Ch 15 homework solutions (1).pdf

Ch 15 homework solutions (1).pdf - CH 15 HOMEWORK SOLUTIONS...

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CH. 15 HOMEWORK SOLUTIONS Brief Exercise 15-1 Because none of the four classification criteria is met, this is an operating lease. Accordingly, LTT will record rent expense for each of the four \$25,000 payments, reducing its earnings by \$100,000 each year. Brief Exercise 15-2 Because none of the four classification criteria is met, this is an operating lease. Accordingly, Lakeside will record rent revenue for each of the four \$25,000 payments, increasing its earnings by \$100,000 each year. In addition Lakeside, as owner of the asset, will record depreciation. Assuming straight-line depreciation of the \$2 million cost over the 25- year life, that’s \$80,000 depreciation expense each year. So, earnings are increased by a net \$20,000 (\$100,000 80,000). Brief Exercise 15-3 Because this is an operating lease, Ward will record rent expense for each of the \$5,000 payments. The advance payment also represents rent, recorded initially as prepaid rent and allocated equally over the ten years of t he lease. As a result, Ward’s rent expense for the year reduces its earnings by \$70,000 each year. \$5,000 x 12 = \$60,000 \$100,000 / 10 = 10,000 \$70,000

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