Intermediate accounting chapter 21 solutions

CHAPTER 21

Accounting for Leases

SOLUTIONS TO EXERCISES

EXERCISE 21-1 (15–20 minutes)

(a) This is a capital lease to Adams since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 831/3% (5 ÷ 6) of the asset’s economic life.

(b) Computation of present value of minimum lease payments: $9,968 X 4.16986* = $41,565

*Present value of an annuity due of 1 for 5 periods at 10%.

(c) 1/1/12 Leased Equipment................................... 41,565 Lease Liability.................................. 41,565

Lease Liability.......................................... 9,968 Cash................................................... 9,968

12/31/12 Depreciation Expense............................. 8,313 Accumulated Depreciation— Capital Leases.............................. 8,313 ($41,565 ÷ 5 = $8,313)

Interest Expense...................................... 3,160 Interest Payable................................ 3,160

[($41,565 – $9,968) X .10]

1/1/13 Lease Liability.......................................... 6,808 Interest Payable....................................... 3,160

Cash................................................... 9,968

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-1

EXERCISE 21-2 (20–25 minutes)

(a) To Brecker, the lessee, this lease is a capital lease because the terms satisfy the following criteria:

1. The lease term is greater than 75% of the economic life of the leased asset; that is, the lease term is 831/3 % (50/60) of the economic life.

2. The present value of the minimum lease payments is greater than 90% of the fair value of the leased asset; that is, the present value of $10,515 (see below) is 96% of the fair value of the leased asset:

(b) The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual value. The present value therefore is:

Monthly payment of $250 for 50 months........... $ 9,800 Residual value of $1,180...................................... 715 Present value of minimum lease payments....... $10,515

(c) Leased Equipment....................................................... 10,515 Lease Liability....................................................... 10,515

(d) Depreciation Expense................................................. 186.70 Accumulated Depreciation—Capital Leases................................................................ 186.70 [($10,515 – $1,180) ÷ 50 months = $186.70]

(e) Lease Liability.............................................................. 144.85 Interest Expense (1% X $10,515)................................ 105.15

Cash....................................................................... 250.00

EXERCISE 21-3 (20–30 minutes)

Capitalized amount of the lease: Yearly payment........................................................... $90,000 Executory costs.......................................................... (3,088 ) Minimum annual lease payment................................ $86,912

21-2 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

EXERCISE 21-3 (Continued)

Present value of minimum lease payments $86,911.86 X 6.32825 = $550,000.00

1/1/13 Leased Buildings............................................. 550,000 Lease Liability.......................................... 550,000

1/1/13 Executory Costs................................................ 3,088 Lease Liability.................................................. 86,912

Cash........................................................... 90,000

12/31/13 Depreciation Expense..................................... 55,000 Accumulated Depreciation— Capital Leases...................................... 55,000 ($550,000 ÷ 10)

12/31/13 Interest Expense (See Schedule 1)........................................... 55,571

Interest Payable........................................ 55,571

1/1/14 Executory Costs................................................ 3,088 Interest Payable............................................... 55,571 Lease Liability.................................................. 31,341

Cash........................................................... 90,000

12/31/14 Depreciation Expense..................................... 55,000 Accumulated Depreciation— Capital Leases...................................... 55,000

12/31/14 Interest Expense.............................................. 51,810 Interest Payable........................................ 51,810

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-3

EXERCISE 21-3 (Continued)

Schedule 1 KIMBERLY-CLARK CORP. Lease Amortization Schedule

(Lessee)

Date

Annual Payment Less