Chapter 13 - Solution Manual

However if the amount so determined exceeds the fair

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However, if the amount so determined exceeds the fair value of the equipment at the inception of the lease, the amount recorded as a liability should be the fair value. For Lease K, Borman Company should record as a liability at the inception of the lease an amount determined in the same manner as for Lease J. and the payment called for in the bargain purchase option should be included in the minimum lease payments. For Lease L, Borman Company should not record a liability at the inception of the lease. c. For Lease J. Borman Company should allocate each minimum lease payment between a reduction of the liability and interest expense so as to produce a constant periodic rate of interest on the remaining balance of the liability. For Lease K, Borman Company should allocate each minimum lease payment in the same manner as for Lease J. For Lease L, Borman Company should charge minimum lease (rental) payments to rental expense as they become payable. Case 13-6 1.a. A lessee would account for a capital lease as an asset and an obligation at the inception of the lease. Rental payments during the year would be allocated between a reduction in the obligation and interest expense. Because the lease transfers ownership of the leased asset to the leasee, the asset would be amortized in a manner consistent with the lessee's normal depreciation policy for owned assets. That is, the le s see depreciates the leased asset over its useful life. b. No asset or obligation would be recorded at the inception of the lease. Normally, rental on an operating lease would be charged to expense over the lease term as it becomes payable. If rental payments are not made on a straight-line basis, rental expense nevertheless would be recognized Unknown Deleted: Unknown Deleted: Unknown Deleted: a Unknown Deleted:
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282 on a straight-line basis unless another systematic or rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis would be used. 2.a. The gross investment in the lease is the same for both a sales-type and a direct-financing lease. The gross investment in the lease is the minimum lease-payments (net of amounts, if any, included therein for executory costs such as maintenance, taxes, and insurance to be paid by the lessor, together with any profit thereon) plus the unguaranteed residual value accruing to the benefit of the lessor. b. For both a sales-type lease and a direct-financing lease, the unearned interest income would be amortized to income over the lease term by use of the interest method to produce a constant periodic rate of return on the net investment in the lease. However, other methods of income recognition may be used if the results obtained are not materially different from the interest method.
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