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Chapter 13 - Solution Manual

2 the lease contains a bargain purchase option 3 the

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2. The lease contains a bargain purchase option. 3. The lease term is equal to 75 percent or more of the estimated economic life of the leased equipment. 4. The present value of the minimum lease payments at the beginning of the lease term-- excluding that portion of the payments representing executory cost such as insurance, maintenance, and taxes to be paid by Lambert Company, including any profit thereon-- equals or exceeds 90 percent of the amount by which the fair value of the equipment leased to Lambert Company at the inception of the lease exceeds any related investment tax credit that the Lambert Company retains and expects to realize. The criteria in items 3 and 4 do not apply if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased equipment, including earlier years of use. b. Lambert Company has entered into a sales type lease or direct financing lease if at its inception the lease meets one or more of the criteria listed in a., above and in addition meets both of the following criteria: 1. The collectibility of the minimum lease payment is reasonably predictable. 2. No important uncertainties surround the amount of unreimbursible costs yet to be incurred by the Lambert Company under the lease. c. In a sales-type lease, manufacturer's or dealer's profit is recognized and represents the excess of the fair value of the leased property over the cost at the inception of the lease. In a direct financing lease, the cost and the fair value of the leased property are the same at the inception of the lease. Thus, the lessor had not manufacturer's or dealer's profit; instead, the lessor has only interest income that will he earned over the life of the lease. Unknown Deleted:
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281 Case 13-5 a. A lease should be classified as a capital lease when it transfers substantially all of the benefits and risks inherent to the ownership of property by meeting any one of the four criteria established by SFAS 13 for classifying a lease as a capital lease. Lease J should be classified as a capital lease because the lease term is equal to 80 percent of the estimated economic life of the equipment, which exceeds the 75 percent or more criterion. Lease K should be classified as a capital lease because the lease contains a bargain purchase option. Lease L should be classified as an operating lease because it does not meet any of the four criteria for classifying a lease as a capital lease. b. For Lease J. Borman Company should record as a liability at the inception of the lease 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 such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon.
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2 The lease contains a bargain purchase option 3 The lease...

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