Chapter 13 - Solution Manual

If the two certainty criteria are not met grant

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If the two certainty criteria are not met, Grant should report the lease as an operating lease. e. The financial statement impacts of treating the lease as a sales type lease when the salvage value is not guaranteed are discussed above in b. f. If Grant treats the lease as an operating lease, lease income of $10,000 will be reported. If there are initial direct costs, 1/20 of those costs will be subtracted from lease income. The balance sheet would report the cost of the leased asset, $75,000 less accumulated depreciation calculated on a straight-line basis over its useful life of 30 years and any unamortized initial direct costs. The statement of cash flows would report an inflow of $10,000 and if there are initial direct costs, their outflow. Both cash flows would appear as operating activities. Case 13-3 a. When a lease transfers substantially all of the benefits and risks incident to the ownership of property to the lessee, it should be capitalized by the lessee. The economic effect of such a lease on the lessee is similar, in many respects, to that of an installment purchase. b. Lani should account for this lease at its inception as an asset and an obligation at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term, excluding that portion of the payments representing executory costs, together with any profit thereon. However, if the amount so determined exceeds the fair value of the leased machine at the inception of the lease, the amount recorded as the asset and obligation should be the machine's fair value. c. Lani will incur interest expense equal to the interest rate used to capitalize the lease at its inception multiplied by the appropriate net carrying value of the liability.
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280 In addition, Lani will incur an expense relating to amortization of the capitalized cost of the leased asset. This amortization should be based on the estimated useful life of the leased asset and amortized in a manner consistent with Lani's normal depreciation policy for owned assets. d. The asset recorded under the capital lease and the accumulated amortization should be reported on Lani's December 31, 2010, balance sheet classified as noncurrent and should be separately identified by Lani in its balance sheet or footnotes thereto. The related obligation recorded under the capital lease should be reported on Lani's December 31, 2010, balance sheet appropriately classified into current and noncurrent categories and should be separately identified by Lani in its balance sheet. Case 13-4 a. Doherty Company has entered into a capital lease if at its inception the lease meets one or more of the following criteria. 1. The lease transfers ownership of the equipment to Doherty Company by the end of the lease term.
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