Chapter 15 Day 2-2

# Chapter 15 Day 2-2 - Exercise1517 Requirement1 Note Because...

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Exercise 15-17 Requirement 1  Note: Because exercise of the option appears at the inception of the lease to be reasonably assured, payment of the option price (\$45,000) is expected to occur when the option becomes exercisable (at the  end  of the third year).   Present value of annual lease payments  (\$36,000 x 2.69005 ** ) \$  96,842 Plus:  Present value of the BPO price  (\$45,000 x .71178 * )   32     ,030 Present value of minimum lease payments \$128     ,872 *    present value of \$1: n=3, i=12% **  present value of an annuity due of \$1: n=3, i=12% Requirement 2  Lease Amortization Schedule Effective Decrease Outstanding Payments Interest in Balance Balance 12% x Outstanding Balance 128,872 1/1/16 36,000 36,000 92,872 12/31/16 36,000 .12 (92,872) = 11,145 24,855 68,017 12/31/17 36,000 .12 (68,017) = 8,162 27,838 40,179 12/31/18 45,000 .12 (40,179) = 4    ,821 40,179 153,000 24,128 128,872

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Exercise 15-17 (concluded) Requirement 3  January 1, 2016 Leased   equipment  (calculated above) ....................... 128,872 Lease payable  (calculated above) ......................... 128,872 Lease payable  ...................................................... 36,000 Cash  (annual payment) ......................................... 36,000 December 31, 2016 Depreciation expense  (\$128,872  ÷  6 years*) .............. 21,479 Accumulated depreciation

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Unformatted text preview: ............................... 21,479 Interest expense (12% x [\$128,872 – 36,000]). ............ 11,145 Lease payable (difference: from schedule). ................ 24,855 Cash (annual payment). ........................................ 36,000 December 31, 2017 Depreciation expense (\$128,872 ÷ 6 years*). ............. 21,479 Accumulated depreciation. ............................... 21,479 Interest expense (12% x \$68,017: from schedule). ....... 8,162 Lease payable (difference: from schedule). ................ 27,838 Cash (annual payment). ........................................ 36,000 December 31, 2018 Depreciation expense (\$128,872 ÷ 6 years*). ............. 21,479 Accumulated depreciation. ............................... 21,479 Interest expense (12% x \$40,179: from schedule). ....... 4,821 Lease payable (difference: from schedule). ................ 40,179 Cash (BPO price). ................................................ 45,000 * Because title passes with the expected exercise of the BPO, depreciation is for the entire six-year useful life of the asset. The depreciation entry will be recorded for three years after the completion of the lease term....
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