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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 Taccount) × Borrowing Rate
OBCL
•
12/31/YR 2
Interest Expense*
→
(look at Taccount) × Borrowing Rate
OBCL
•
12/31/YR 1 AND YR 2
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View Full Document 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)
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This note was uploaded on 03/07/2011 for the course ECON 136C taught by Professor Anderson during the Spring '08 term at UCSB.
 Spring '08
 anderson

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