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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