Solutions for Chapter 21 exercises and problems

# Intermediate Accounting

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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

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EXERCISE 21-2 (a) To Brecker, the lessee, this lease is a capital lease because the terms satisfy the following criteria: 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, i.e., \$10,906. (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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Solutions for Chapter 21 exercises and problems - EXERCISE...

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