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Unformatted text preview: The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provisions, and related events are as follows: 1. The lease term is five years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. 2. The computers have an estimated life of five years, a fair value of $300,000, and a zero estimated residual value. 3. Sax Company agrees to pay all executory costs. 4. The lease contains no renewal or bargain purchase option. 5. The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate. 6. Sax Company uses the straight-line method to record depreciation on similar equipment. Required 1. Determine what type of lease this is for Sax Company. 2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar). 3. Prepare a table summarizing the lease payments and interest expense. 4. Prepare journal entries for Sax Company for the years 2010 and 2011. 5. If the lease term is 3 years and the annual payment is $110,000, how would Sax Company classify the lease under (a) U.S. GAAP and (b) IFRS? E21-2 Lessee Accounting Issues Name: An asterisk (*) will appear next to an incorrect amount(s) in the outlined cell(s). If you are still getting a red asterisk, and think the answer is correct, but used a formula in the cell try manually typing in the answer according to the rounding instructions. Required 1. Determine what type of lease this is for Sax Company. Determination of Lease Classification Criteria Met 1. Transfer of ownership at end of lease No 2. Bargain purchase option No 3. Lease term is 75% or more of economic life Yes 4. Present value of lease payments is 90% or more of fair value Yes According to the above criteria the lease would be classified as what type? Capital 2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar). Lease payments $83,222.92 PV Factor 3.6 Present Value $300,000 3. Prepare a table summarizing the lease payments and interest expense. Date January 1, 2010 $300,000.00 December 31, 2010 $83,222.92 $36,000.00 $47,222.92 252,777.08 December 31, 2011 83,222.92 30,333.25 52,889.67 199,887.41 December 31, 2012 83,222.92 23,986.49 59,236.43 140,650.98 December 31, 2013 83,222.92 16,878.12 66,344.80 74,306.18 December 31, 2014 83,222.92 8,916.74 74,306.18 - 4. Prepare journal entries for Sax Company for the years 2010 and 2011. 2010 Jan. 1 Leased Equipment 300,000.00 Capital Lease Obligation 300,000.00 Dec. 31 Capital Lease Obligation 47,222.92 Interest Expense 36,000.00 Cash 83,222.92 Dec. 31 Depr Exp: Leased Equipment 60,000.00 Accum Depr: Leased Equipment 60,000.00 2011 Dec. 31 Capital Lease Obligation 52,889.67 Interest Expense...
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This note was uploaded on 06/26/2011 for the course ACCOUNTING AC300 taught by Professor Jean during the Spring '08 term at Kaplan University.
- Spring '08