21–41
PROBLEM 21-3 (Continued)
(e) WINSTON INDUSTRIES
Lease Amortization Schedule
Date
Annual
Lease
Receipt/
Payment
Interest on
Receivable/
Liability at 8%
Reduction in
Receivable/
Liability
Lease
Receivable/
Liability
Lessor (December 31, 2012)
Interest Receivable ……………………………………. 206,882
Interest Revenue …………………………………. 206,882
(f) WINSTON INDUSTRIES
Balance Sheet
December 31, 2012
Property, plant, and equipment:
Current liabilities:
*$3,000,000 ÷ 10 = $300,000
**($413,971 – $206,882)
***No portion of this amount paid within the next year.
PROBLEM 21-3 (Continued)
EWING INC.
Balance Sheet
December 31, 2012
Assets
Noncurrent assets:
Lease receivable ……………………………………………….. $2,378,940*
21–43
PROBLEM 21-4
2. Current liabilities:
$ 38,932 Lease liability
$ 23,768 Interest payable
3. $ 19,875 Interest expense (See amortization schedule)
$ 5,500 Lease executory expense
$ 50,064 Depreciation expense ($300,383 ÷ 6 = $50,064)
4. Current liabilities:
$ 42,825 Lease liability
$ 19,875 Interest payable
21–44
PROBLEM 21-4 (Continued)
2. Current liabilities:
$ 38,932 Lease liability
$ 5,942 Interest payable
3. $ 22,795 Interest expense
[($23,768 – $5,942) + ($19,875 X 3/12) =
4. Current liabilities:
$ 42,825 Lease liability
$ 4,969 Interest payable ($19,875 X 3/12 = $4,969)
PROBLEM 21-5
(a) 1. $ 23,768 Interest revenue
2. Current assets:
$ 62,700 Lease receivable $38,932
3. $ 19,875 Interest revenue
4. Current assets:
$ 62,700 Lease receivable $42,825
Interest receivable $19,875
2. Current assets:
$ 44,874 Lease receivable $38,932
Interest receivable $5,942
4. Current assets:
$ 47,794 Lease receivable $42,825
Interest receivable $4,969
Noncurrent assets:
$155,926 Lease receivable
21–46
PROBLEM 21-6
Note: This lease is a capital lease to the lessee because the lease term
(six years) exceeds 75% of the remaining economic life of the asset (six years).
Also, the present value of the minimum lease payments exceeds 90% of the
fair value of the asset.
$ 50,000 Guaranteed residual value
X .50663 PV of 1 for n = 6, i = 12%
$ 25,332 PV of guaranteed residual value
(a) VANCE COMPANY (Lessee)
Lease Amortization Schedule
Annual
Lease
Payment
Interest (12%)
Reduction
of Lease
Lease
PROBLEM 21-6 (Continued)
(b) January 1, 2012
Leased Equipment ………………………………………….. 600,000
Lease Liability ………………………………………….. 600,000
December 31, 2012
Interest Expense …………………………………………….. 57,024
Interest Payable ……………………………………….. 57,024
Depreciation Expense …………………………………….. 91,667
Accumulated Depreciation—Capital
Leases ([$600,000 – $50,000] ÷ 6) …………… 91,667
During 2013
Executory Costs …………………………………………….. 5,000
Cash ………………………………………………………… 5,000
21–48
PROBLEM 21-6 (Continued)
(Note to instructor: The guaranteed residual value was subtracted for
purposes of determining the depreciable base. The reason is that at
PROBLEM 21-7
(a) December 31, 2012
Leased Equipment ………………………………………….. 166,794
Lease Liability ………………………………………….. 166,794
(b) December 31, 2013
Depreciation Expense …………………………………….. 23,828
Accumulated Depreciation—Capital
Leases …………………………………………………. 23,828
(To record depreciation of the leased
asset based upon a cost to Ludwick of
$166,794 and a life of 7 years)
21–50
PROBLEM 21-7 (Continued)
LUDWICK STEEL COMPANY (Lessee)
Lease Amortization Schedule
(Annuity Due Basis)
Annual
Lease
Interest (10%)
Reduction
of Lease
Lease
*Rounding error of $2
(c) December 31, 2014
Interest Expense ………………………………………………. 9,947
Lease Liability ………………………………………………….. 30,053
Cash ………………………………………………………….. 40,000
PROBLEM 21-7 (Continued)
(d) LUDWICK STEEL COMPANY
Balance Sheet
December 31, 2014
21–52
PROBLEM 21-8
(a) The $550,000 is the present value of the five annual lease payments of
$137,899 less the $6,000 attributable to the payment for taxes, insurance,
and maintenance. In other words, it is the present value of five $131,899
payments to be made at the beginning of each year discounted at 10%,
(b) Leased Equipment …………………………………………. 550,000
Lease Liability …………………………………………. 550,000
($131,899 X Annuity Due Factor for
5 years at 10% = $131,899 X 4.16986 =
$550,000)
(d) Interest Expense ……………………………………………. 41,810
Interest Payable ………………………………………. 41,810
(See amortization schedule)
PROBLEM 21-8 (Continued)
CAGE COMPANY (Lessee)
Lease Amortization Schedule
Annual
Lease
Interest (10%)
Reduction
of Lease
Lease
(f) CAGE COMPANY
Balance Sheet
December 31, 2012
Assets
Liabilities
PROBLEM 21-9
Entries on August 1, 2012:
(1) Leased Equipment ……………………………………… 2,845,263
Lease Liability ……………………………………… 2,845,263
(2) Maintenance and Repairs Expense ……………. 3,000
Lease Liability ………………………………………….. 37,000
Cash ………………………………………………….. 40,000
Entries on August 31, 2012:
(1) Interest Expense ………………………………………. 28,083
Interest Payable …………………………………. 28,083
(2) Depreciation Expense ………………………………. 19,759
Accumulated Depreciation—Capital
Leases ……………………………………………. 19,759
21–55
PROBLEM 21-10
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 10% ……………………………… 6.75902
2. Sales price is $270,361 (the present value of the 10 annual lease
payments); or, the initial PV of $278,072 minus the PV of the un–
guaranteed residual value of $7,711.
PROBLEM 21-10 (Continued)
(b) GEORGE COMPANY (Lessor)
Lease Amortization Schedule
Annuity Due Basis, Unguaranteed Residual Value
Beginning
of Year
Annual Lease
Payment Plus
Residual Value
Interest (10%)
on Lease
Receivable
Lease
Receivable
Recovery
Lease
Receivable
(a)
(b)
(c)
(d)
Initial PV
—
—
—
$278,072
1
$ 40,000
—
$ 40,000
238,072
2
40,000
*$ 23,807
16,193
221,879
3
40,000
17,812
204,067
4
184,474
5
40,000
21,553
162,921
6
40,000
23,708
139,213
7
113,134
8
40,000
28,687
9
40,000
31,555
*$141,928
*Rounding error is $1.00.
(a) Annual lease payment required by lease contract.
(b) Preceding balance of (d) X 10%, except beginning of first year of lease term.
(c) (a) minus (b).
(d) Preceding balance minus (c).
Selling Expenses …………………………………………… 4,000
Cash ……………………………………………………….. 4,000
(To record payment of the initial direct
costs relating to the lease)
21–57
PROBLEM 21-10 (Continued)
Cash …………………………………………………………………. 40,000
Lease Receivable ………………………………………… 40,000
(To record receipt of the first lease
payment)
PROBLEM 21-11
(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) NATIONAL AIRLINES (Lessee)
Lease Amortization Schedule
(Annuity due basis and URV)
Beginning
of Year
Annual Lease
Payment
Interest (10%)
on Lease
Liability
Reduction
of Lease
Liability
Lease
Liability
(a)
(b)
(c)
(d)
Initial PV
—
—
—
$270,361
1
$ 40,000
—
$ 40,000
230,361
2
40,000
$ 23,036
16,964
213,397
3
40,000
21,340
18,660
194,737
4
174,211
5
40,000
17,421
22,579
151,632
6
40,000
15,163
24,837
126,795
7
8
40,000
30,052
9
40,000
33,058
$129,639
*Rounding error is $1.
(a) Annual lease payment required by lease contract.
21–59
PROBLEM 21-11 (Continued)
(c) Lessee’s journal entries:
equipment using capital lease method)
Lease Liability ………………………………………………… 40,000
Cash ………………………………………………………… 40,000
(To record the first rental payment)
Depreciation Expense …………………………………….. 27,036
Accumulated Depreciation—Capital
Leases …………………………………………………. 27,036
PROBLEM 21-12
(a) GRISHELL TRUCKING COMPANY
Schedule to Compute the Discounted Present Value
of Terminal Facilities and the Related Obligation
January 1, 2012
Present value of first 10 payments:
Immediate payment ……………………………….. $ 800,000
Present value of an ordinary annuity for
9 years at 6% ($800,000 X 6.801692) …….. 5,441,354 $6,241,354
Discounted present value of terminal
facilities and related obligation……………. $7,635,410
(Note to instructor: The student can compute the $6,241,354 by using
the present value of an annuity due for 10 periods at 6% (7.80169 X
(b) GRISHELL TRUCKING COMPANY
Journal Entries
2014
(1) (1/1/14)
Interest Payable …………………………………………. 384,480
Lease Liability ……………………………………………. 415,520