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MIDTERM 2 MATH STUDY GUIDE

# MIDTERM 2 MATH STUDY GUIDE - MIDTERM 2 MATH STUDY GUIDE...

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MIDTERM 2 MATH STUDY GUIDE CHAPTER 21 LEASE PROBLEMS PART 1: JOURNAL ENTRIES FOR LESSEE Step 1. Present Value of Minimum Lease Payments Lease Payments* × Present Value of Annuity due (I = lower of borrowing rate & implicit, n = lease term) *make sure to subtract any executory costs such as insurance before multiplying by PV of Annuity Due NOTE: If there is guaranteed residual multiply of by PV (not annuity) and add it to PVMLP TESTS FOR CAPITAL LEASE 1. If Regular Payments × PVAD is > 90% of FMV of equipment = Capital Lease 2. Does ownership transfer 3. Is there a bargain purchase option 4. Lease term > 75% of asset’s useful life JOURNAL ENTRIES - LESSEE 1/1/YR 1 Capital Lease Asset (Regular Payments × PVAD) Obligations under C/L IF THERE IS AN EXECUTORY COST YOU HAVE TO HAVE THIS JOURNAL Lease Obligation (Annual Payments – Executory Costs) Insurance Expense → (Executory Costs) Cash (Annual Payments including the Executory Costs) 1/1/YR 1 & YR 2 DO NOT DO THIS JOURNAL ENTRY IF THERE IS AN EXECUTORY COST OBCL annual payments (given) Cash 12/31/YR 1 Interest Expense* (look at T-account) × Borrowing Rate OBCL 12/31/YR 2 Interest Expense* (look at T-account) × Borrowing Rate OBCL 12/31/YR 1 AND YR 2

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Depreciation Expense (PVMLP ÷ Life of Lease) Accumulated Depreciation NOTE: IF THERE IS A GUARANTEED RESIDUAL VALUE TO GET DEPRECIATION EXPENSE 1. Subtract PVMLP – FMV of Asset at end of its lease term 2. Divide by lease term 12/31/YR 1 AND YR 2 Property Tax Expense (if it says in problem LESSEE pays property tax) Cash DEBIT CREDIT Annual Payments (given) Present Value of Minimum Lease Payments PVOMLP – Annual Payments ↑ × Borrowing Rate (Goes in J/E for YR 1) Annual Payments (given) Add up Credits and Subtract Debits PVOMLP – Annual Payments ↑ × Borrowing Rate (Goes in J/E for YR 2) Add up Credits and Subtract Debits
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