Chapter 21 Self Study Solutions

CHAPTER21 Accountingfor Leases BRIEFEXERCISE21-1 The leasedoes not meet the transferof ownershiptest, the bargainpurchasetest, or the economic life test [(5 years ÷ 8 years) < 75%]. However, it does pass the recoveryof investmenttest. The present value of the minimumlease payments ($31,000 X 4.16986 = $129,266) is greater than 90% of the FMV of the asset (90% X $138,000 = $124,200). Therefore, Callawayshould classify the lease as a capital lease. BRIEFEXERCISE21-2 Lea LeasedEqui dEquip pmentUnd tUnde erCapi CapittalLea Leases............. ...... ............. ............ ............ ......... ... LeaseLiability...............................................................

150, 150,0 000

LeaseLi eLiability...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cash............................................................................

43,019

150,000 43,019

BRIEFEXERCISE21-3 Int InterestExpense............ .................. ........... ........... ............ ............ ........... ........... ............ ............ .......... .... InterestPayable[($300,000– $53,920)X 12%]....................

29,530

DepreciationEx nExpense...................................... ......................................................... ...................... ... AccumulatedDepreciation($300,000X 1/8).......................

37,500

29,530 37,500

BRIEFEXERCISE21-4 Inte InterrestPay Payable[($3 e[($300,000– $53, $53,9 920)X 12% 12%]............. ....... ............ ............ ......... ... LeaseLi eLiability...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cash............................................................................

29,5 29,53 30 24,390 53,920

BRIEFEXERCISE21-5 RentExpense............ ................. ........... ............ ............ ............ ............ ............ ............ ............ ............ ........ Cash............................................................................ Copyri Cop yright ght © 201 2010 0 John John Wile Wiley y & Sons Sons,, Inc. Inc.

Kieso, Kieso, Intermediate Accounting, 13/e 13/e,, Solu Soluti tion ons s Manu Manual al

35,000 35,000 (For Instructor Use Only)

21-1

BRIEFEXERCISE21-6 Lea LeaseRe eReceivable(4. e(4.9 99271X $30 $30,044)....................................... Equipment....................................................................

150 150,000

Cash.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. LeaseReceivable...........................................................

30,044

150,000 30,044

BRIEFEXERCISE21-7 InterestReceivable...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... InterestRevenue[($150,000– $30,044)X 8%]....................

9,5 9,596 9,596

BRIEFEXERCISE21-8 Cash........................................................................... 15, 15,000 RentRevenue................................................................ DepreciationEx nExpense.......... ............... ......... ......... .......... .......... ......... ......... ......... ......... .......... ........ ... AccumulatedDepreciation($80,000X 1/ 1/8).........................

15,000 10,000 10,000

BRIEFEXERCISE21-9 Lea LeasedMa dMachineryUn yUnderCapi rCapittal Le Leases.................. ......... .................. ................ ....... LeaseLiability............................................................... *PVof rentals [PV of guar. RV

$40,000X 4.79079 $20,000X .5 .56447

202 202,921* 202,921

$191,632 11,289 $202,921

LeaseLi eLiability...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cash............................................................................

40,000 40,000

BRIEFEXERCISE21-10 LeaseRe eReceivable............ ................. ........... ............ ............ ........... ........... ............ ............ ............ ......... ... Machinery.....................................................................

202 202,921

Cash........................................................................... 40, 40,000 LeaseReceivable........................................................... 21-2

Copyri Cop yright ght © 2010 2010 John John Wiley Wiley & Sons, Sons, IInc. nc.

Kieso, Kieso, Intermediate Accounting, 13/e 13/e,, Solu Soluti tion ons s Manu Manual al

202,921 40,000 (For Instructor Use Only)

BRIEFEXERCISE21-11 LeaseReceivable($40,800X 4.03735)....................................... Sales............................................................................

164,724

Costof GoodsSold................................................................ Inventory......................................................................

110,000

164,724 110,000

Cash........................................................................... 40,800 LeaseReceivable...........................................................

40,800

*BRIEFEXERCISE21-12 Cash........................................................................... 33,000 Truck............................................................................ UnearnedProfit on Sale-Leaseback.................................. LeasedTruckUnderCapitalLeases......................................... LeaseLiability...............................................................

28,000 5,000 33,000* 33,000

*($8,705X 3.79079;$1 differencedue to rounding.) DepreciationExpense............................................................ AccumulatedDepreciation($33,000X 1/5).........................

6,600

UnearnedProfit onSale-Leaseback......................................... DepreciationExpense($5,000X 1/5).................................

1,000

InterestExpense($33,000X 10%)............................................ LeaseLiability....................................................................... Cash............................................................................

3,300 5,405

Copyright © 2010 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 13/e, Solutions Manual

6,600

1,000

8,705

(For Instructor Use Only)

21-3

SOLUTIONSTO EXERCISES EXERCISE21-1 (15–20minutes) (a)

This is a capital lease to Adamssince the lease term (5 years) is greater than 75% of the economiclife (6 years) of the leased asset. The lease term is 83 1/3% (5 ÷ 6) of the asset’s economiclife.

(b) Computationof presentvalueof minimumleasepayments: $9,968X 4.16986*= $41,565 *Presentvalue of an annuity due of 1 for 5 periodsat 10%. (c)

1/1/10

12/31/10

1/1/11

21-4

LeasedMachineUnderCapital Leases...................................................... LeaseLiability.......................................

41,565 41,565

LeaseLiability............................................... Cash....................................................

9,968

DepreciationExpense.................................... AccumulatedDepreciation— CapitalLeases................................... ($41,565÷ 5 = $8,313)

8,313

InterestExpense........................................... InterestPayable..................................... [($41,565– $9,968) X .10]

3,160

LeaseLiability............................................... InterestPayable............................................ Cash....................................................

6,808 3,160


9,968

8,313

3,160


9,968


EXERCISE21-2 (20–25minutes) (a)

To Brecker, the lessee, this lease is a capital lease because the terms satisfy the followingcriteria: 1. 2.

The lease term is greaterthan 75%of the economiclife of the leasedasset;that is, the lease termis 831/3 % (50/60) of the economiclife. The present value of the minimumlease payments is greater than 90% of the fair value of the leased asset; that is, the present value of $10,515 (see below) is 96% of the fair value of the leasedasset:

(b)

The minimumlease paymentsin the case of a guaranteed residual value by the lessee includethe guaranteedresidual value. The present value thereforeis: Monthlypaymentof $250for 50 months........................ $ 9,800 Residualvalueof $1,180............................................. 715 Presentvalueof minimumleasepayments.................... $10,515

(c)

LeasedPropertyUnderCapitalLeases................................. LeaseLiability............................................................

10,515

(d) DepreciationExpense........................................................ AccumulatedDepreciation—Capital Leases................................................................... [($10,515– $1,180) ÷ 50 months= $186.70]

186.70

(e)

144.85 105.15

LeaseLiability................................................................... InterestExpense(1%X $10,515).......................................... Cash.........................................................................

10,515

186.70

250.00

EXERCISE21-3 (20–30minutes) Capitalizedamountof the lease: Yearlypayment. ............................................................... Executorycosts............................................................... Minimumannualleasepayment.........................................



$90,000.00 (3,088.14) $86,911.86


21-5

Presentvalue of minimumlease payments $86,911.86X 6.32825= $550,000.00 1/1/11

LeasedBuildingUnderCapital Leases................................................ LeaseLiability.................................

1/1/11

12/31/11

12/31/11

1/1/12

12/31/12

12/31/12

21-6

550,000.00 550,000.00

ExecutoryCosts—PropertyTaxes................ LeaseLiability......................................... Cash..............................................

3,088.14 86,911.86

DepreciationExpense.............................. AccumulatedDepreciation— Capital Leases............................. ($550,000÷ 10)

55,000.00

InterestExpense (SeeSchedule1).................................. InterestPayable...............................

90,000.00

55,000.00

55,570.58 55,570.58

ExecutoryCosts—PropertyTaxes................. InterestPayable...................................... LeaseLiability......................................... Cash..............................................

3,088.14 55,570.58 31,341.28

DepreciationExpense.............................. AccumulatedDepreciation— Capital Leases.............................

55,000.00

InterestExpense..................................... InterestPayable...............................

51,809.62


90,000.00

55,000.00


51,809.62


Schedule1

KIMBERLY-CLARKCORP. LeaseAmortizationSchedule (Lessee) Annual Payment Less Executory Costs

Date 1/1/11 1/1/11 1/1/12 1/1/13

Interest(12%)on Liability

$86,911.86 86,911.86 86,911.86

$ 0 55,570.58 51,809.62

Reduction of LeaseLiability LeaseLiability $550,000.00 463,088.14 431,746.86 396,644.62

$86,911.86 31,341.28 35,102.24

EXERCISE21-4 (20–25minutes) Computationof annual payments Cost(fair marketvalue)of leasedassetto lessor.................................... Less: Presentvalueof salvagevalue (residual value in this case) $16,000X .82645 (Presentvalueof 1 at 10%for 2 periods)..................................... Amountto berecoveredthroughleasepayments................................... Twoperiodicleasepayments$226,776.80÷ 1.73554*...............................

$240,000.00

13,223.20 $226,776.80 $130,666.42

*Presentvalue of an ordinaryannuity of 1 for 2 periodsat 10% KRAUSSLEASINGCOMPANY(Lessor) LeaseAmortizationSchedule

Date 1/1/11 12/31/11 12/31/12

AnnualPayment Less Executory Costs

Interest on Recovery of LeaseReceivable LeaseReceivable

$130,666.42 130,666.42

*$24,000.00 * 13,332.84* *$37,332.84

$106,666.42 117,333.58

Lease Receivable $240,000.00 133,333.58 16,000.00

*Differenceof $.52 due to rounding. Copyright © 2010 John Wiley & Sons, Inc.



21-7

(a)

1/1/11 12/31/11

12/31/12

(b) 12/31/12

LeaseReceivable............................. Equipment..............................

240,000.00

Cash($130,666.42+ $7,000).............. ExecutoryCosts Payable............................... LeaseReceivable..................... InterestRevenue......................

137,666.42

240,000.00

7,000.00 106,666.42 24,000.00

Cash............................. 137,666.42 ExecutoryCosts Payable............................... LeaseReceivable..................... InterestRevenue......................

7,000.00 117,333.58 13,332.84

Cash................................. 16,000.00 LeaseReceivable.....................

16,000.00


Because the lease term is longer than 75% of the economic life of the asset and the present value of the minimumlease payments is more than 90% of the fair value of the asset, it is a capital lease to the lessee. Assumingcollectibility of the rents is reasonably assuredand no importantuncertaintiessurroundthe amountof unreimbursablecosts yet to be incurredby the lessor, the lease is a direct financinglease to the lessor. The lessee should adopt the capital lease method and record the leased asset and lease liability at the presentvalue of the minimumlease paymentsusing the lessee’sincremental borrowingrate or the interest rate implicit in the lease if it is lower than the incrementalrate and is known to the lessee. The lessee’s depreciation depends on whether ownership transfers to the lessee or if there is a bargain purchaseoption. If one of these conditionsis fulfilled, amortization would be over the economiclife of the asset. Otherwise, it would be depreciated over the lease term. Becauseboth the economiclife of the asset and the lease termare three years, the leasedasset shouldbe depreciatedover this period.

21-8




The lessor should adopt the direct financinglease methodand replace the asset cost of $75,000 with Lease Receivable of $75,000. (See schedule below.) Interest would be recognizedannually at a constantrate relative to the unrecoverednet investment. Cost(fair marketvalueof leasedasset)..............................................

$75,000

Amountto be recoveredby lessor throughlease payments....................................................................................

$75,000

Threeannualleasepayments: $75,000÷ 2.53130*...............................

$29,629

*Presentvalue of an ordinaryannuity of 1 for 3 periodsat 9%. (b) Scheduleof InterestandAmortization Rent Receipt/ Payment 1/1/11 12/31/11 12/31/12 12/31/13

Interest Revenue/ Expense

— $29,629 29,629 29,629

— *$6,750* 4,691 2,446

Reductionof Principal

Receivable/ Liability

— $22,879 24,938 27,183

$75,000 52,121 27,183 0

*$75,000X .09 = $6,750 EXERCISE21-6 (15–20minutes) (a) $38,514X 5.7122*= $220,000 *Presentvalue of an annuity due of 1 for 8 periodsat 11%. (b) 1/1/11

1/1/11

LeaseReceivable...................................... Costof GoodsSold................................... Sales............................................... Inventory..........................................

220,000 170,000

Cash........................................................ LeaseReceivable..............................

38,514



220,000 170,000 38,514


21-9

12/31/07

InterestReceivable.................................... Interest Revenue [($220,000– $38,514)X .11].............

19,963 19,963


This is a capital lease to Woodssince the lease term is 75%(6 ÷ 8) of the asset’seconomic life. In addition, the presentvalue of the minimumlease paymentsis more than 90%of the fair value of the asset. This is a capital lease to Palmer since collectibility of the lease payments is reasonably predictable,there are no importantuncertaintiessurroundingthe costs yet to be incurred by the lessor, and the lease term is 75% of the asset’s economiclife. Becausethe fair value of the equipment($200,000)exceedsthe lessor’s cost ($150,000), the lease is a sales-type lease.

(b) Computationof annualrentalpayment: $200,000 – ($10,000 X .53464)* = $41,452 4.69590**

**Presentvalue of $1 at 11%for 6 periods. **Presentvalue of an annuity due at 11% for 6 periods. (c)

1/1/11

LeasedEquipmentUnderCapital Leases................................................... LeaseLiability ($41,452X 4.60478)***....................... LeaseLiability............................................ Cash.................................................

190,877 190,877 41,452 41,452

***Presentvalue of an annuity due at 12%for 6 periods. 12/31/11

21-10

DepreciationExpense................................. AccumulatedDepreciation ($190,877÷ 6 years).........................

31,813

InterestExpense......................................... Interest Payable ($190,877– $41,452)X .12.................

17,931


31,813


17,931


(d) 1/1/11

*

LeaseReceivable.................................... Costof GoodsSold................................. Sales............................................. Inventory........................................

200,000* 144,654** 194,654*** 150,000

*($41,452X 4.6959) + ($10,000X .53464) **$150,000– ($10,000X .53464) ***$41,452X 4.6959 Cash........................................... 41,452 LeaseReceivable.............................

12/31/11

InterestReceivable.................................. Interest Revenue [($200,000– $41,452)X .11].............

41,452 17,440 17,440


The lease agreement has a bargain purchase option and thus meets the criteria to be classifiedas a capital lease fromthe viewpointof the lessee. Also, the presentvalue of the minimumlease paymentsexceeds90%of the fair value of the assets.

(b) The lease agreement has a bargain purchase option. The collectibility of the lease paymentsis reasonablypredictable,and there are no importantuncertaintiessurrounding the costs yet to be incurred by the lessor. The lease, therefore, qualifies as a capital-type lease from the view-point of the lessor. Due to the fact that the initial amount of lease receivable (net investment) (which in this case equals the present value of the minimum lease payments, $81,000) exceeds the lessor’s cost ($65,000), the lease is a sales-type lease. (c) Computationof leaseliability: $18,829.49 Annualrentalpayment X 4.16986 PV of annuitydueof 1 for n = 5, i = 10% $78,516.34PV of periodicrental payments




21-11

$ 4,000.00 X .62092 $ 2,483.68

Bargainpurchaseoption PV of 1 for n = 5, i = 10% PV of bargainpurchaseoption

$78,516.34 PV of periodicrentalpayments + 2,483.68 PV of bargainpurchaseoption $81,000.00*Leaseliability *rounded GILL COMPANY(Lessee) LeaseAmortizationSchedule

Date 5/1/10 5/1/10 5/1/11 5/1/12 5/1/13 5/1/14 4/30/15

Annual Lease PaymentPlus BPO

Interest Reduction of (10%) on Liability LeaseLiability

$18,829.49 18,829.49 18,829.49 18,829.49 18,829.49 4,000.00 $98,147.45

*$ 6,217.05 4,955.81 3,568.44 2,042.33 * 363.82* $17,147.45

LeaseLiability $81,000.00 62,170.51 49,558.07 35,684.39 20,423.34 3,636.18 0

$18,829.49 12,612.44 13,873.68 15,261.05 16,787.16 3,636.18 $81,000.00

*Roundingerror is 20 cents. (d) 5/1/10

12/31/10

21-12

LeasedEquipmentUnder Capital Leases....................................... LeaseLiability..................................

81,000.00 81,000.00

LeaseLiability.......................................... Cash................................................

18,829.49

InterestExpense....................................... Interest Payable ($6,217.05X 8/12 = $4,144.70).............

4,144.70


18,829.49


4,144.70


1/1/11 5/1/11

12/31/11

12/31/11

DepreciationExpense............................. AccumulatedDepreciation— Capital Leases............................ ($81,000.00÷ 10 = ($8,100.00;$8,100.00X (8/12 = $5,400)

5,400

InterestPayable..................................... InterestExpense............................

4,144.70

InterestExpense.................................... LeaseLiability....................................... Cash.............................................

6,217.05 12,612.44

InterestExpense.................................... InterestPayable............................. ($4,955.81X 8/12 = ($3,303.87)

3,303.87

DepreciationExpense............................. AccumulatedDepreciation— Capital Leases............................ ($81,000.00÷ 10 years = ($8,100.00)

8,100.00

5,400

4,144.70

18,829.49 3,303.87

8,100.00

(Note to instructor: Becausea bargain purchaseoption was involved, the leasedasset is depreciatedover its economiclife rather than over the lease term.) EXERCISE21-9 (20–30minutes) Note: The lease agreement has a bargain purchase option. The collectibility of the lease paymentsis reasonably predictable, and there are no important uncertainties surroundingthe costs yet to be incurredby the lessor. The lease, therefore, qualifies as a capital lease from the viewpointof the lessor. Due to the fact that the amount of the sale (which in this case equals the present value of the minimumlease payments,$81,000) exceedsthe lessor’s cost ($65,000), the lease is a sales-type lease.




21-13

The minimumlease paymentsassociatedwith this lease are the periodic annual rents plus the bargain purchaseoption. There is no residual value relevant to the lessor’s accountingin this lease. (a)

Theleasereceivableis computedas follows: $18,829.49 X 4.16986 $78,516.34

Annualrentalpayment PV of annuitydueof 1 for n = 5, i = 10% PV of periodicrentalpayments

$ 4,000.00 X .62092 $ 2,483.68

Bargainpurchaseoption PV of 1 for n = 5, i = 10% PV of bargainpurchaseoption

$78,516.34 PV of periodicrentalpayments + 2,483.68 PV of bargainpurchaseoption $81,000.00*Leasereceivableat inception *Rounded (b)

LENNOXLEASINGCOMPANY(Lessor) LeaseAmortizationSchedule

Date 5/1/10 5/1/10 5/1/11 5/1/12 5/1/13 5/1/14 4/30/15

Annual Lease PaymentPlus BPO

Interest (10%) on Recovery of LeaseReceivable LeaseReceivable

$18,829.49 18,829.49 18,829.49 18,829.49 18,829.49 4,000.00 $98,147.45

$ 6,217.05 4,955.81 3,568.44 2,042.33 363.82* *$17,147.45

$18,829.49 12,612.44 13,873.68 15,261.05 16,787.16 3,636.18 $81,000.00

Lease Receivable $81,000.00 62,170.51 49,558.07 35,684.39 20,423.34 3,636.18 0

*Roundingerror is 20 cents.

21-14




(c)

5/1/10

LeaseReceivable............................. Costof GoodsSold.......................... Sales...................................... Inventory................................

81,000.00 65,000.00 81,000.00 65,000.00

Cash............................... 18,829.49 LeaseReceivable..................... 12/31/10

5/1/11

12/31/11

5/1/12

12/31/12

InterestReceivable.......................... InterestRevenue...................... ($6,217.05X 8/12 = $4,144.70)

18,829.49 4,144.70 4,144.70

Cash............................... 18,829.49 LeaseReceivable..................... InterestReceivable.................. InterestRevenue..................... ($6,217.05– $4,144.70) InterestReceivable.......................... InterestRevenue...................... ($4,955.81X 8/12 = ($3,303.87)

12,612.44 4,144.70 2,072.35 3,303.87 3,303.87

Cash................................. 18,829.49 LeaseReceivable..................... InterestReceivable................... InterestRevenue...................... ($4,955.81– $3,303.87) InterestReceivable.......................... InterestRevenue...................... ($3,568.44X 8/12 = ($2,378.96)


13,873.68 3,303.87 1,651.94 2,378.96


2,378.96


21-15


Fairmarketvalueof leasedassetto lessor................................... Less: Presentvalue of unguaranteed residual value $61,071X .56447 (presentvalueof 1 at 10%for 6 periods)............................ Amountto berecoveredthroughleasepayments.........................

$343,000.00

Sixperiodicleasepayments$308,527.25÷ 4.79079*......................

$ 64,400.00**

34,472.75 $308,527.25

*Presentvalue of annuity due of 1 for 6 periodsat 10%. **Roundedto the nearest dollar. (b)

FIEVALLEASINGCOMPANY(Lessor) LeaseAmortizationSchedule Annual Lease PaymentPlus Interest (10%) on URV LeaseReceivable Date 1/1/10 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 12/31/15

(c)

1/1/10 1/1/10 12/31/10 1/1/11

12/31/11 21-16

$ 64,400 64,400 64,400 64,400 64,400 64,400 61,071 $447,471

$ 27,860 24,206 20,187 15,765 10,902 5,551 $104,471

Recovery of Lease Receivable

Lease Receivable $343,000 278,600 242,060 201,866 157,653 109,018 55,520 0

$ 64,400 36,540 40,194 44,213 48,635 53,498 55,520 $343,000

LeaseReceivable........................................ Equipment.........................................

343,000 343,000

Cash.............................................. 64,400 LeaseReceivable................................ InterestReceivable..................................... InterestRevenue.................................

64,400 27,860 27,860

Cash.............................................. 64,400 LeaseReceivable................................ InterestReceivable............................. InterestReceivable..................................... InterestRevenue.................................


36,540 27,860 24,206


24,206 (For Instructor Use Only)

EXERCISE21-11 (20–30minutes) Note: This lease is a capital lease to the lessee because the lease term (five years) exceeds75% of the remainingeconomiclife of the asset (five years). Also, the present value of the minimumlease paymentsexceeds90% of the fair value of the asset. $20,541.11Annualrental payment X 4.16986 PV of an annuitydueof 1 for n = 5, i = 10% $85,653.55PV of minimumlease payments (a)

AZURECOMPANY(Lessee) LeaseAmortizationSchedule

Date 1/1/10 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14

AnnualLease Payment

Interest (10%) on Liability

$ 20,541.11 20,541.11 20,541.11 20,541.11 20,541.11 $102,705.55

Reduction of LeaseLiability

*$ 6,511.24 5,108.26 3,564.97 * 1,867.53* *$17,052.00

LeaseLiability

$20,541.11 14,029.87 15,432.85 16,976.14 18,673.58 $85,653.55

$85,653.55 65,112.44 51,082.57 35,649.72 18,673.58 0

*Roundingerror is 17 cents. (b) 1/1/10

1/1/10

LeasedEquipmentUnder Capital Leases................................ LeaseLiability............................ LeaseLiability................................... Cash.........................................

85,653.55 85,653.55 20,541.11 20,541.11

During2010 InsuranceExpense............................. Cash.........................................

900.00

PropertyTaxExpense......................... Cash.........................................

1,600.00


900.00


1,600.00


21-17

12/31/10

1/1/11

InterestExpense.................................... InterestPayable.............................

6,511.24

DepreciationExpense............................. AccumulatedDepreciation— Capital Leases............................ ($85,653.55÷ 5 = $17,130.71)

17,130.71

InterestPayable..................................... InterestExpense............................

6,511.24

InterestExpense.................................... LeaseLiability........................................ Cash.............................................

6,511.24 14,029.87

6,511.24

17,130.71

6,511.24

20,541.11

During2011

12/31/11

InsuranceExpense................................. Cash.............................................

900.00

PropertyTaxExpense............................. Cash.............................................

1,600.00

InterestExpense.................................... InterestPayable.............................

5,108.26

DepreciationExpense............................. AccumulatedDepreciation— Capital Leases............................

17,130.71

900.00 1,600.00 5,108.26

17,130.71

Note to instructor: 1. The lessorsets the annualrental paymentas follows: Fairmarketvalueof leasedassetto lessor.................................. Less: Presentvalue of unguaranteed residual value $7,000X .62092 (presentvalueof 1 at 10%for 5 periods)........................... Amountto berecoveredthroughleasepayments......................... Fiveperiodicleasepayments $85,653.56÷ 4.16986*............................................................

$90,000.00 4,346.44 $85,653.56 $20,541.11

*Presentvalue of annuity due of 1 for 5 periodsat 10%.

21-18




2.

Theunguaranteedresidualvalueis notsubtractedwhendepreciatingthe leasedasset.

EXERCISE21-12 (10–20minutes) (a) Entriesfor Secadaare as follows: 1/1/11 12/31/11

Building................................................. Cash..................................................

3,600,000 3,600,000

Cash........................................ 220,000 RentalRevenue...............................

220,000

DepreciationExpense.............................. AccumulatedDepreciation— Building($3,600,000÷ 50)..............

72,000

PropertyTaxExpense.............................. InsuranceExpense.................................. Cash..............................................

85,000 10,000

72,000

95,000

(b) Entriesfor Rykerare as follows: 12/31/11 (c)

RentExpense......................................... Cash..............................................

220,000 220,000

The real estate broker’s fee should be capitalized and amortized equally over the 10-year period.Asa result, real estatefee expenseof $3,000($30,000÷ 10) shouldbe reportedin each period.


Annualrental revenue................................................................. Less: Maintenanceandotherexecutorycosts............................... Depreciation($900,000÷ 8)............................................... Incomebeforeincometax............................................................



$180,000 25,000 112,500 $ 42,500


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(b) Rentexpense.............................................................................

$180,000

Note: Both the rent security deposit and the last month’s rent prepaymentshould be reported as a noncurrentasset.

21-20




Chapter 21 Self Study Solutions

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