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Unformatted text preview: s lease as a capital lease, Thompkins Laundry would have to arrange the terms so that the lease did not meet any of the criteria for capital leases. Consequently, the company would have to arrange the terms so that: (1 ) (2 ) (3 ) (4 ) the present value of the lease payments is less than 90% of the fair market value of the leased property; the term of the lease is less than 75% of the leased property's life; the lessee does not have the right either during or at the expiration of the lease agreement to purchase the property from the lessor at a nominal amount; or ownership of the property is not transferred to the lessee from the lessor by the end of the lease term. P11–16 a. Equipment (+A) Discount on Notes Payable (–L) 17,604 2,396 Notes Payable (+L) 20,000 Purchased equipment in exchange for a note. b. Present Value \$17,604 = Present Value of Maturity Payment + Present Value of Periodic Payments = (\$20,000 Present Value Factor) + (\$1,000 Present Value of an Ordinary Annuity Factor) Since the present value of \$17,604 is less than the face value, we know that the note was issued at a discount. Consequently, the effective rate is greater than the stated rate. We also know that the stated rate is 5% (\$1,000 ÷ \$20,000 face value). Try i = 6% for n = 5: (\$20,000 .74726 from Table 4 in Appendix A) + (\$1,000 4.21236 from Table 5 in Appendix A) = \$14,945 + \$4,212 = \$19,158 Try i = 8% for n = 5 (\$20,000 .68058 from Table 4 in Appendix A) + (\$1,000 3.99271 from Table 5 in Appendix A) = \$13,612 + \$3,992 = \$17,604 Therefore, the effective interest rate on the note is 8%. P11–16 Concluded c. Payable (+L) Interest Expense (E, –SE) 1,408a Discount on Notes 408b Cash (–A) 1,000 Incurred and paid interest. a \$1,408 = Book Value Effective Rate per Period = (\$20,000 – \$2,396) 8% b \$408 = Interest Expense – Interest Payment d. 12/31/12 Net Book Value = = = Face Value – 12/31/12 Discount on Notes Payable \$20,000 – (\$2,396 – \$408) \$18,012 P11–17 a. Since the bonds are selling at par value, the effective interest rate must be equal to the stated interest rate of 9%. The effective interest rate is the sum o...
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