Lease amortization schedule semi annual interest

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Lease Amortization Schedule Semi-Annual Interest Reduction of Date Lease Payment 4% Lease Obligation Balance Initial PV $2,872,427 1/1/11 $200,000 $200,000 2,672,427 7/1/11 200,000 106,897 93,103 2,579,324 1/1/12 200,000 103,173 96,827 2,482,497 21 - 39
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Test Bank for Intermediate Accounting, Thirteenth Edition Solution 21-119 (cont.) December 31, 2011 Depreciation Expense .................................................................. 281,243* Accumulated Depreciation—Capital Leases ..................... 281,243 Interest Expense .......................................................................... 103,173 Interest Payable ............................................................... 103,173 *($2,872,427 – $60,000) ÷ 10 = $281,243. Pr. 21-120 —Lessor accounting—direct-financing lease. Lucas, Inc. enters into a lease agreement as lessor on January 1, 2011, to lease an airplane to National Airlines. The term of the noncancelable lease is eight years and payments are required at the end of each year. The following information relates to this agreement: 1. National Airlines has the option to purchase the airplane for $9,000,000 when the lease expires at which time the fair value is expected to be $15,000,000. 2. The airplane has a cost of $38,000,000 to Lucas, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time (due to technological obsolescence). 3. National Airlines will pay all executory costs related to the leased airplane. 4. Annual year-end lease payments of $5,766,425 allow Lucas to earn an 8% return on its investment. 5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas. Instructions (a) What type of lease is this? Discuss. (b) Prepare a lease amortization schedule for the lessor for the first two years (2011-2012). (Round all amounts to nearest dollar.) (c) Prepare the journal entries on the books of the lessor to record the lease agreement, to reflect payments received under the lease, and to recognize income, for the years 2011 and 2012. Solution 21-120 (a) The lease is a direct-financing type lease from the lessor's point of view or a capital lease from the lessee's point of view. The lease contains a bargain purchase option which satisfies one of the criteria for classification as a direct-financing lease. The option to buy for $9,000,000 at the termination of the lease when the asset is expected to have a fair value of $15,000,000 constitutes a bargain purchase option. Additionally, the payments are collectible, and there are no uncertainties as to future lessor costs. (b) Lessor's Lease Amortization Schedule Annual Interest on Lease Receivable Date Lease Rental Lease Receivable Recovery Lease Receivable 1/1/11 $38,000,000 12/31/11 $5,766,425* $3,040,000 $2,726,425 35,273,575 12/31/12 5,766,425 2,821,886 2,944,539 32,329,036 *[$38,000,000 – ($9,000,000 × .54027)] ÷ 5.74664 = $5,766,425. 21 - 40
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Accounting for Leases Solution 21-120 (cont.) January 1, 2011 (c) Lease Receivable ....................................................................... 38,000,000 Airplanes ......................................................................... 38,000,000 December 31, 2011 Cash ........................................................................................... 5,766,425 Lease Receivable ............................................................ 2,726,425 Interest Revenue ............................................................. 3,040,000 December 31, 2012 Cash ........................................................................................... 5,766,425 Lease Receivable ............................................................ 2,944,539 Interest Revenue ............................................................. 2,821,886 21 - 41
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Test Bank for Intermediate Accounting, Thirteenth Edition IFRS QUESTIONS True/False 1. iGAAP requires that companies provide a year-by-year breakout of future noncancelable lease payments due in years 1 through 5.
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