21-1
CHAPTER 21
SOLUTIONS TO EXERCISES
EXERCISE 21-8 (20-30 minutes)
(a)
The lease agreement has a bargain purchase option and thus meets the criteria to
be classified as a capital lease from the viewpoint of the lessee. The present value
of the minimum lease payments exceeds 90% of the fair value of the assets.
(b)
The lease agreement has a bargain purchase option. The collectibility of the lease
payments is reasonably predictable, and there are no important uncertainties
surrounding the costs yet to be incurred by the lessor. The lease, therefore,
qualifies as a capital-type lease from the viewpoint of the lessor. Due to the fact
that the initial amount of lease receivable (net investment) (which in this case
equals the present value of the minimum lease payments, $91,000) exceeds the
lessor’s cost ($65,000), the lease is a sales-type lease.
(c)
Computation of lease liability:
$21,227.65
Annual rental payment
X
4.16986
PV of annuity due of 1 for n = 5, i = 10%
$88,516.32
PV of periodic rental payments
$
4,000.00
Bargain purchase option
X
.62092
PV of 1 for n= 5, i = 10%
$
2,483.68
PV of bargain purchase option
$88,516.32
PV of periodic rental payments
+
2,483.68
PV of bargain purchase option
$91,000.00
Lease liability
DENISE RODE COMPANY (Lessee)
Lease Amortization Schedule
Date
Annual Lease
Payment Plus
BPO
Interest (10%)on
Liability
Reduction
of
Lease Liability
Lease Liability
5/1/04
$91,000.00
5/1/04
$
21,227.65
$21,227.65
69,772.35
5/1/05
21,227.65
*
$
6,977.24
14,250.41
55,521.94
5/1/06
21,227.65
5,552.19
15,675.46
39,846.48
5/1/07
21,227.65
3,984.65
17,243.00
22,603.48
5/1/08
21,227.65
2,260.35
18,967.30
3,636.18
4/30/09
4,000.00
*
363.82
*
3,636.18
0
$110,138.25
$19,138.25
$91,000.00
*Rounding error is 20 cents.