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
1/1/14
$3,000,000
1/1/14
$413,971
$ –0–
$413,971
2,586,029
1/1/15
2,378,940
(f) WINSTON INDUSTRIES
Balance Sheet (Partial)
December 31, 2014
Property, plant, and equipment:
Current liabilities:
$3,000,000
Interest payable
$ 206,882
Lease liability
207,089**
PROBLEM 21-3 (Continued)
EWING INC.
Balance Sheet (Partial)
December 31, 2014
Assets
Current assets:
Interest receivable……………………………………………… $ 206,882
PROBLEM 21-4
(a) 1. $ 23,768 Interest expense (See amortization schedule)
$ 5,500 Lease executory expense
$ 50,064 Depreciation expense ($300,383 ÷ 6 = $50,064)
2. Current liabilities:
$ 38,932 Lease liability
3. $ 19,875 Interest expense (See amortization schedule)
4. Current liabilities:
$ 42,825 Lease liability
$ 19,875 Interest payable
Long-term liabilities:
$155,926 Lease liability
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:
Lease receivable $38,932
Interest receivable $23,768
(b) 1. $ 5,942 Interest revenue ($23,768 X 3/12 = $5,942)
2. Current assets:
Lease receivable $38,932
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.
$ 124,798 Annual rental payment
X 4.60478 PV of an annuity-due of 1 for n = 6, i = 12%
(a) VANCE COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual
Lease
Payment
Plus GRV
Interest (12%)
on Liability
Reduction
of Lease
Liability
Lease
Liability
1/1/14
$600,000
1/1/14
$124,798
$ –0–
$124,798
475,202
1/1/16
124,798
331,521
1/1/17
124,798
246,506
1/1/18
124,798
151,289
1/1/19
124,798
12/31/19
50,000
44,646
PROBLEM 21-6 (Continued)
(b) January 1, 2014
Leased Equipment ………………………………………….. 600,000
Lease Liability ………………………………………….. 600,000
Depreciation Expense …………………………………….. 91,667
Accumulated Depreciation—Capital
Leases ([$600,000 – $50,000] ÷ 6) …………… 91,667
January 1, 2015
Interest Payable ……………………………………………… 57,024
Interest Expense ………………………………………. 57,024
Depreciation Expense …………………………………….. 91,667
Accumulated Depreciation—Capital
Leases …………………………………………………. 91,667
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, 2014
Leased Equipment ………………………………………….. 166,794
Lease Liability ………………………………………….. 166,794
(b) December 31, 2015
Depreciation Expense …………………………………….. 23,828
Accumulated Depreciation—Capital
December 31, 2015
Interest Expense …………………………………………….. 12,679
Lease Liability ………………………………………………… 27,321
PROBLEM 21-7 (Continued)
LUDWICK STEEL 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
—
—
—
$166,794
12/31/14
$40,000
$ 0
$40,000
126,794
12/31/16
12/31/17
12/31/18
(c) December 31, 2016
Depreciation Expense ………………………………………. 23,828
Accumulated Depreciation—Capital
PROBLEM 21-7 (Continued)
(d) LUDWICK STEEL COMPANY
Balance Sheet (Partial)
December 31, 2016
Property, plant, and equipment:
Current liabilities:
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
(b) Leased Equipment …………………………………………. 550,000
Lease Liability …………………………………………. 550,000
(c) Depreciation Expense ……………………………………. 220,000
(d) Interest Expense ……………………………………………. 41,810
Interest Payable ………………………………………. 41,810
(See amortization schedule)
(e) Executory Costs ……………………………………………. 6,000
PROBLEM 21-8 (Continued)
CAGE COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual
Lease
Payment
Interest (10%)
on Liability
Reduction
of Lease
Liability
Lease
Liability
1/1/14
$550,000
1/1/14
$131,899
418,101
1/1/16
228,914
(f) CAGE COMPANY
Balance Sheet (Partial)
December 31, 2014
Assets
Liabilities
Property, plant, and equipment:
Current:
Noncurrent:
PROBLEM 21-9
Entries on August 1, 2014:
(1) Leased Equipment ……………………………………… 2,845,263
Lease Liability ……………………………………… 2,845,263
(2) Maintenance and Repairs Expense ……………. 3,000
Lease Liability ………………………………………….. 37,000
Entries on August 31, 2014:
(1) Interest Expense ………………………………………. 28,083
Interest Payable …………………………………. 28,083
(2) Depreciation Expense ………………………………. 19,759
Accumulated Depreciation—Capital
PROBLEM 21-10
(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 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–
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
$ 0
$ 0
$ 0
$278,072
1
40,000
0
40,000
238,072
2
40,000
23,807
16,193
221,879
3
40,000
22,188
17,812
204,067
4
184,474
5
40,000
18,447
21,553
162,921
6
40,000
16,292
23,708
139,213
7
113,134
8
40,000
11,313
28,687
9
40,000
31,555
*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).
(c) Beginning of the Year
Lease Receivable …………………………………………… 278,072
Selling Expenses …………………………………………… 4,000
Cash ……………………………………………………….. 4,000
PROBLEM 21-10 (Continued)
Cash …………………………………………………………………. 40,000
Lease Receivable ………………………………………… 40,000
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.
Initial Lease Liability:
(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
18,660
194,737
4
174,211
5
40,000
22,579
151,632
6
40,000
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.
PROBLEM 21-11 (Continued)
(c) Lessee’s journal entries:
Beginning of the Year
Leased Equipment ………………………………………….. 270,361
End of the Year
Interest Expense …………………………………………….. 23,036
Interest Payable ……………………………………….. 23,036
PROBLEM 21-12
(a) GRISHELL TRUCKING 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 ……………………………….. $ 800,000
Present value of an ordinary annuity for
9 years at 6% ($800,000 X 6.801692) …….. 5,441,354 $6,241,354
Present value of last 10 payments:
(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
2016
(1/1/16)
Interest Payable …………………………………………. 384,480