hw7 - ORIE 350 Homework #7 1. Wilson Transit Authority...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ORIE 350 Homework #7 1. Wilson Transit Authority (WTA) owns a railcar used in its light rail system, with historical cost $950,000 and accumulated depreciation of $350,000. The railcar has a remaining life of 10 years and zero salvage value. At the beginning of 2005, WTA sells the car to Consolidated Financial Services (CFS) for $800,000, and leases it back, agreeing to pay lease payments of $141,588 at the end of each year for ten years. The applicable interest rate is 12%. There is no ownership transfer or bargain purchase option. a. Show WTA’s journal entries needed on January 1, 2005. b. Show WTA’s journal entries needed on December 31, 2005. c. Show how the above transactions would appear on WTA’s 2005 income statement. d. Show how the above transactions would appear on WTA’s Dec. 31, 2005 balance sheet. a. 1/1/05 Cash 800,000 Acc. Depr. 350,000 Equip 950,000 Deferred Gain on S-L 200,000 1/1/05 Leased Asset 800,000 Lease Obligation 800,000 b. 12/31/05 Deferred Gain on S-L 20,000 Depr. Expense 20,000 Depr. Expense 80,000 Acc. Depr. 80,000 Interest Expense 96,000 Lease Obligation 45,588 Cash 141,588 c. Deprec. Expense 60,000 Int. Expense 96,000 d. Assets Leased Asset 800,000 Less Deferred Gain on S-L (180,000) Less Acc. Depr. (80,000) Leased Asset (net) 540,000 Liabilities Lease Obligation 754,412
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Note: Deferred Gain should be shown as an offset to the leased asset. As such, it is properly a contra-asset account. I said that it was an SE account in lecture, I think it is better to consider it as a contra-asset. In any case, it is an offset to the leased asset! 2. GMI Industries plans to lease a new Chevrolet Borracho truck. The terms for the four-year lease are 47 payments of $499.77 at the end of each month, $2,434.75 due at lease signing, an APR of 5.9%, and the option to purchase the truck at lease end for $9,800. a. Explain whether GMI should record the lease as a capital lease or an operating lease. Consider the 4 criteria: 1. Ownership transfer? NO 2. Bargain purchase option? NO 3. Length of lease > 75% useful life? CALCULATE 4. PV of lease payments > 90% of fair market value? CALCULATE We are given the APR of 5.9%. Hence, the PV of the 47 monthly payments is found using ( 29 00478852 . 0 1 1 12 1 = - + = APR i ( 29 ( 29 80 . 988 , 20 $ 00478852 . 0 00478852 . 0 1 1 97 . 499 1 1 47 = + - = + - = - - i i A PV n We add to this the cash payment due at lease signing and find that the PV of the payments totals $23,423.55. Finally, if GMI wanted to own the truck, they would have to pay $9,800 in four years.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 9

hw7 - ORIE 350 Homework #7 1. Wilson Transit Authority...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online