Chpt_21_Solutions - EXERCISE 21-5 (1520 minutes) (a)...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
EXERCISE 21-5 (15–20 minutes) (a) Because the lease term is longer than 75% of the economic life of the asset and the present value of the minimum lease payments is more than 90% of the fair value of the asset, it is a capital lease to the lessee. Assuming collectibility of the rents is reasonably assured and no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor, the lease is a direct financing lease to the lessor. The lessee should adopt the capital lease method and record the leased asset and lease liability at the present value of the minimum lease pay-ments using the lessee’s incremental borrowing rate or the interest rate implicit in the lease if it is lower than the incremental rate and is known to the lessee. The lessee’s depreciation depends on whether owner-ship transfers to the lessee or if there is a bargain purchase option. If one of these conditions is fulfilled, amortization would be over the eco-nomic life of the asset. Otherwise, it would be depreciated over the lease term. Because both the economic life of the asset and the lease term are three years, the leased asset should be depreciated over this period.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
EXERCISE 21-5 (Continued) The lessor should adopt the direct financing lease method and replace the asset cost of $95,000 with Lease Receivable of $95,000. (See schedule below.) Interest would be recognized annually at a constant rate relative to the unrecovered net investment. Cost (fair market value of leased asset). ................................. $95,000 Amount to be recovered by lessor through lease payments. ................................................................................ $95,000
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7

Chpt_21_Solutions - EXERCISE 21-5 (1520 minutes) (a)...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online