Kieso_IA_16e_PPT_Ch21v2.pptx

Collectibility is reasonably assured and caterpillar

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Collectibility is reasonably assured and Caterpillar incurs no additional costs (with the exception of the property taxes being collected from Sterling). Caterpillar sets the annual lease payments to ensure a rate of return of 10 percent (implicit rate) on its investment. LO 3 Direct-Financing Method (Lessor)
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21-35 Computation of Lease Payments LO 3 Direct-Financing Method (Lessor) ILLUSTRATION 21-12
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21-36 The lease meets the criteria for classification as a direct- financing lease for several reasons. 1. The lease term exceeds 75 percent of the equipment’s estimated economic life. 2. The present value of the minimum lease payments exceeds 90 percent of the equipment’s fair value. 3. Collectibility of the payments is reasonably assured. 4. Caterpillar incurs no further costs. It is not a sales-type lease because there is no difference between the fair value ($100,000) of the loader and Caterpillar’s cost ($100,000). Direct-Financing Method (Lessor) LO 3
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21-37 Leased Receivable100,000 Equipment 100,000 Caterpillar records the lease of the asset and resulting receivable on January 1, 2017, as follows: Direct-Financing Method (Lessor) Computation of Lease Receivable Total payment $ 25,981.62 Property taxes (executory cost) - 2,000.00 Payment net of executory cost 23,981.62 Present value factor (i=10%,n=5) x 4.16986 Lease receivable $100.000.00 LO 3
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21-38 ILLUSTRATION 21-14 Lease Amortization Schedule for Lessor—Annuity-Due Basis LO 3
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21-39 ILLUSTRATION 21-14 Cash 25,981.62 Lease Receivable 23,981.62 Property Tax Expense/Property Taxes Payable 2,000.00 On January 1, 2017, Caterpillar records receipt of the first year’s lease payment as follows. LO 3
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21-40 ILLUSTRATION 21-14 Interest Receivable 7,601.84 Interest Revenue (leases) 7,601.84 On December 31, 2017, Caterpillar recognizes the interest revenue during the first year through the following entry. LO 3
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21-41 LO 3 ILLUSTRATION 21-14 Cash 25,981.62 Lease Receivable 16,379.78 Interest Receivable 7,601.84 Property Tax Expense/Property Taxes Payable 2,000.00 On January 1, 2018, Caterpillar records the following.
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21-42 ILLUSTRATION 21-14 Interest Receivable 5,963.86 Interest Revenue (leases) 5,963.86 On December 31, 2018, Caterpillar accrues interest as follows. LO 3
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21-43 Records each rental receipt as rental revenue. Depreciates leased asset in the normal manner. Operating Method (Lessor) ACCOUNTING BY THE LESSOR LO 3
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21-44 Illustration: Assume Caterpillar accounts for the lease as an operating lease. It records the cash rental receipt as follows: Cash 25,981.62 Rental Revenue 25,981.62 Depreciation is recorded as follows: $100,000 ÷ 5 years = $20,000 Depreciation Expense 20,000 Accumulated Depreciation 20,000 ACCOUNTING BY THE LESSOR LO 3
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21-45 1 Explain the nature, economic substance, and advantages of lease transactions. 2 Describe the accounting for leases by lessees. LEARNING OBJECTIVES 3 Describe the accounting for leases by lessors. 4 Describe the accounting and reporting for special features of lease arrangements.
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