Kieso_IA_16e_PPT_Ch21v2.pptx

Depreciation concept depreciation and the discharge

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Depreciation Concept Depreciation and the discharge of the obligation are independent accounting processes. Asset and Liability Accounted for Differently LO 2 ACCOUNTING BY THE LESSEE
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21-20 Illustration: Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction Corp. sign a lease agreement dated January 1, 2017, that calls for Caterpillar to lease a front-end loader to Sterling beginning January 1, 2017. The terms and provisions of the lease agreement, and other pertinent data, are as follows. The term of the lease is five years. The lease agreement is noncancelable, requiring equal rental payments of $25,981.62 at the beginning of each year (annuity-due basis). The loader has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value. Sterling pays all of the executory costs directly to third parties except for the property taxes of $2,000 per year, which is included as part of its annual payments to Caterpillar. The lease contains no renewal options. The loader reverts to Caterpillar at the termination of the lease. Sterling’s incremental borrowing rate is 11 percent per year. Sterling depreciates, on a straight-line basis, similar equipment that it owns. Caterpillar sets the annual rental to earn a rate of return on its investment of 10 percent per year; Sterling knows this fact. LO 2 ACCOUNTING BY THE LESSEE
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21-21 What type of lease is this? Capitalization Criteria: 1. Transfer of ownership 2. Bargain purchase option 3. Lease term = 75% of economic life of leased property 4. Present value of minimum lease payments => 90% of FMV of property NO NO Lease term = 5 yrs. Economic life = 5 yrs. PV = $100,000 FMV = $100,000. Capital Lease? LO 2 YES YES ACCOUNTING BY THE LESSEE
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21-22 Payment $ 25,981.62 Property taxes (executory cost) - 2,000.00 Minimum lease payment 23,981.62 Present value factor (i=10%,n=5) x 4.16986 PV of minimum lease payments $100.000.00 Compute present value of the minimum lease payments. LO 2 * * Present value of an annuity due of 1 for 5 periods at 10% (Table 6-5) Sterling uses Caterpillar’s implicit interest rate of 10 percent instead of its incremental borrowing rate of 11 percent because (1) it is lower and (2) it knows about it. ACCOUNTING BY THE LESSEE
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21-23 Leased Equipment (under capital leases) 100,000 Lease Liability 100,000 LO 2 Sterling records the capital lease on its books on January 1, 2017, as: Property Tax Expense 2,000.00 Lease Liability 23,981.62 Cash 25,981.62 Sterling records the first lease payment on January 1, 2017 , as follows. ACCOUNTING BY THE LESSEE
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21-24 LO 2 ILLUSTRATION 21-6 Lease Amortization Schedule for Lessee—Annuity-Due Basis
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21-25 ILLUSTRATION 21-6 Interest Expense 7,601.84 Interest Payable 7,601.84 Prepare the entry to record accrued interest at Dec. 31, 2017. LO 2 * rounding
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21-26 Depreciation Expense (capital leases) 20,000 Accumulated Depreciation—Capital Leases 20,000 LO 2 Prepare the required on December 31, 2017, to record depreciation for the year using the straight-line method ($100,000 ÷ 5 years).
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