Chapter 21 solutions to long problems

# Chapter 21 solutions to long problems - PROBLEM 21-1(a This...

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PROBLEM 21-1 (a) This is a capital lease to Potter since the lease term is greater than 75% of the economic life of the leased asset. The lease term is 78% (7 ÷ 9) of the asset’s economic life. This is a capital lease to Stine because collectibility of the lease payments is reasonably predictable, there are no important uncertainties surrounding the costs yet to be incurred by the lessor, and the lease term is greater than 75% of the asset’s economic life. Since the fair value (\$560,000) of the equipment exceeds the lessor’s cost (\$420,000), the lease is a sales-type lease. (b) Calculation of annual rental payment: \$560,000 – (\$80,000 × .51316)* 5.35526** = \$96,904 * *Present value of \$1 at 10% for 7 periods. **Present value of an annuity due at 10% for 7 periods. (c) Computation of present value of minimum lease payments: PV of annual payments: \$96,904 X 5.23054* * = \$506,860 PV of guaranteed residual value: \$80,000 X .48166** = 38,533 \$545,393 * *Present value of an annuity due at 11% for 7 periods. **Present value of \$1 at 11% for 7 periods. (d) 1/1/07 Leased Machinery Under Capital Leases .................................................................... 545,393 Lease Liability ............................................... 545,393 Lease Liability ......................................................... 96,904 Cash ................................................................ 96,904

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PROBLEM 21-1 (Continued) 12/31/07 Depreciation Expense .............................................. 66,485 Accumulated Depreciation ........................... 66,485 (\$545,393 – \$80,000) ÷ 7 Interest Expense ...................................................... 49,334 Interest Payable ............................................. 49,334 (\$545,393 – \$96,904) X .11 1/1/08 Lease Liability ......................................................... 47,570 Interest Payable ....................................................... 49,334 Cash ................................................................ 96,904 12/31/08 Depreciation Expense .............................................. 66,485 Accumulated Depreciation ........................... 66,485 Interest Expense ...................................................... 44,101 Interest Payable ............................................. 44,101 [(\$545,393 – \$96,904 – \$47,570) X .11] (e) 1/1/07 Lease Receivable ...................................................... 560,000 Cost of Goods Sold .................................................. 420,000 Sales ................................................................ 560,000 Inventory ........................................................ 420,000 Cash ....................................................................... 96,904 Lease Receivable ............................................ 96,904 12/31/07 Interest Receivable .................................................. 46,310 Interest Revenue ............................................ 46,310 [(\$560,000 – \$96,904) X .10] 1/1/08 Cash ....................................................................... 96,904 Lease Receivable ............................................ 50,594 Interest Receivable ........................................ 46,310 12/31/08 Interest Receivable .................................................. 41,250 Interest Revenue ............................................
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