Intermediate accounting chapter 21a solutions pdf

INTERMEDIATE ACCOUNTING

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

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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

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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

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EXERCISE 21-3 (Continued)

Schedule 1 KIMBERLY-CLARK CORP. Lease Amortization Schedule

(Lessee)

Date

Annual Payment Less

Executory Costs

Interest (12%) on Liability

Reduction of Lease Liability Lease Liability

1/1/12 $550,000 1/1/12 $86,912 $ 0 $86,912 463,088 1/1/13 86,912 55,571 31,341 431,747 1/1/14 86,912 51,810 35,102 396,645

EXERCISE 21-4 (20–25 minutes)

Computation of annual payments Cost (fair value) of leased asset to lessor.................................. $240,000.00 Less: Present value of salvage value

(residual value in this case) $16,000 X .82645 (Present value of 1 at 10% for 2 periods)........................ 13,223.20

Amount to be recovered through lease payments.................... $226,776.80

Two periodic lease payments $226,776.80 ÷ 1.73554*.............. $130,666.42

*Present value of an ordinary annuity of 1 for 2 periods at 10%

KRAUSS LEASING COMPANY (Lessor) Lease Amortization Schedule

Date

Annual Payment Less Executory

Costs

Interest on Lease

Receivable

Recovery of Lease

Receivable Lease

Receivable

1/1/13 $240,000.00 12/31/13 $130,666.42 *$24,000.00 $106,666.42 133,333.58 12/31/14 130,666.42 * 13,332.84* 117,333.58 16,000.00

*$37,332.84

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*Difference of $.52 due to rounding.

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EXERCISE 21-4 (Continued)

(a) 1/1/13 Lease Receivable......................... 240,000.00 Equipment............................ 240,000.00

12/31/13 Cash ($130,666.42 + $7,000)....... 137,666.42 Executory Costs Payable.... 7,000.00 Lease Receivable................. 106,666.42 Interest Revenue.................. 24,000.00

12/31/14 Cash.............................................. 137,666.42 Executory Costs Payable.... 7,000.00 Lease Receivable................. 117,333.58 Interest Revenue.................. 13,332.84

(b) 12/31/14 Cash.............................................. 16,000.00 Lease Receivable................. 16,000.00

EXERCISE 21-5 (15–20 minutes)

(a) Because the lease term is longer than 75% of the economic life of the asset and the present value of the minimum lease payments is more than 90% of the fair value of the asset, it is a capital lease to the lessee. Assuming collectibility of the rents is reasonably assured and no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor, the lease is a direct financing lease to the lessor.

The lessee should adopt the capital lease method and record the leased asset and lease liability at the present value of the minimum lease payments using the lessee’s incremental borrowing rate or the interest rate implicit in the lease if it is lower than the incremental rate and is known to the lessee. The lessee’s depreciation depends on whether ownership transfers to the lessee or if there is a bargain purchase option. If one of these conditions is fulfilled, amortization would be over the economic life of the asset. Otherwise, it would be depreciated over the lease term. Because both the economic life of the asset and the lease term are three years, the leased asset should be depreciated over this period.

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EXERCISE 21-5 (Continued)

The lessor should adopt the direct-financing lease method and replace the asset cost of $75,000 with Lease Receivable of $75,000. (See schedule below.) Interest would be recognized annually at a constant rate relative to the unrecovered net investment.

Cost (fair value of leased asset)............................................... $75,000

Amount to be recovered by lessor through lease payments................................................................................. $75,000

Three annual lease payments: $75,000 ÷ 2.53130*................ $29,629

*Present value of an ordinary annuity of 1 for 3 periods at 9%.

(b) Schedule of Interest and Amortization

Rent Receipt/ Payment

Interest Revenue/ Expense

Reduction of Principal

Receivable/ Liability

1/1/13 — — — $75,000 12/31/13 $29,629 *$6,750* $22,879 52,121 12/31/14 29,629 4,691 24,938 27,183 12/31/15 29,629 2,446 27,183 0

*$75,000 X .09 = $6,750

EXERCISE 21-6 (15–20 minutes)

(a) $38,514 X 5.7122* = $220,000

*Present value of an annuity due of 1 for 8 periods at 11%.

(b) 1/1/13 Lease Receivable................................. 220,000 Cost of Goods Sold............................. 170,000

Sales Revenue............................. 220,000 Inventory....................................... 170,000

1/1/13 Cash...................................................... 38,514 Lease Receivable......................... 38,514

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EXERCISE 21-6 (Continued)

12/31/13 Interest Receivable.............................. 19,963 Interest Revenue [($220,000 – $38,514) X .11].... 19,963

EXERCISE 21-7 (20–25 minutes)

(a) This is a capital lease to Woods since the lease term is 75% (6 ÷ 8) of the asset’s economic life. In addition, the present value of the minimum lease payments is more than 90% of the fair value of the asset.

This is a capital lease to Palmer since collectibility of the lease payments is reasonably predictable, there are no important uncertainties surrounding the costs yet to be incurred by the lessor, and the lease term is 75% of the asset’s economic life. Because the fair value of the equipment ($200,000) exceeds the lessor’s cost ($150,000), the lease is a sales- type lease.

(b) Computation of annual rental payment:

= $41,452

**Present value of $1 at 11% for 6 periods. **Present value of an annuity due at 11% for 6 periods.

(c) 1/1/12 Leased Equipment................................ 190,877 Lease Liability ($41,452 X 4.60478)***............... 190,877

Lease Liability....................................... 41,452 Cash................................................ 41,452

***Present value of an annuity due at 12% for 6 periods.

12/31/12 Depreciation Expense.......................... 31,813 Accumulated Depreciation— Capital Leases ($190,877 ÷ 6 years).................. 31,813

Interest Expense................................... 17,931 Interest Payable ($190,877 – $41,452) X .12........ 17,931

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EXERCISE 21-7 (Continued)

(d) 1/1/12 Lease Receivable............................... 200,000* Cost of Goods Sold........................... 144,654**

Sales Revenue........................... 194,654*** Inventory..................................... 150,000

* *($41,452 X 4.6959) + ($10,000 X .53464) **$150,000 – ($10,000 X .53464)

***$41,452 X 4.6959

Cash.................................................... 41,452 Lease Receivable....................... 41,452

12/31/12 Interest Receivable............................ 17,440 Interest Revenue [($200,000 – $41,452) X .11].... 17,440

EXERCISE 21-8 (20–30 minutes)

(a) The lease agreement has a bargain-purchase option and thus meets the criteria to be classified as a capital lease from the viewpoint of the lessee. Also, the present value of the minimum lease payments exceeds 90% of the fair value of the assets.

(b) The lease agreement has a bargain-purchase option. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lease, therefore, qualifies as a capital-type lease from the view- point of the lessor. Due to the fact that the initial amount of lease receivable (net investment) (which in this case equals the present value of the minimum lease payments, $81,000) exceeds the lessor’s cost ($65,000), the lease is a sales-type lease.

(c) Computation of lease liability: $18,829.49 Annual rental payment X 4.16986 PV of annuity due of 1 for n = 5, i = 10% $78,516.34 PV of periodic rental payments

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EXERCISE 21-8 (Continued)

$ 4,000.00 Bargain-purchase option X .62092 PV of 1 for n = 5, i = 10% $ 2,483.68 PV of bargain purchase option

$78,516.34 PV of periodic rental payments + 2,483.68 PV of bargain-purchase option $81,000.00* Lease liability

*rounded

GILL COMPANY (Lessee) Lease Amortization Schedule

Date

Annual Lease Payment Plus

BPO

Interest (10%) on Liability

Reduction of Lease Liability

Lease Liability

5/1/12 $81,000.00 5/1/12 $18,829.49 $18,829.49 62,170.51 5/1/13 18,829.49 *$ 6,217.05 12,612.44 49,558.07 5/1/14 18,829.49 4,955.81 13,873.68 35,684.39 5/1/15 18,829.49 3,568.44 15,261.05 20,423.34 5/1/16 18,829.49 2,042.33 16,787.16 3,636.18 4/30/17 4,000.00 * 363.82* 3,636.18 0

$98,147.45 $17,147.45 $81,000.00

*Rounding error is 20 cents.

(d) 5/1/12 Leased Equipment............................... 81,000.00 Lease Liability............................... 81,000.00

Lease Liability...................................... 18,829.49 Cash............................................... 18,829.49

12/31/12 Interest Expense.................................. 4,144.70 Interest Payable ($6,217.05 X 8/12 = $4,144.70).... 4,144.70

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EXERCISE 21-8 (Continued)

Depreciation Expense...................... 5,400 Accumulated Depreciation— Capital Leases....................... 5,400 ($81,000.00 ÷ 10 = ($8,100.00; $8,100.00 X (8/12 = $5,400)

1/1/13 Interest Payable................................ 4,144.70 Interest Expense....................... 4,144.70

5/1/13 Interest Expense............................... 6,217.05 Lease Liability................................... 12,612.44

Cash........................................... 18,829.49

12/31/13 Interest Expense............................... 3,303.87 Interest Payable........................ 3,303.87 ($4,955.81 X 8/12 = ($3,303.87)

12/31/13 Depreciation Expense...................... 8,100.00 Accumulated Depreciation— Capital Leases....................... 8,100.00 ($81,000.00 ÷ 10 years = ($8,100.00)

(Note to instructor: Because a bargain-purchase option was involved, the leased asset is depreciated over its economic life rather than over the lease term.)

EXERCISE 21-9 (20–30 minutes)

Note: The lease agreement has a bargain-purchase option. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lease, therefore, qualifies as a capital lease from the viewpoint of the lessor.

Due to the fact that the amount of the sale (which in this case equals the present value of the minimum lease payments, $81,000) exceeds the lessor’s cost ($65,000), the lease is a sales-type lease.

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EXERCISE 21-9 (Continued)

The minimum lease payments associated with this lease are the periodic annual rents plus the bargain-purchase option. There is no residual value relevant to the lessor’s accounting in this lease.

(a) The lease receivable is computed as follows:

$18,829.49 Annual rental payment X 4.16986 PV of annuity due of 1 for n = 5, i = 10% $78,516.34 PV of periodic rental payments

$ 4,000.00 Bargain purchase option X .62092 PV of 1 for n = 5, i = 10% $ 2,483.68 PV of bargain-purchase option

$78,516.34 PV of periodic rental payments + 2,483.68 PV of bargain-purchase option $81,000.00* Lease receivable at inception

*Rounded

(b) LENNOX LEASING COMPANY (Lessor) Lease Amortization Schedule

Date

Annual Lease Payment Plus

BPO

Interest (10%) on Lease

Receivable

Recovery of Lease

Receivable Lease

Receivable

5/1/12 $81,000.00 5/1/12 $18,829.49 $18,829.49 62,170.51 5/1/13 18,829.49 $ 6,217.05 12,612.44 49,558.07 5/1/14 18,829.49 4,955.81 13,873.68 35,684.39 5/1/15 18,829.49 3,568.44 15,261.05 20,423.34 5/1/16 18,829.49 2,042.33 16,787.16 3,636.18 4/30/17 4,000.00 363.82* 3,636.18 0

$98,147.45 *$17,147.45 $81,000.00

*Rounding error is 20 cents.

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EXERCISE 21-9 (Continued)

(c) 5/1/12 Lease Receivable....................... 81,000.00 Cost of Goods Sold.................... 65,000.00

Sales Revenue.................... 81,000.00 Inventory............................. 65,000.00

Cash............................................. 18,829.49 Lease Receivable............... 18,829.49

12/31/12 Interest Receivable.................... 4,144.70 Interest Revenue................ 4,144.70 ($6,217.05 X 8/12 = $4,144.70)

5/1/13 Cash............................................. 18,829.49 Lease Receivable............... 12,612.44 Interest Receivable............. 4,144.70 Interest Revenue................ 2,072.35 ($6,217.05 – $4,144.70)

12/31/13 Interest Receivable.................... 3,303.87 Interest Revenue................. 3,303.87 ($4,955.81 X 8/12 = ($3,303.87)

5/1/14 Cash............................................. 18,829.49 Lease Receivable................ 13,873.68 Interest Receivable............. 3,303.87 Interest Revenue................. 1,651.94 ($4,955.81 – $3,303.87)

12/31/14 Interest Receivable.................... 2,378.96 Interest Revenue................. 2,378.96 ($3,568.44 X 8/12 = ($2,378.96)

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EXERCISE 21-10 (15–25 minutes)

(a) Fair value of leased asset to lessor.................................. $343,000 Less: Present value of unguaranteed

residual value $61,071 X .56447 (present value of 1 at 10% for 6 periods).............. 34,473

Amount to be recovered through lease payments.......... $308,527

Six periodic lease payments $308,527.25 ÷ 4.79079*...... $ 64,400**

*Present value of annuity due of 1 for 6 periods at 10%. **Rounded to the nearest dollar.

(b) FIEVAL LEASING COMPANY (Lessor) Lease Amortization Schedule

Date

Annual Lease

Payment Plus URV

Interest (10%) on Lease

Receivable

Recovery of Lease

Receivable Lease

Receivable

1/1/12 $343,000 1/1/12 $ 64,400 $ 64,400 278,600 1/1/13 64,400 $ 27,860 36,540 242,060 1/1/14 64,400 24,206 40,194 201,866 1/1/15 64,400 20,187 44,213 157,653 1/1/16 64,400 15,765 48,635 109,018 1/1/17 64,400 10,902 53,498 55,520 12/31/17 61,071 5,551 55,520 0

$447,471 $104,471 $343,000

(c) 1/1/12 Lease Receivable.................................. 343,000 Equipment...................................... 343,000

1/1/12 Cash........................................................ 64,400 Lease Receivable.......................... 64,400

12/31/12 Interest Receivable............................... 27,860 Interest Revenue........................... 27,860

1/1/13 Cash........................................................ 64,400 Lease Receivable.......................... 36,540 Interest Receivable........................ 27,860

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12/31/13 Interest Receivable............................... 24,206 Interest Revenue........................... 24,206

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EXERCISE 21-11 (20–30 minutes)

Note: This lease is a capital lease to the lessee because the lease term (five years) exceeds 75% of the remaining economic life of the asset (five years). Also, the present value of the minimum lease payments exceeds 90% of the fair value of the asset.

$20,541.11 Annual rental payment X 4.16986 PV of an annuity due of 1 for n = 5, i = 10% $85,653.55 PV of minimum lease payments

(a) AZURE COMPANY (Lessee) Lease Amortization Schedule

Date Annual Lease

Payment Interest (10%)

on Liability

Reduction of Lease Liability

Lease Liability

1/1/12 $85,653.55 1/1/12 $ 20,541.11 $20,541.11 65,112.44 1/1/13 20,541.11 *$ 6,511.24 14,029.87 51,082.57 1/1/14 20,541.11 5,108.26 15,432.85 35,649.72 1/1/15 20,541.11 3,564.97 16,976.14 18,673.58 1/1/16 20,541.11 * 1,867.53* 18,673.58 0

$102,705.55 *$17,052.00 $85,653.55

*Rounding error is 17 cents.

(b) 1/1/12 Leased Equipment........................ 85,653.55 Lease Liability....................... 85,653.55

1/1/12 Lease Liability............................... 20,541.11 Cash....................................... 20,541.11

During 2012

Insurance Expense....................... 900.00 Cash....................................... 900.00

Property Tax Expense.................. 1,600.00

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Cash....................................... 1,600.00

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EXERCISE 21-11 (Continued)

12/31/12 Interest Expense............................... 6,511.24 Interest Payable........................ 6,511.24

Depreciation Expense...................... 17,130.71 Accumulated Depreciation— Capital Leases....................... 17,130.71 ($85,653.55 ÷ 5 = $17,130.71)

1/1/13 Interest Payable................................ 6,511.24 Interest Expense....................... 6,511.24

Interest Expense............................... 6,511.24 Lease Liability................................... 14,029.87

Cash........................................... 20,541.11

During 2013

Insurance Expense........................... 900.00 Cash........................................... 900.00

Property Tax Expense...................... 1,600.00 Cash........................................... 1,600.00

12/31/13 Interest Expense............................... 5,108.26 Interest Payable........................ 5,108.26

Depreciation Expense...................... 17,130.71 Accumulated Depreciation— Capital Leases....................... 17,130.71

Note to instructor:

1. The lessor sets the annual rental payment as follows:

Fair value of leased asset to lessor.................................. $90,000.00 Less: Present value of unguaranteed

residual value $7,000 X .62092 (present value of 1 at 10% for 5 periods)............. 4,346.44

Amount to be recovered through lease payments.......... $85,653.56 Five periodic lease payments

$85,653.56 ÷ 4.16986*..................................................... $20,541.11

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

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EXERCISE 21-11 (Continued)

2. The unguaranteed residual value is not subtracted when depreciating the leased asset.

EXERCISE 21-12 (10–20 minutes)

(a) Entries for Secada are as follows:

1/1/12 Buildings............................................ 3,600,000 Cash............................................ 3,600,000

12/31/12 Cash.................................................... 220,000 Rent Revenue............................. 220,000

Depreciation Expense....................... 72,000 Accumulated Depreciation— Buildings ($3,600,000 ÷ 50).... 72,000

Property Tax Expense....................... 85,000 Insurance Expense............................ 10,000

Cash............................................ 95,000

(b) Entries for Ryker are as follows:

12/31/12 Rent Expense..................................... 220,000 Cash............................................ 220,000

(c) The real estate broker’s fee should be capitalized and amortized equally over the 10-year period. As a result, real estate fee expense of $3,000 ($30,000 ÷ 10) should be reported in each period.

EXERCISE 21-13 (15–20 minutes)

(a) Annual rental revenue........................................................... $180,000 Less: Maintenance and other executory costs................. 25,000

Depreciation ($900,000 ÷ 8)...................................... 112,500 Income before income tax.................................................... $ 42,500

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EXERCISE 21-13 (Continued)

(b) Rent expense......................................................................... $180,000

Note: Both the rent security deposit and the last month’s rent prepayment should be reported as a noncurrent asset.

SOLUTIONS TO PROBLEMS

PROBLEM 21-1

(a) This is a capital lease to Jensen since the lease term is greater than 75% of the economic life of the leased asset. The lease term is 78% (7 ÷ 9) of the asset’s economic life.

This is a capital lease to Glaus because collectibility of the lease payments is reasonably predictable, there are no important uncertainties surrounding the costs yet to be incurred by the lessor, and the lease term is greater than 75% of the asset’s economic life. Since the fair value ($700,000) of the equipment exceeds the lessor’s cost ($525,000), the lease is a sales-type lease.

(b) Calculation of annual rental payment:

= $121,130

**Present value of $1 at 10% for 7 periods. **Present value of an annuity due at 10% for 7 periods.

(c) Computation of present value of minimum lease payments: PV of annual payments: $121,130 X 5.23054** = $633,575 PV of guaranteed residual value: $100,000 X .48166** = 48,166

$681,741 **Present value of an annuity due at 11% for 7 periods. **Present value of $1 at 11% for 7 periods.

(d) 1/1/12 Leased Equipment................................ 681,741 Lease Liability................................ 681,741

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Lease Liability....................................... 121,130 Cash................................................ 121,130

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PROBLEM 21-1 (Continued)

12/31/12 Depreciation Expense.......................... 83,106 Accumulated Depreciation— Capital Leases ($681,741 – $100,000) ÷ 7.......... 83,106

Interest Expense................................... 61,667 Interest Payable ($681,741 – $121,130) X .11...... 61,667

1/1/13 Lease Liability....................................... 59,463 Interest Payable..................................... 61,667

Cash................................................ 121,130

12/31/13 Depreciation Expense.......................... 83,106 Accumulated Depreciation— Capital Leases.......................... 83,106

Interest Expense................................... 55,126 Interest Payable............................. 55,126 [($681,741 – $121,130 – $59,463) X .11]

(e) 1/1/12 Lease Receivable.................................. 700,000 Cost of Goods Sold............................... 525,000

Sales Revenue............................... 700,000 Inventory........................................ 525,000

Cash........................................................ 121,130 Lease Receivable.......................... 121,130

12/31/12 Interest Receivable............................... 57,887 Interest Revenue [($700,000 – $121,130) X .10].... 57,887

1/1/13 Cash........................................................ 121,130 Lease Receivable.......................... 63,243 Interest Receivable........................ 57,887

12/31/13 Interest Receivable................................ 51,563 Interest Revenue ($700,000 – $121,130 – $63,243) X .10................................ 51,563

21-22 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-2

(a) The lease is an operating lease to the lessee and lessor because:

1. it does not transfer ownership,

2. it does not contain a bargain-purchase option,

3. it does not cover at least 75% of the estimated economic life of the crane, and

4. the present value of the lease payments is not at least 90% of the fair value of the leased crane.

$33,000 Annual Lease Payments X PV of annuity due at 9% for 5 years $33,000 X 4.23972 = $139,910.76, which is less than $216,000.00 (90% X

$240,000.00).

At least one of the four criteria would have had to be satisfied for the lease to be classified as other than an operating lease.

(b) Lessee’s Entries Rent Expense............................................................... 33,000

Cash....................................................................... 33,000

Lessor’s Entries Insurance Expense...................................................... 500 Property Tax Expense................................................. 2,000 Maintenance and Repairs Expense........................... 650

Accounts Payable................................................ 3,150

Depreciation Expense................................................. 18,750 Accumulated Depreciation—Capital Leases [($240,000 – $15,000) ÷ 12]............................. 18,750

Cash.............................................................................. 33,000 Rent Revenue........................................................ 33,000

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-23

PROBLEM 21-2 (Continued)

(c) Abriendo as lessee must disclose in the income statement the $33,000 of rent expense and in the notes the future minimum rental payments required as of January 1 (in total, $132,000) and for each of the succeed- ing four years: 2013—$33,000; 2014—$33,000; 2015—$33,000; 2016— $33,000. Nothing relative to this lease would appear on the lessee’s balance sheet.

Cleveland as lessor must disclose in the balance sheet or in the notes the cost of the leased crane ($240,000) and the accumulated depreciation of $18,750 separately from assets not leased. Additionally, Cleveland must disclose in the notes the minimum future rentals as a total of $132,000, and for each of the succeeding four years: 2013—$33,000; 2014—$33,000; 2015—$33,000; 2016—$33,000.

The income statement for the lessor reports rent revenue and expenses for insurance, taxes, maintenance, and depreciation expense.

21-24 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-3

(a) The lease should be treated as a capital lease by Winston Industries requiring the lessee to capitalize the leased asset. The lease qualifies for capital lease accounting by the lessee because: (1) title to the engines transfers to the lessee, (2) the lease term is equal to the estimated life of the asset, and (3) the present value of the minimum lease payments exceeds 90% of the fair value of the leased engines. The transaction represents a purchase financed by installment payments over a 10-year period.

For Ewing Inc. the transaction is a sales-type lease because a manufacturer’s profit accrues to Ewing. This lease arrangement also represents the manufacturer’s financing the transaction over a period of 10 years.

Present Value of Lease Payments $413,971 X 7.24689*................................................... $3,000,000

*Present value of an annuity due at 8% for 10 years, rounded by $2.

Dealer Profit Sales (present value of lease payments)..................... $3,000,000 Less cost of engines...................................................... 2,600,000 Profit on sale................................................................... $ 400,000

(b) Leased Equipment............................................. 3,000,000 Lease Liability............................................. 3,000,000

(c) Lease Receivable............................................... 3,000,000 Cost of Goods Sold........................................... 2,600,000

Sales Revenue............................................. 3,000,000 Inventory...................................................... 2,600,000

(d) Lessee (January 1, 2012) Lease Liability.................................................... 413,971

Cash.............................................................. 413,971

Lessor (January 1, 2012) Cash..................................................................... 413,971

Lease Receivable........................................ 413,971

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-25

PROBLEM 21-3 (Continued)

(e) WINSTON INDUSTRIES Lease Amortization Schedule

Date

Annual Lease

Receipt/ Payment

Interest on Receivable/

Liability at 8%

Reduction in Receivable/

Liability

Lease Receivable/

Liability 1/1/12 3,000,000 1/1/12 413,971 413,971 2,586,029 1/1/13 413,971 206,882 207,089 2,378,940 1/1/14 413,971 190,315 223,656 2,155,284

Lessee (December 31, 2012) Interest Expense................................................ 206,882

Interest Payable........................................... 206,882

Lessor (December 31, 2012) Interest Receivable............................................ 206,882

Interest Revenue......................................... 206,882

(f) WINSTON INDUSTRIES Balance Sheet

December 31, 2012

Property, plant, and equipment: Current liabilities:

Leased property $3,000,000 Interest payable $ 206,882

Less accumulated depreciation 300,000*

Lease liability 207,089**

Long-term liabilities: $2,700,000 Lease liability

(See schedule) 2,378,940***

*$3,000,000 ÷ 10 = $300,000 **($413,971 – $206,882)

***No portion of this amount paid within the next year.

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Note: The title Obligations under Capital Leases is often used instead of Lease liability.

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-27

PROBLEM 21-3 (Continued)

EWING INC. Balance Sheet

December 31, 2012

Assets Current assets:

Interest receivable........................................................ $ 206,882 Lease receivable.......................................................... 207,089

Noncurrent assets: Lease receivable.......................................................... $2,378,940*

Note: The title Net Investment in leases is often shown instead of Lease receivable.

*See balance on amortization schedule at 1/1/13.

21-28 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-6

Note: This lease is a capital lease to the lessee because the lease term (six years) exceeds 75% of the remaining economic life of the asset (six years). Also, the present value of the minimum lease payments exceeds 90% of the fair value of the asset.

$ 124,798 Annual rental payment X 4.60478 PV of an annuity due of 1 for n = 6, i = 12% $ 574,668 * PV of periodic rental payments

$ 50,000 Guaranteed residual value X .50663 PV of 1 for n = 6, i = 12% $ 25,332 PV of guaranteed residual value

$ 574,668* PV of periodic rental payments + 25,332 PV of guaranteed residual value $ 600,000 PV of minimum lease payments

(a) VANCE COMPANY (Lessee) Lease Amortization Schedule

Date

Annual Lease

Payment Plus GRV

Interest (12%) on Liability

Reduction of Lease Liability

Lease Liability

1/1/12 $600,000

1/1/12 $124,798 $124,798 475,202

1/1/13 124,798 *$ 57,024 67,774 407,428

1/1/14 124,798 48,891 75,907 331,521

1/1/15 124,798 39,783 85,015 246,506

1/1/16 124,798 29,581 95,217 151,289

1/1/17 124,798 18,155 106,643 44,646

12/31/17 50,000 * 5,354* 44,646 0

$798,788 $198,788 $600,000

*Rounding error is $1. **Rounding error is $3.

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-29

PROBLEM 21-6 (Continued)

(b) January 1, 2012 Leased Equipment................................................... 600,000

Lease Liability.................................................... 600,000

Lease Liability........................................................... 124,798 Cash.................................................................... 124,798

During 2012 Executory Costs....................................................... 5,000

Cash.................................................................... 5,000

December 31, 2012 Interest Expense....................................................... 57,024

Interest Payable................................................. 57,024

Depreciation Expense.............................................. 91,667 Accumulated Depreciation—Capital Leases ([$600,000 – $50,000] ÷ 6)................ 91,667

January 1, 2013 Interest Payable........................................................ 57,024

Interest Expense................................................ 57,024

Interest Expense....................................................... 57,024 Lease Liability........................................................... 67,774

Cash.................................................................... 124,798

During 2013 Executory Costs....................................................... 5,000

Cash.................................................................... 5,000

December 31, 2013 Interest Expense....................................................... 48,891

Interest Payable................................................. 48,891

Depreciation Expense.............................................. 91,667 Accumulated Depreciation—Capital Leases............................................................ 91,667

21-30 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-6 (Continued)

(Note to instructor: The guaranteed residual value was subtracted for purposes of determining the depreciable base. The reason is that at the end of the lease term, hopefully, this balance can offset the remaining lease obligation balance. To depreciate the leased asset to zero might lead to a large gain in the final years if the asset has a value at least equal to its guaranteed amount.)

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-31

PROBLEM 21-7

(a) December 31, 2012 Leased Equipment................................................... 166,794

Lease Liability.................................................... 166,794 (To record leased asset and related liability at the present value of 5 future annual payments of $40,000 discounted at 10%, $40,000 X 4.16986)

December 31, 2012 Lease Liability........................................................... 40,000

Cash.................................................................... 40,000 (To record the first rental payment)

(b) December 31, 2013 Depreciation Expense.............................................. 23,828

Accumulated Depreciation—Capital Leases............................................................ 23,828 (To record depreciation of the leased asset based upon a cost to Ludwick of $166,794 and a life of 7 years)

December 31, 2013 Interest Expense....................................................... 12,679 Lease Liability........................................................... 27,321

Cash.................................................................... 40,000 (To record annual payment on lease liability of which $12,679 represents interest at 10% on the unpaid principal of $126,794)

21-32 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-7 (Continued)

LUDWICK STEEL COMPANY (Lessee) Lease Amortization Schedule

(Annuity Due Basis)

Date

Annual Lease

Payment Interest (10%)

on Liability

Reduction of Lease Liability

Lease Liability

12/31/12 — — — $166,794

12/31/12 $40,000 $ 0 $40,000 126,794

12/31/13 40,000 12,679 27,321 99,473

12/31/14 40,000 9,947 30,053 69,420

12/31/15 40,000 6,942 33,058 36,362

12/31/16 40,000 3,638* 36,362 0

*Rounding error of $2

(c) December 31, 2014 Interest Expense.......................................................... 9,947 Lease Liability.............................................................. 30,053

Cash....................................................................... 40,000 (To record annual payment on lease liability of which $9,947 represents interest at 10% on the unpaid principal of $99,473)

December 31, 2014 Depreciation Expense................................................. 23,828

Accumulated Depreciation—Capital Leases............................................................... 23,828 (To record annual depreciation on assets leased)

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-33

PROBLEM 21-7 (Continued)

(d) LUDWICK STEEL COMPANY Balance Sheet

December 31, 2014

Property, plant, and equipment: Current liabilities: Leased equipment $166,794 Lease liability $33,058 Less: Accumulated

depreciation 47,656 Interest payable Long-term:

31,813

$119,138 Lease liability 36,362

21-34 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-10

(a) The lease is a sales-type lease because: (1) the lease term exceeds 75% of the asset’s estimated economic life, (2) collectibility of payments is reasonably assured and there are no further costs to be incurred, and (3) George Company realized an element of profit aside from the financing charge.

1. Present value of an annuity due of $1 for 10 periods discounted at 10%..................................... 6.75902 Annual lease payment...................................................... X $ 40,000 Present value of the 10 rental payments........................ 270,361 Add present value of estimated residual value of $20,000 in 10 years at 10% ($20,000 X .38554) ........................................................ 7,711 Lease receivable at inception.......................................... $278,072

2. Sales price is $270,361 (the present value of the 10 annual lease payments); or, the initial PV of $278,072 minus the PV of the un- guaranteed residual value of $7,711.

3. Cost of sales is $172,289 (the $180,000 cost of the asset less the present value of the unguaranteed residual value).

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-35

PROBLEM 21-10 (Continued)

(b) GEORGE COMPANY (Lessor) Lease Amortization Schedule

Annuity Due Basis, Unguaranteed Residual Value

Beginning of Year

Annual Lease Payment Plus Residual Value

Interest (10%) on Lease

Receivable

Lease Receivable Recovery

Lease Receivable

(a) (b) (c) (d) Initial PV — — — $278,072

1 $ 40,000 — $ 40,000 238,072 2 40,000 *$ 23,807 16,193 221,879 3 40,000 22,188 17,812 204,067 4 40,000 20,407 19,593 184,474 5 40,000 18,447 21,553 162,921 6 40,000 16,292 23,708 139,213 7 40,000 13,921 26,079 113,134 8 40,000 11,313 28,687 84,447 9 40,000 8,445 31,555 52,892 10 40,000 5,289 34,711 18,181

End of 10 20,000 * 1,819* 18,181 0 $420,000 *$141,928 $278,072

*Rounding error is $1.00.

(a) Annual lease payment required by lease contract. (b) Preceding balance of (d) X 10%, except beginning of first year of lease term. (c) (a) minus (b). (d) Preceding balance minus (c).

(c) Beginning of the Year Lease Receivable..................................................... 278,072 Cost of Goods Sold.................................................. 172,289

Sales Revenue................................................... 270,361 Inventory............................................................ 180,000 (To record the sale and the cost of goods sold in the lease transaction)

Selling Expenses...................................................... 4,000 Cash.................................................................... 4,000 (To record payment of the initial direct

21-36 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

costs relating to the lease)

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-37

PROBLEM 21-10 (Continued)

Cash.............................................................................. 40,000 Lease Receivable................................................. 40,000 (To record receipt of the first lease payment)

End of the Year Interest Receivable...................................................... 23,807

Interest Revenue.................................................. 23,807 (To record interest earned during the first year of the lease)

21-38 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-11

(a) The lease is a capital lease because: (1) the lease term exceeds 75% of the asset’s economic life and (2) the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset.

Initial Obligation Under Capital Leases: Minimum lease payments ($40,000) X PV of an annuity due for 10 periods at 10% (6.75902)................ $270,361

(b) NATIONAL AIRLINES (Lessee) Lease Amortization Schedule (Annuity due basis and URV)

Beginning of Year

Annual Lease Payment

Interest (10%) on Lease Liability

Reduction of Lease Liability

Lease Liability

(a) (b) (c) (d) Initial PV — — — $270,361

1 $ 40,000 — $ 40,000 230,361 2 40,000 $ 23,036 16,964 213,397 3 40,000 21,340 18,660 194,737 4 40,000 19,474 20,526 174,211 5 40,000 17,421 22,579 151,632 6 40,000 15,163 24,837 126,795 7 40,000 12,680 27,320 99,475 8 40,000 9,948 30,052 69,423 9 40,000 6,942 33,058 36,365

10 40,000 3,635* 36,365 0 $400,000 $129,639 $270,361

*Rounding error is $1.

(a) Annual lease payment required by lease contract. (b) Preceding balance of (d) X 10%, except beginning of first year of lease term. (c) (a) minus (b). (d) Preceding balance minus (c).

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-39

PROBLEM 21-11 (Continued)

(c) Lessee’s journal entries:

Beginning of the Year Leased Equipment................................................... 270,361

Lease Liability.................................................... 270,361 (To record the lease of computer equipment using capital lease method)

Lease Liability........................................................... 40,000 Cash.................................................................... 40,000 (To record the first rental payment)

End of the Year Interest Expense....................................................... 23,036

Interest Payable................................................. 23,036 (To record accrual of annual interest on lease obligation)

Depreciation Expense.............................................. 27,036 Accumulated Depreciation—Capital Leases............................................................ 27,036 (To record depreciation expense for first year [$270,361 ÷ 10])

21-40 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-13

(a) The noncancelable lease is a sales-type lease because: (1) the lease term is for 83% (10 ÷ 12) of the economic life of the leased asset, (2) the present value of the minimum lease payments exceeds 90% of the fair value of the leased property, (3) the collectibility of the lease payments is reasonably predictable and no uncertainties exist as to unreimbursable costs yet to be incurred by the lessor, and (4) the lease provides the lessor with manufacturer’s profit in addition to interest revenue.

1. Lease Receivable:

Present value of annual payments of $60,000 made at the beginning of each period for 10 years, $60,000 X 6.75902 (PV of an annuity due @ 10%)......... $405,541

Present value of guaranteed residual value, $15,000 X .38554............................................................... 5,783

Present value of minimum lease payments............... $411,324

2. Sales price is the same as the present value of minimum lease payments................................................ $411,324

3. Cost of sales is the cost of manufacturing the x-ray machine................................................................... $250,000

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-41

PROBLEM 21-13 (Continued)

(b) AMIRANTE INC. (Lessor) Lease Amortization Schedule

(Annuity due basis, guaranteed residual value)

Beginning of Year

Annual Lease Payment Plus Residual Value

Interest (10%) on Lease

Receivable

Recovery of Lease

Receivable Lease

Receivable (a) (b) (c) (d)

Initial PV — — — $411,324 1 $ 60,000 — $ 60,000 351,324 2 60,000 $ 35,132 24,868 326,456 3 60,000 32,646 27,354 299,102 4 60,000 29,910 30,090 269,012 5 60,000 26,901 33,099 235,913 6 60,000 23,591 36,409 199,504 7 60,000 19,950 40,050 159,454 8 60,000 15,945 44,055 115,399 9 60,000 11,540 48,460 66,939 10 60,000 6,694 53,306 13,633

End of 10 15,000 * 1,367* 13,633 0 $615,000 *$203,676 $411,324

*Rounding error is $4.00.

(a) Annual lease payment required by lease contract. (b) Preceding balance of (d) X 10%, except beginning of first year of lease term. (c) (a) minus (b). (d) Preceding balance minus (c).

(c) Lessor’s journal entries:

Beginning of the Year Lease Receivable..................................................... 411,324 Cost of Goods Sold.................................................. 250,000

Sales Revenue................................................... 411,324 Inventory............................................................ 250,000

Selling Expenses...................................................... 14,000 Accounts Payable............................................. 14,000 (To record the incurrence of initial direct

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costs relating to the lease)

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-43

PROBLEM 21-13 (Continued)

Cash.............................................................................. 60,000 Lease Receivable................................................. 60,000 (To record receipt of the first lease payment)

End of the Year Interest Receivable...................................................... 35,132

Interest Revenue.................................................. 35,132 (To record interest earned during the first year of the lease)

21-44 Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only)

PROBLEM 21-14

(a) The noncancelable lease is a capital lease because: (1) the lease term is for 83% (10 ÷ 12) of the economic life of the leased asset and (2) the present value of the minimum lease payments exceeds 90% of the fair market value of the leased asset.

Initial Obligation Under Capital Lease: PV of lease payments, $60,000 X 6.75902......................... $405,541 PV of guaranteed residual value, $15,000 X .38554......... 5,783 Initial obligation under capital lease................................. $411,324

(b) CHAMBERS MEDICAL (Lessee) Lease Amortization Schedule

(Annuity Due Basis, GRV)

Beginning of Year

Annual Lease Payment Plus

GRV

Interest (10%) on Unpaid Liability

Reduction of Lease Liability

Lease Liability

(a) (b) (c) (d) Initial PV — — — $411,324

1 $ 60,000 — $ 60,000 351,324 2 60,000 $ 35,132 24,868 326,456 3 60,000 32,646 27,354 299,102 4 60,000 29,910 30,090 269,012 5 60,000 26,901 33,099 235,913 6 60,000 23,591 36,409 199,504 7 60,000 19,950 40,050 159,454 8 60,000 15,945 44,055 115,399 9 60,000 11,540 48,460 66,939 10 60,000 6,694 53,306 13,633

End of 10 15,000 * 1,367* 13,633 0 $615,000 *$203,676 $411,324

*Rounding error is $4.

(a) Annual lease payment required by lease contract. (b) Preceding balance of (d) X 10%, except beginning of first year of lease term. (c) (a) minus (b). (d) Preceding balance minus (c).

Copyright © 2011 John Wiley & Sons, Inc. Kieso,     Intermediate Accounting, 14/e, Solutions Manual (    For Instructor Use Only) 21-45

PROBLEM 21-14 (Continued)

(c) Lessee’s journal entries:

Beginning of the Year Leased Equipment................................................... 411,324

Lease Liability.................................................... 411,324 (To record the lease of x-ray equipment using capital lease method)

Lease Liability........................................................... 60,000 Cash.................................................................... 60,000 (To record payment of annual lease obligation)

End of the Year Interest Expense....................................................... 35,132

Interest Payable................................................. 35,132 (To record accrual of annual interest on

lease obligation)

Depreciation Expense.............................................. 39,632 Accumulated Depreciation—Capital Leases............................................................ 39,632 (To record depreciation expense for year 1 using straight-line method [($411,324 – $15,000) ÷ 10 years])

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