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Class9 - more problems

Class9 - more problems - PROBLEM 21-3(a The lease should be...

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PROBLEM 21-3
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(a) The lease should be treated as a capital lease by Cascade Industries requiring the lessee to capitalize the leased asset. The lease qualifies for capital lease accounting by the lessee because: (1) title to the engines transfers to the lessee, (2) the lease term is equal to the estimated life of the asset, and (3) the present value of the minimum lease payments exceeds 90% of the fair value of the leased engines. The transaction represents a purchase financed by installment payments over a 10-year period. For Hardy Inc. the transaction is a sales-type lease because a manufacturer’s profit accrues to Hardy. This lease arrangement also represents the manufacturer’s financing the transaction over a period of 10 years. Present Value of Lease Payments $620,956 X 7.24689* $4,500,000 *Present value of an annuity due at 8% for 10 years. Dealer Profit Sales (present value of lease payments) $4,500,000 Less cost of engines 3,900,000 Profit on sale $ 600,000 (b) Leased Engines Under Capital Leases ............ 4,500,000 Lease Liability .............................................
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