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E fair value of the asset cost of the asset 15 14

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Unformatted text preview: ide 15 Capital Leases - Example On January 1, 2009, Matrix, Inc. signed a 5-year On lease with RentPro, Inc. for equipment. The lease specifies annual payments of $6,000 beginning 1/1/09 and at each December 31st beginning through 2012. through The equipment has an economic life of 5 years The and a fair value of $25,873. Matrix has an incremental borrowing rate of 8%, which is the same as the implicit rate used by RentPro to calculate the annual payment. calculate 15-15 Slide 16 Capital Leases - Lessee The lease term meets the “75% of the The 75% economic life” test. economic Economic life 75% of economic life Lease Term Years 5 3.75 5 Lease Term (5 years) is more than 75% of the economic life of the equipment (3.75 years). T his test is met. 15-16 Slide 17 Capital Leases - Lessee The PV of the payments ≥ 90% of the The equipment’s fair value equipment’s Minimum Lease Payments per Year Present Value of Annuity Due factor (5 periods @ 8%) Present Value of the payments Fair value of the equipment at lease inception 90% of the fair value of the equipment at lease inception $ × 6,000 4.31213 $ 25,872.78 $ 25,873 $ 23,286 The present value of the payments > 90% of the fair value of the equipment. This test is met. 15-17 Slide 18 Capital Leases - Lessee Matrix makes the following entries at inception Matrix of the lease. of GENERAL JOURNAL Date Description Jan 1 Leased equipment Lease payable Lease payable Cash Debit Credit 25,873 25,873 6,000 6,000 15-18 Slide 19 Capital Leases - Lessor In addition to the information given earlier, the In lessor (RentPro) knows that the collectibility of the lease payments is reasonably predictable, and there are no future costs to be incurred. RentPro’s performance is substantially complete as far as the lease is concerned. RentPro is not a manufacturer or dealer and its cost of the equipment is $25,873 (rounded). 15-19 Slide 20 Capital Leases - Lessor Because the cost of the asset is equal to Because the cost of the asset is equal to Because Because iits fair value, the lease is classified as a ts fair value, the lease is classified as a Direct Financing Lease.. Direct Financing Lease Direct Direct RentPro makes the following...
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