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Chapter 21 Solutions

# Chapter 21 Solutions - CHAPTER 21 Accounting for Leases...

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CHAPTER 21 Accounting for Leases

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CHAPTER 21 Accounting for Leases SOLUTIONS TO EXERCISES EXERCISE 21-1 (15–20 minutes) (a) This is a capital lease to Burke since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 83 1 / 3 % (5 ÷ 6) of the asset’s economic life. (b) Computation of present value of minimum lease payments: \$8,668 X 4.16986* = \$36,144 *Present value of an annuity due of 1 for 5 periods at 10%. (c) 1/1/07 Leased Machine Under Capital Leases ................................................... 36,144 Lease Liability .................................. 36,144 Lease Liability .......................................... 8,668 Cash ................................................... 8,668 12/31/07 Depreciation Expense ............................. 7,229 Accumulated Depreciation— Capital Leases .............................. 7,229 (\$36,144 ÷ 5 = \$7,229) Interest Expense ...................................... 2,748 Interest Payable ................................ 2,748 [(\$36,144 – \$8,668) X .10]

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1/1/08 Lease Liability .......................................... 5,920 Interest Payable ....................................... 2,748 Cash ................................................... 8,668
EXERCISE 21-2 (20–25 minutes) (a) To Delaney, the lessee, this lease is a capital lease because the terms satisfy the following criteria: 1. The lease term is greater than 75% of the economic life of the leased asset; that is, the lease term is 83 1 / 3 % (50/60) of the economic life. 2. The present value of the minimum lease payments is greater than 90% of the fair value of the leased asset; that is, the present value of \$8,555 (see below) is 98% of the fair value of the leased asset: (b) The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual value. The present value therefore is: Monthly payment of \$200 for 50 months ........... \$7,840 Residual value of \$1,180 ...................................... 715 Present value of minimum lease payments ....... \$8,555 (c) Leased Property Under Capital Leases .................... 8,555 Lease Liability ....................................................... 8,555 (d) Depreciation Expense ................................................. 147.50 Accumulated Depreciation—Capital Leases ............................................................... 147.50 [(\$8,555 – \$1,180) ÷ 50 months = \$147.50] (e) Lease Liability .............................................................. 114.45 Interest Expense (1% X \$8,555) ................................. 85.55 Cash ....................................................................... 200.00 EXERCISE 21-3 (20–30 minutes) Capitalized amount of the lease: Yearly payment \$72,000.00

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Executory costs 2,470.51 Minimum annual lease payment \$69,529.49
EXERCISE 21-3 (Continued) Present value of minimum lease payments \$69,529.49 X 6.32825 = \$440,000.00 1/1/08 Leased Building Under Capital Leases ............................................. 440,000.00 Lease Liability ............................ 440,000.00 1/1/08 Executory Costs—Property Taxes ...... 2,470.51 Lease Liability .................................... 69,529.49 Cash ............................................. 72,000.00 12/31/08 Depreciation Expense ....................... 44,000.00 Accumulated Depreciation— Capital Leases ........................ 44,000.00 (\$440,000 ÷ 10) 12/31/08 Interest Expense (See Schedule 1) ............................ 44,456.46 Interest Payable .......................... 44,456.46 1/1/09 Executory Costs—Property Taxes ...... 2,470.51 Interest Payable ................................. 44,456.46 Lease Liability .................................... 25,073.03 Cash ............................................. 72,000.00 12/31/09 Depreciation Expense ....................... 44,000.00 Accumulated Depreciation— Capital Leases ........................ 44,000.00 12/31/09 Interest Expense ................................ 41,447.70 Interest Payable .......................... 41,447.70

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EXERCISE 21-3 (Continued) Schedule 1 Kimberly-Clark Corp. Lease Amortization Schedule (Lessee) Date Annual Payment Less Executory Costs Interest (12%) on Liability Reduction of Lease Liability Lease Liability 1/1/08 \$440,000.00 1/1/08 \$69,529.49 \$ 0 . \$69,529.49 370,470.51 1/1/09 69,529.49 44,456.46 25,073.03 345,397.48 1/1/10 69,529.49 41,447.70 28,081.79 317,315.69 EXERCISE 21-8 (20–30 minutes) (a) The lease agreement has a bargain purchase option and thus meets the criteria to be classified as a capital lease from the viewpoint of the lessee. Also, the present value of the minimum lease payments exceeds 90% of the fair value of the assets.

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