62288fromtable5inappendixa

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Unformatted text preview: n years and a payment of \$149,388 at the end of Year 10. The essential difference between the two financing arrangements is that a portion of every lease payment is applied against the outstanding principal balance while the annual payments under the bank loan do not reduce the principal balance. c. Option 1 Building (+A) 149,388 Notes Payable (+L) 149,388 Purchased a building. Option 2 Assets Acquired Under Capital Leases (+A) Obligations Under Capital Leases (+L) 149,388 Acquired a building under a capital lease. 149,388 Option 3 Under the operating lease, the building would not be capitalized. Instead, on every lease payment date, Watts Motors would debit Lease Expense or Rent Expense for \$26,439 and credit Cash for the same amount. E11–24 Concluded d. Payment \$26,439.32 26,439.32 Interest Expensea \$149,388.00 \$17,926.56 \$8,512.76 16,905.03 9,534.29 Principal Reductionb Principal 140,875.24 131,340.95 a Interest Expense = Principal Effective Interest Rateof 12% b Principal Reduction = Payment – Interest Expense e. Present Value = \$26,439.32 Present Value of an Ordinary Annuity Factor for i = 12% and n = 8 = \$26,439.32 4.96764 (from Table 5 in Appendix A) = \$131,341.02 The present value of the future lease payments equals the amount reported on the balance sheet calculated in part (d). E11–25 Present Value = = Present Value of Face Value + Present Value of Interest Payment (Face Value Present Value Factor) + (Periodic Interest Payment Present Value of an Ordinary Annuity Factor) Note 1 Since the proceeds (i.e., present value) equal the face value, we know that the effective rate equals the stated rate. Consequently, the effective rate for Note 1 is 8%. As proof: Present value (i = 8%, n = 6) PV of face value (\$10,000 .63017 from Table 4 in Appendix A) PV of interest payments [(\$10,000 8%) 4.62288 from Table 5 in Appendix A] Total present value (i.e., proceeds) Note 2 \$35,056 = PV Factor PV Factor = = \$ \$ 6,301.70 3,698.30 10,000.00 (\$100,000 Present Value Factor)...
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