Chapter 13 Current Liabilities
Intermediate Accounting II, ACCT-2164
Chapter 15 Practice Problem Solutions
Brief Exercise 15–3 (operating lease)
Because this is an operating lease, Ward will record rent expense for each of the $5,000 payments. The advance payment also represents rent, recorded initially as prepaid rent and allocated equally over the 10 years of the lease. As a result, Ward’s rent expense for the year reduces its earnings by $70,000 each year.
$5,000 x 12 = $60,000
$100,000 ÷ 10 = 10,000
$70,000
Exercise 15–7 (capital lease)
Requirement 1 January 1, 2013
Leased assets 4,000,000
Lease payable 4,000,000
Requirement 2
$4,000,000 ÷ 3.16987** = $1,261,881
present lease
value payment
** Present value of an ordinary annuity of $1: n = 4, i = 10%
Lease Amortization Schedule
Lease Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
4,000,000
2013 1,261,881 .10 (4,000,000) = 400,000 861,881 3,138,119
2014 1,261,881 .10 (3,138,119) = 313,812 948,069 2,190,050
2015 1,261,881 .10 (2,190,050) = 219,005 1,042,876 1,147,174
2016 1,261,881 .10 (1,147,174) = 114,707* 1,147,174 0
5,047,524 1,047,524 4,000,000
* Adjusted for rounding of other numbers in the schedule.
Requirement 3 December 31, 2013
Interest expense (10% x outstanding balance) 400,000
Lease payable (difference) 861,881
Cash (payment determined above) 1,261,881
Requirement 4 December 31, 2015
Interest expense (10% x outstanding balance) 219,005
Lease payable (difference) 1,042,876
Cash (payment determined above) 1,261,881
Brief Exercise 15–10
The price at which the lessor is “selling” the asset being leased is the present value of the lease payments:
*$26,269 x 5.32948Φ = $140,000
(rounded)
ΦPresent value of an annuity due of $1: n = 6, i = 5%
Pretax earnings will be increased by $20,687 as calculated below:
January 1, interest revenue $ 0
Dec. 31, interest revenue (5% x [$140,000* – 26,269]) 5,687
Interest revenue for the year $ 5,687
Sales revenue* 140,000
Cost of goods sold (125,000)
Income effect $ 20,687
Journal entry (not required):
Lease receivable (present value) 140,000
Cost of goods sold (lessor’s cost) 125,000
Sales revenue (present value) 140,000
Inventory of equipment (lessor’s cost) 125,000
Brief Exercise 15–12
Amount to be recovered (fair value) $600,000
Less: Present value of the BPO price ($100,000 x .74726*) (74,726)
Amount to be recovered through periodic lease payments $525,274
_____________________(
Lease payments at the beginning (
of each of the next 5 years: ($525,274 ÷ 4.46511**) $117,640
* Present value of $1: n = 5, i = 6%
** Present value of an annuity due of $1: n = 5, i = 6%
Brief Exercise 15–13 ( bargain purchase option)
Amount to be recovered (fair value) $700,000
Less: Present value of the residual value ($100,000 x .82270*) (82,270)
Amount to be recovered through periodic lease payments $617,730
_______________________(
Lease payments at the end (
of each of the next 4 years: ($617,730 ÷ 3.54595**) $174,207
* Present value of $1: n = 4, i = 5%
** Present value of an ordinary annuity of $1: n = 4, i = 5%
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