Payable
[($162,511 – $26,500) X 0.10] …………………. 13,601
PROBLEM 21-16B (Continued)
December 31, 2014
Lessor:
Interest Receivable ……………………………………………. 13,601
Interest Revenue …………………………………………. 13,601
(c) (1) and (2) are both $155,513, as the lessee has no obligation to pay the
residual value.