Economic life fmv of leased 6 yrs property is unknown

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Unformatted text preview: ife FMV of leased 6 yrs. property is unknown. economic life of leased property lease payments => 90% of FMV of property 5. Present value of minimum YES Chapter 15-34 83.3% Accounting by the Lessee Compute present value of the minimum lease payments. Payment Present value factor (i=10%,n=5) PV of minimum lease payments Journal entry 1/1/07 Leased Machine Under Capital Lease Leases liability Leases liability Cash Chapter 15-35 $ 8,668 4.16986 $36,144 36,144 8,668 36,144 8,668 Accounting by the Lessee Lease Amortization Schedule Lease Payment $ 8,668 8,668 8,668 8,668 8,668 2,748 2,156 1,504 788 10% Interest Reduction Expense in Liability $ 8,668 5,920 6,512 7,164 7,880 Lease Liability $ 36,144 27,476 21,556 15,044 7,880 0 Date 1/1/07 1/1/07 12/31/07 12/31/08 12/31/09 12/31/10 Chapter 15-36 Accounting by the Lessee Journal entries for Burke through Jan. 1, 2008. Journal entry 12/31/07 Depreciation expense Accumulated depreciation ($36,144 ÷ 5 = $7,229) 7,229 7,229 Interest expense Interest payable [($36,144 – $8,668) X .10] 2,748 2,748 Chapter 15-37 Accounting by the Lessee Journal entries for Burke through Jan. 1, 2008. Journal entry 1/1/08 Lease liability Interest payable Cash 5,920 2,748 8,668 Chapter 15-38 Accounting by the Lessee Comparison of Capital Lease with Operating Lease Capital Lease Depreciation Interest Expense Expense $ 7,229 7,229 7,229 7,229 7,228 $ Chapter 15-39 Date 2007 2008 2009 2009 2010 Total $ 9,977 9,385 8,733 8,017 7,228 $ 43,340 Operating Lease Expense $ 8,668 8,668 8,668 8,668 8,668 $ 43,340 Diff. $ 1,309 717 65 (651) (1,440) 0 $ 2,748 2,156 1,504 * 788 $ 7,196 36,144 * rounding Residual Values Lessee Accounting for Residual Value The accounting consequence is that the minimum lease payments, include the guaranteed residual value but excludes the unguaranteed residual value. Depreciation does not take UGRV into account but takes GRV into account If it is a titled lease then it is simple because there is no GRV or UGRV and depreciation takes residual value into account as usual. Chapter 15-40 Guaranteed Residual Values (Illustration with Guaranteed Residual Value) On Jan. 1, 2007, Velde Company (lessee entered into a four-year, noncancellable contact to lease a computer for Exceptional Computer Company (lessor). Annual rentals of $16,228 are to be paid each Jan. 1. The equipment an estimated useful life of four years and a $5,000 residual value. Velde has guaranteed the lessor a residual value of $5,000. Velde has an incremental borrowing rate of 12% but has knowledge that Exceptional computer Company used a rate of 10% in setting annual rentals. Chapter 15-41 Guaranteed Residual Values Illustration (LESSEE) What is the present value of the minimum lease payments? Payment PV of annunity due (i=10%, n=4) PV of residual value Residual value PV of single sum (i=10%, n=4) PV of residual value Total Present Value Chapter 15-42 $ 16,228 3.48685 56,585 5,000 0.68301 3,415 $ 60,000 Guaranteed Residual Values Illustration (LESSEE) What type of lease is this? Explain. Capitalization Criteria: 2. Tra...
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