Chapter 15-Part I

Chapter 15-Part I - Chapter 15 Leases Question 15-1...

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Unformatted text preview: Chapter 15 Leases Question 15-1 Regardless of the legal form of the agreement, a lease is accounted for as either a rental agreement or a purchase/sale accompanied by debt financing depending on the substance of the leasing arrangement. Capital leases are agreements that are formulated outwardly as leases, but that are in reality installment purchases. Professional judgment is needed to differentiate between leases that represent rental agreements and those that in reality are installment purchases/sales. The FASB provides guidance for distinguishing between the two fundamental types of leases. Question 15-2 Periodic interest expense is calculated by the lessee as the effective interest rate times the amount of the outstanding lease liability during the period. This same principle applies to the flip side of the transaction, i.e., the lessors lease receivable (net investment). The approach is the same regardless of the specific form of the debt that is, whether in the form of notes, bonds, leases, pensions, or other debt instruments. Question 15-6 The lease is a capital lease to Seminole because the present value of the minimum lease payments ($5.2 million) is greater than 90% of the fair value of the asset (90% x $5.6 million = $5.04 million). Since the additional lessor conditions also are met, it is a nonoperating lease to Lukawitz. Furthermore it is a sales-type lease because the present value of the minimum lease payments exceeds the lessors cost. Question 15-7 Yes. The minimum lease payments for the lessee exclude any residual value not guaranteed by the lessee. On the other hand, the lessor includes any residual value not guaranteed by the lessee but guaranteed by a third-party guarantor. Even when minimum lease payments are the same, their present values will differ if the lessee uses a discount rate different from the lessors implicit rate. This would occur if the lessee is unaware of the implicit rate or if the implicit rate exceeds the lessees incremental borrowing rate. Exercise 15-1 (a) Nath-Langstrom Services, Inc. (Lessee) June 30, 2009 Rent expense................................... 10,000 Cash ............................................ 10,000 December 31, 2009 Rent expense................................... 10,000 Cash ............................................ 10,000 (b) ComputerWorld Corporation (Lessor) June 30, 2009 Cash................................................ 10,000 Rent revenue ............................... 10,000 December 31, 2009 Cash................................................ 10,000 Rent revenue ............................... 10,000 Depreciation expense ($90,000 6 years) 15,000 Accumulated depreciation .......... 15,000...
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Chapter 15-Part I - Chapter 15 Leases Question 15-1...

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