Chapter 15

Chapter 15 - ACG 3141 Installment Notes (Ch. 14) &...

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ACG 3141 Leases (Ch. 15)
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2 Class 11: Accounting for Installment Notes (Chapter 14) Lease Accounting Issues in General Lessee Lease Classification (Operating vs. Capital) Accounting for Operating Leases (Lessee and Lessor) Accounting for Capital Leases (Lessee) Class 12: Lessor Lease Classification (Operating, Direct Financing or Sales-Type) Accounting for Direct Financing Lease (Lessor) Accounting for Sales-Type Lease (Lessor) Other Issues (Discount Rates, Bargain Purchase Options, Residual Value, Sale-Leaseback)
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3 Installment Notes o When debt is an installment note, in addition to interest paid, each When debt is an installment note, in addition to interest paid, each payment has a portion of principal paid. At the end of the term, there is payment has a portion of principal paid. At the end of the term, there is no balance left in the note payable account. A mortgage is an example of no balance left in the note payable account. A mortgage is an example of an installment note. an installment note. o To compute To compute cash payment cash payment (i.e., annuity), the Note Payable (i.e., FV of (i.e., annuity), the Note Payable (i.e., FV of asset transferred) must be known. Use present value tables (PVAD if asset transferred) must be known. Use present value tables (PVAD if payment is made up front; PVA if payment made at the end of the period). payment is made up front; PVA if payment made at the end of the period). o For example, if on 2/1/08 Mary purchases a computer for a note For example, if on 2/1/08 Mary purchases a computer for a note payable of $10,000 to be paid in three equal installments starting on payable of $10,000 to be paid in three equal installments starting on 2/1/08. The amount of the payments would be calculated by dividing 2/1/08. The amount of the payments would be calculated by dividing $10,000 by the PVAD Discount factor (n= applicable interest rate, $10,000 by the PVAD Discount factor (n= applicable interest rate, i=3). i=3). o To compute To compute Note Payable Note Payable , the cash payment must be known. , the cash payment must be known. MULTIPLY the cash payment x PVAD (or PVA) factor to compute. MULTIPLY the cash payment x PVAD (or PVA) factor to compute. o Interest expense (for debtor) or revenue (for creditor) each period: Interest expense (for debtor) or revenue (for creditor) each period: Effective interest rate × Outstanding balance of debt = Interest expense or Effective interest rate × Outstanding balance of debt = Interest expense or revenue revenue o Principal reduction (reduction in payable for debtor & reduction in Principal reduction (reduction in payable for debtor & reduction in receivable for creditor): receivable for creditor): Cash payment – Interest component = Principal reduction per period Cash payment – Interest component = Principal reduction per period
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4 Installment Notes On January 1, 2006, Matrix, Inc. purchased a truck by
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Chapter 15 - ACG 3141 Installment Notes (Ch. 14) &...

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