chapter15homeworksolution - 1 Chapter 15 Homework Solution...

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1 Chapter 15 Homework Solution and etc. BE15-12A and BE15-12B: Calculate annual lease payments Since James (the lessor) will retain the title after the lease term, James will include the RV (does not matter whether RV is guaranteed as in BE15-12A or not as in BE15-12B ) in its annual lease payments calculation. Therefore, the answers for these two questions are the same! James will use the lease term (i.e. 4 years), not the economic life of the leased equipment, to determine the annual lease payments. Amount to be recovered through leasing = Fair value of the leased asset = the PV of annuity due + PV of GRV I.e. $700,000 = Annual rental payments x PVA (Table 6, i=5%, n=4) + $100,000 x PV(Table 6, i=5%, n=4) = Annual rental payments x 3.72325 + $100,000 x 0.82270 = Annual rental payments x 3.72325 + $82,270 So, Annual rental payments = ($700,000 - $82,270) ÷ 3.72325 $165,911.50 E15-1: Operating lease Actually, first of all, we need to know how to classify this lease: Transfer of title? No Bargain purchase option? No Lease term 75% of useful life No 75% x 6 years = 4.5; 2 lease years < 4.5 years PV of MLP 90% of fair value No 90% of fair value = 90% x $90,000 = $81,000 PV of MLP = 10,000 x PVA(Table 4, i=5%,n=4) = 10,000 x 3.54595 = $35,459.5 < $81,000 Since none of the 4 criteria satisfy, this is an operating lease for both the Lessee and the Lessor. Here are the side-by-side comparisons of the entries: (Note that payments start 6 months later) Inception of the lease (1/1/2006): Lessee (Nath-Langstrom) Lessor (ComputerWorld) (no entry) (no entry) 1st rent payment (6/30/2006): Lessee (Nath-Langstrom) Lessor (ComputerWorld) Rent expense 10,000 Cash 10,000 Cash 10,000 Rent revenue 10,000
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2 2nd rent payment (12/31/2006): Lessee (Nath-Langstrom) Lessor (ComputerWorld) Rent expense 10,000 Cash 10,000 Cash 10,000 Rent revenue 10,000 Year-end adjustment (12/31/2006): Lessee (Nath-Langstrom) Lessor (ComputerWorld) Depreciation expense 15,000 (no entry) Accumulated depreciation 15,000 Note that, for operating lease, it is the Lessor that keeps and depreciates the asset! E 15-4 and E15-5: Capital lease for Lessee (E15-4) and Direct Financing Lease for Lessor (E15-5) First of all, we need to know how should this lease be classified: Transfer of title? No Bargain purchase option? No Lease term 75% of useful life Yes 75% x 2 years = 1.5; 2 lease years > 1.5 years This is a capital lease for lessor. And, assume that collectibility of lease payments is reasonably assured and Edison does not have material cost uncertainties, it is a direct financing lease for Lessor. For Lessee, we start with the calculation of lease liability. Lessee should use its own incremental borrowing rate (10%) to calculate lease liability. However, if Lessee knows Lessor’s implicit rate and if Lessor’s rate is lower, Lessee should use Lessor’s rate. In this case, Lessee knows Lessor’s rate and Lessor’s rate, 8%, is lower than Lessee’s incremental borrowing rate, Lessee should use 8% to calculate PV of MLP. Note that lease payments are made at the beginning of each quarter for 2 years; n=2 x 4 = 8 and i=8%
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This note was uploaded on 11/28/2009 for the course BUSINESS acct 3212 taught by Professor Nike during the Spring '09 term at Calhoun Community College.

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chapter15homeworksolution - 1 Chapter 15 Homework Solution...

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