CH+21+Solutions

# CH+21+Solutions - EXERCISE 21-1(a This is a capital lease...

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EXERCISE 21-1 (a) This is a capital lease to Adams since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 83 1 / 3 % (5 ÷ 6) of the asset’s economic life. (b) Computation of present value of minimum lease payments: \$9,968 X 4.16986* = \$41,565 *Present value of an annuity due of 1 for 5 periods at 10%. (c) 1/1/10 Leased Machine Under Capital Leases. .............................................................. 41,565 Lease Liability. ............................................. 41,565 Lease Liability. ....................................................... 9,968 Cash. ............................................................ 9,968 12/31/10 Depreciation Expense. .......................................... 8,313 Accumulated Depreciation— Capital Leases. ........................................ 8,313 (\$41,565 ÷ 5 = \$8,313) Interest Expense. .................................................. 3,160 Interest Payable. .......................................... 3,160 [(\$41,565 – \$9,968) X .10] 1/1/11 Lease Liability. ....................................................... 6,808 Interest Payable. ................................................... 3,160 Cash…………………………………………. 9,968 EXERCISE 21-2 (a) To Brecker, the lessee, this lease is a capital lease because the terms satisfy the following criteria:

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1. The lease term is greater than 75% of the economic life of the leased asset; that is, the lease term is 83 1 / 3 % (50/60) of the economic life. 2. The present value of the minimum lease payments is greater than 90% of the fair value of the leased asset; that is, the present value of \$10,515 (see below) is 96% of the fair value of the leased asset: (b) The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual value. The present value therefore is: Monthly payment of \$250 for 50 months. ............................ \$ 9,800 Residual value of \$1,180. .................................................... 715 Present value of minimum lease payments. ........................ \$10,515 (c) Leased Property Under Capital Leases. ...................................... 10,515 Lease Liability. ..................................................................... 10,515 (d) Depreciation Expense. ................................................................. 186.70 Accumulated Depreciation—Capital Leases. ............................................................................. 186.70 [(\$10,515 – \$1,180) ÷ 50 months = \$186.70] (e) Lease Liability. .............................................................................. 144.85 Interest Expense (1% X \$10,515). ............................................... 105.15 Cash. .................................................................................... 250.00
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## This note was uploaded on 11/20/2011 for the course ACCT 316 taught by Professor Debessay,a during the Spring '08 term at University of Delaware.

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CH+21+Solutions - EXERCISE 21-1(a This is a capital lease...

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