Class_7_Solns

# Class_7_Solns - EXERCISE 21-1(a This is a capital lease to...

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EXERCISE 21-1 (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% or present value of an annuity for 4 periods plus 1. (c) 1/1/07 Leased Machine Under Capital Lease. ........................................... 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] 1/1/08 Lease Liability. ................................. 5,920 Interest Payable. .............................. 2,748 Cash. .......................................... 8,668 1

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EXERCISE 21-2 (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
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Class_7_Solns - EXERCISE 21-1(a This is a capital lease to...

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