2-1-11 Solutions - *QQ Q21-3 Lessees have available two...

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**QQ Q21-3 Lessees have available two lease accounting methods: (a) the operating method and (b) the capital-lease method. Under the operating method, the leased asset remains the property of the lessor with the payment of a lease rental recognized as rental expense. Generally the lessor pays the insurance, taxes, and maintenance costs related to the leased asset. Under the capital-lease method, the lessee treats the lease transaction as if an asset were being purchased on credit; therefore, the lessee: (1) sets up an asset and a related obligation and (2) recognizes depreciation of the asset, reduction of the obligation, and interest expense.
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EXERCISE 21-1 (a) This is a capital lease to Adams since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 83 1 / 3 % (5 ÷ 6) of the asset’s economic life. (b) Computation of present value of minimum lease payments: $9,968 X 4.16986* = $41,565 *Present value of an annuity due of 1 for 5 periods at 10%. (c) 1/1/10 Leased Machine Under Capital Leases. .................................................. 41,565 Lease Liability. ................................. 41,565 Lease Liability. ......................................... 9,968 Cash. .................................................. 9,968 12/31/10 Depreciation Expense. ............................ 8,313 Accumulated Depreciation— Capital Leases. ............................. 8,313 ($41,565 ÷ 5 = $8,313) Interest Expense. ..................................... 3,160 Interest Payable. ............................... 3,160 [($41,565 – $9,968) X .10] 1/1/11 Lease Liability. ......................................... 6,808 Interest Payable. ...................................... 3,160 Cash. .................................................. 9,968
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EXERCISE 21-2 (a) To Brecker, the lessee, this lease is a capital lease because the terms satisfy the following criteria: 1. The lease term is greater than 75% of the economic life of the leased asset; that is, the lease term is 83 1 / 3 % (50/60) of the economic life. 2.
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This note was uploaded on 01/31/2011 for the course MGMT 351 taught by Professor Staff during the Spring '08 term at Purdue University-West Lafayette.

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2-1-11 Solutions - *QQ Q21-3 Lessees have available two...

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