.Solutions to Chapter 10 Lease Problems – more than I originally assigned, the additions are purely optional
.10.25 (FedUp Delivery Services; preparing lessee’s journal entries for an operating and a capital lease.)
a. This lease is a capital lease because the present value of the lease payments of $22,581 (= $750 X 30.10751) exceeds 90 percent of the market value of the leased asset (.90 X $24,000 = $21,600). The life of the lease is less than 75 percent of the life of the leased property and the property reverts to GM at the end of the lease period, so the lease fails these criteria for a capital lease.
b. Time of Signing Lease
No Entry.
End of Each Month
Rent Expense............................................................................ 750
Cash.............................................................................................. 750
To record monthly rental expense and payment.
c. Time of Signing Lease
Leased Asset........................................................................ 22,581
Lease Liability............................................................................ 22,581
To record capital lease.
End of First Month
Interest Expense (= .01 X $22,581).................................. 225.81
Lease Liability.................................................................... 524.19
Cash.............................................................................................. 750.00
To record interest expense and cash payment .. for
first month; the book value of the lease liability is
now $22,056.81 (= $22,581.00 – $524.19).
Depreciation Expense........................................................ 627.25
Accumulated Depreciation....................................................... 627.25
To record depreciation expense for the first month
of $627.25 (= $22,581/36).
End of Second Month
Interest Expense (= .01 X $22,056.81)............................ 220.57
Lease Liability.................................................................... 529.43
Cash.............................................................................................. 750.00
To record interest expense and cash payment for
the second month.
Depreciation Expense........................................................ 627.25
Accumulated Depreciation....................................................... 627.25
To record depreciation expense for the second month.
10.38 (Effects of leases on statement of cash flows.)
a. The journal entry to record this transaction is:
Depreciation Expense ................................................... 10,000
Accumulated Depreciation ...................................... 10,000
Because this entry does not involve a debit or credit to the Cash account, Line (9) does not change. Depreciation expense reduces net income, so Line (1) decreases by $10,000. The recognition of depreciation expense does not affect cash, so Line (2) increases by $10,000.
b. The journal entry for this transaction is:
Cash ................................................................................. 19,925
Rent Revenue ............................................................. 19,925
The debit to Cash results in an increase of $19,925 in Line (9). The credit to Rent Revenue increases Line (1), net income, by $19,925.
c. The journal entry to record this transaction is:
Rent Expense ................................................................. 19,925
Cash ............................................................................. 19,925
The credit to Cash results in an decrease of $19,925 in Line (9). The debit to Rent Expense reduces Line (1), net income, by $19,925.
d. The journal entry for this transaction is:
Leased Asset .................................................................. 100,000
Lease Liability ........................................................... 100,000
This transaction does not involve a change in cash, so Line (9) does not change. The entry does not affect net income, so Line (1) does not change. This transaction is an investing and financing activity that would not appear in the statement of cash flows but in a supplementary schedule or note to the financial statements.
e. The journal entry to record this transaction is:
Interest Expense ........................................................... 15,000
Lease Liability ................................................................ 4,925
Cash ............................................................................ 19,925
This entry results in a reduction in Cash, so Line (9) decreases by $19,925. Line (1) decreases by $15,000 for interest expense and Line (7) increases by $4,925 for the reduction in the lease liability. Thus, $15,000 of the reduction in cash appears in the operating section and $4,925 appears in the financing section of the statement of cash flows.
10.40 (Wal-Mart Stores; financial statement effects of operating and capital leases.)
a. Interest Expense (= .11 X $1,694.2) ....................... 186.4
Lease Liability (Plug) ................................................ 18.3
Cash (Given) .......................................................... 204.7
b. Rent Expense ............................................................. 249.3
Cash ......................................................................... 249.3
c. January 31, Year 9
Leased Asset .............................................................. 1,586.5
Lease Liability ....................................................... 1,586.5
To capitalize operating leases.
January 31, Year 10
Interest Expense (= .12 X $1,586.5) ....................... 190.4
Lease Liability ........................................................... 58.9
Cash ......................................................................... 249.3
To record interest expense and cash payment
on capitalized operating leases.
Depreciation Expense ............................................... 105.8
Accumulated Depreciation .................................. 105.8
To record depreciation expense on capitalized
operating leases; $105.8 = $1,586.5/15.
10.41 (American Airlines; financial statement effect of operating and capital leases.)
(Amounts in Millions)
a. Capital Lease Liability, December 31, Year 10.............................. $ 2,233
Interest Expense for Year 11 (= .08 X $2,233)......................................... 179
Cash Payment for Year 11......................................................................... (268)
New Leases Signed during Year 11 (Plug)...................................... 259
Capital Lease Liability, December 31, Year 11.............................. $ 2,403
b. Leasehold Asset, December 31, Year 10........................................... $ 1,716
New Leases Capitalized during Year 11 (from Part a.)......................... 259
Depreciation Expense for Year 11 (Plug)......................................... (97)
Leasehold Asset, December 31, Year 11........................................... $ 1,878
c. December 31, Year 11
Interest Expense .............................................................. 179
Lease Liability ................................................................... 89
Cash ................................................................................ 268
Depreciation Expense ...................................................... 97
Accumulated Depreciation ......................................... 97
Leased Asset ..................................................................... 259
Lease Liability .............................................................. 259
d. December 31, Year 11
Rent Expense ..................................................................... 946
Cash ................................................................................ 946
e. December 31, Year 10
Leased Asset ..................................................................... 7,793
Lease Liability .............................................................. 7,793
To capitalize operating leases as if they were capital leases.
December 31, Year 11
Interest Expense (= .10 X $7,793) ................................. 779
Lease Liability ................................................................... 167
Cash ................................................................................ 946
To record interest expense and cash payment for
capitalized operating leases.
Depreciation Expense ...................................................... 354
Accumulated Depreciation ......................................... 354
To record depreciation for Year 11; ($354 = $7,793/22).
Leased Asset ..................................................................... 538
Lease Liability .............................................................. 538
To record present value of new leases; $7,793 + X
– $167 = $8,164; X = $538.
10.42 (Carom Sports Collectibles Shop; comparison of borrow/buy with operating and capital leases.)
a. $100,000/3.79079 = $26,379.725 = $26,380.
Carom
Sports Collectibles Shop Amortization Schedule
Start End of
of
Year Interest Year
Year Balance (10%) Payment Reduction Balance
1 $ 100,000 $ 10,000 $ 26,380 $ 16,380 $ 83,620
2 83,620 8,362 26,380 18,018 65,602
3 65,602 6,560 26,380 19,820 45,782
4 45,782 4,578 26,380 21,802 23,980
5 23,980 2,398 26,380 23,982 (2)
b. (1) Asset—Computer System.
Asset Contra—Accumulated Depreciation on Computer System.
Liability—Bonds Payable and Interest Payable.
(2) None.
(3) Asset—Leased Computer System.
Asset Contra—Accumulated Depreciation.
Liability—Lease Liability.
c. $150,000 = $100,000 + (.10 X $100,000 X 5).
d. (1) Operating: $131,900 = $26,380 X 5.
(2) Capital: $131,900.
f. (1) $30,000 = $20,000 depreciation plus $10,000 bond interest.
(2) Operating-lease Method: $26,380.
Capital-lease Method: $30,000 = $20,000 amortization + $10,000 lease interest.
g. (1) $30,000.
(2) Operating: $26,380.
Capital: $22,400 (or $22,398) = $20,000 + $2,400.
CAROM SPORTS COLLECTIBLES SHOP SUMMARY
(Not
Required)
Year 1 Year 2 Year
3 Year 4 Year 5 Total
Plan 1
Depreciation
Expense ............ $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 100,000
Interest
Expense ............ 10,000 10,000 10,000 10,000 10,000 50,000
Total ............... $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 150,000
Plan 2 (Operating)
Lease
Expense ... $ 26,380 $ 26,380 $ 26,380 $ 26,380 $ 26,380 $ 131,900
Plan 2 (Financing)
Depreciation
Expense ............ $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 100,000
Interest
Expense ............ 10,000 8,362 6,560 4,578 2,400* 31,900
Total ............... $ 30,000 $ 28,362 $ 26,560 $ 24,578 $ 22,400 $ 131,900
*Plug to correct for rounding errors. By computations, this number is $2,398 = $26,380/1.10.
10.43 (IBM and Adair Corporation; accounting for lease by lessor and lessee.)
a. January
1, Year 11
Cash ................................................................................. 10,000
Note Payable .............................................................. 10,000
Computer ........................................................................ 10,000
Cash ............................................................................. 10,000
December 31, Year 11
Depreciation Expense ................................................... 3,333
Accumulated Depreciation ...................................... 3,333
Interest Expense (.08 X $10,000) ............................... 800
Note Payable (Plug) ...................................................... 3,080
Cash ($10,000/2.57710) .......................................... 3,880
December
31, Year 12
Depreciation Expense ................................................... 3,333
Accumulated Depreciation ...................................... 3,333
Interest Expense [.08 X ($10,000 – $3,080)] ........... 554
Note Payable (Plug) ...................................................... 3,326
Cash ............................................................................. 3,880
b. January 1, Year 11
No entry.
December 31, Year 11
Rent Expense ................................................................. 3,810
Cash ............................................................................. 3,810
December 31, Year 12
Rent Expense ................................................................. 3,810
Cash ............................................................................. 3,810
c. January
1, Year 11
Leased Asset .................................................................. 10,000
Lease Liability ........................................................... 10,000
December 31, Year 11
Depreciation Expense ................................................... 3,333
Accumulated Depreciation ...................................... 3,333
Interest Expense (.07 X $10,000) ............................... 700
Lease Liability (Plug) .................................................... 3,110
Cash ($10,000/2.62432) .......................................... 3,810
December
31, Year 12
Depreciation Expense ................................................... 3,333
Accumulated Depreciation ...................................... 3,333
Interest Expense [.07 X ($10,000 – $3,110)] ........... 482
Lease Liability (Plug) .................................................... 3,328
Cash ............................................................................. 3,810
d. January 1, Year 11
Computer ........................................................................ 10,000
Sales Revenue ............................................................ 10,000
Cost of Goods Sold ......................................................... 6,000
Inventory .................................................................... 6,000
e. January 1, Year 11
Computer Equipment ................................................... 6,000
Inventory .................................................................... 6,000
December 31, Year 11
Depreciation Expense ................................................... 2,000
Accumulated Depreciation ...................................... 2,000
Cash ................................................................................. 3,810
Rent Revenue ............................................................. 3,810
December 31, Year 12
Depreciation Expense ................................................... 2,000
Accumulated Depreciation ...................................... 2,000
Cash ................................................................................. 3,810
Rent Revenue ............................................................. 3,810
f. January 31, Year 11
Lease Receivable ........................................................... 10,000
Sales Revenue ............................................................ 10,000
Cost of Goods Sold ......................................................... 6,000
Inventory .................................................................... 6,000
December 31, Year 11
Cash ................................................................................. 3,810
Interest Revenue (see Part c.) ............................... 700
Lease Receivable ....................................................... 3,110
December 31, Year 12
Cash ................................................................................. 3,810
Interest Revenue (see Part c.) ............................... 482
Lease Receivable ....................................................... 3,328
g. Lessee Year 11 Year 12 Year 13Total
Borrow and Purchase
Depreciation Expense ............ $ 3,333 $ 3,333 $ 3,334 $ 10,000
Interest Expense ..................... 800 554 286 1,640
$ 4,133 $ 3,887 $ 3,620 $ 11,640
Operating Lease
Rent Expense ........................... $ 3,810 $ 3,810 $ 3,810 $ 11,430
Capital Lease
Depreciation Expense ............ $ 3,333 $ 3,333 $ 3,334 $ 10,000
Interest Expense ..................... 700 482 248 1,430
$ 4,033 $ 3,815 $ 3,582 $ 11,430
h. Lessor Year 11 Year 12 Year 13 Total
Sale
Sales Revenue ......................... $ 10,000 $ -- $ -- $ 10,000
Cost of Goods Sold ................... (6,000) -- -- (6,000)
$ 4,000 $ -- $ -- $ 4,000
Operating Lease
Rent Revenue .......................... $ 3,810 $ 3,810 $ 3,810 $ 11,430
Depreciation Expense (2,000) (2,000) (2,000) (6,000)
$ 1,810 $ 1,810 $ 1,810 $ 5,430
Capital Lease
Sales Revenue ......................... $ 10,000 $ -- $ -- $ 10,000
Cost of Goods Sold ................... (6,000) -- -- (6,000)
Interest Revenue .................... 700 482 248 1,430
$ 4,700 $ 482 $ 248 $ 5,430