ACC33121 - CHAPTER 21 ACCOUNTING FOR LEASES ANSWERS TO...

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Unformatted text preview: CHAPTER 21 ACCOUNTING FOR LEASES ANSWERS TO MULTIPLE CHOICE 1. a 3. d 5. a 7. b 9. a 2. b 4. b 6. c 8. c 10. d Solutions to some MC questions: 2. There is no bargain purchase option. The fair value of the asset is the present value of the annual rentals: $40,000 * 5.95 = $238,000. 5. The depreciation is $3,165,000 * (1/10) * (6/12) = $158,250. The interest expense is ($3,165,000 - $500,000) * 12% * (6/12) = $159,900. 8. The interest expense is $92,170 * 10% = $9,217. The depreciation is $92,170 / 15 = $6,145. SOLUTIONS TO REVIEW EXERCISES RE21-1 Classification Criteria Criteria Met? Remarks 1. Transfer of ownership at end of lease No 2. Bargain purchase option No 3. Lease term is 75% or more of economic life No It is 40% (8 ÷ 20 years) 4. Present value of minimum lease payments is 90% or more of fair value No It is 50% ($50,000 ÷ $100,000) Therefore, this lease is an operating lease. It does not meet any of the criteria. RE21-2 Rent Expense 10,000 Cash 10,000 RE21-3 Classification Criteria Criteria Met? Remarks 1. Transfer of ownership at end of lease No 2. Bargain purchase option No 3. Lease term is 75% or more of economic life No It is 71% (5 ÷ 7 years) 4. Present value of minimum lease payments is 90% or more of fair value Yes It is 100% ($250,000 ÷ $250,000) Therefore, this lease is a capital lease. It meets one of the four criteria. 21-2 RE21-4 Jan, 1 Leased Equipment 250,000.00 Capital Lease Obligation 250,000.00 Dec. 31 Interest Expense (10% x $250,000) 25,000.00 Capital Lease Obligation ($65,949.37 - $25,000) 40,949.37 Cash 65,949.37 RE21-4 (continued) Depreciation Expense: Leased Equipment 50,000.00* Accumulated Depreciation: Leased Equipment 50,000.00 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $50,000 ($250,000 ÷ 5). RE21-5 Jan, 1 Leased Equipment 275,000.00 Capital Lease Obligation 275,000.00 Capital Lease Obligation 65,949.37 Cash 65,949.57 Dec. 31 Interest Expense 20,905.06* Accrued Interest on Capital Lease Obligation 20,905.06 *($275,000 - $65,949.37) x 0.10 Depreciation Expense: Leased Equipment 55,000.00* Accumulated Depreciation: Leased Equipment 55,000.00 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $55,000 ($275,000 ÷ 5)....
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This note was uploaded on 06/23/2011 for the course BUS 2B taught by Professor Hayle during the Spring '11 term at El Camino.

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ACC33121 - CHAPTER 21 ACCOUNTING FOR LEASES ANSWERS TO...

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