EXERCISE
21-3
Capitalized
amount of the lease:
Yearly payment $72,000.00
Executory costs 2,470.51
Minimum annual lease payment $69,529.49
Present value of minimum lease payments
$69,529.49
X 6.32825 = $440,000.00
1/1/05 Leased Building Under Capital
Leases........................................................................... 440,000.00
Lease
Liability.......................................................................... 440,000.00
1/1/05 Executory Costs—Property
Taxes............................................................................
2,470.51
Lease Liability..................................................................
69,529.49
Cash.......................................................................................... 72,000.00
12/31/05 Depreciation Expense......................................................
44,000.00
Accumulated
Depreciation—
Capital Leases...................................................................... 44,000.00
($440,000 ÷ 10)
12/31/05 Interest Expense
(See Schedule 1)...........................................................
44,456.46
Interest
Payable........................................................................ 44,456.46
1/1/06 Executory Costs—Property
Taxes............................................................................
2,470.51
Interest Payable................................................................
44,456.46
Lease Liability..................................................................
25,073.03
Cash.......................................................................................... 72,000.00
12/31/06 Depreciation Expense......................................................
44,000.00
Accumulated
Depreciation—
Capital Leases...................................................................... 44,000.00
12/31/06 Interest Expense..............................................................
41,447.70
Interest
Payable........................................................................ 41,447.70
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 |
|
1/1/05 |
|
|
|
$440,000.00 |
|
1/1/05 |
$69,529.49 |
$ 0. |
$69,529.49 |
370,470.51 |
|
1/1/06 |
69,529.49 |
44,456.46 |
25,073.03 |
345,397.48 |
|
1/1/07 |
69,529.49 |
41,447.70 |
28,081.79 |
317,315.69 |
EXERCISE 21-
(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. 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
viewpoint 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, $91,000) exceeds the lessor’s cost ($65,000), the lease
is a sales-type lease.
(c) Computation
of lease liability:
$21,227.65 Annual rental payment
X 4.16986 PV
of annuity due of 1 for n = 5, i = 10%
$88,516.32 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
$88,516.32 PV of periodic rental payments
+ 2,483.68 PV
of bargain purchase option
$91,000.00 Lease liability
DENISE
RODE COMPANY (Lessee)
Lease
Amortization Schedule
|
Date |
Annual
Lease Payment Plus BPO |
Interest
(10%)on Liability |
Reduction of Lease Liability |
Lease
Liability |
|
5/1/04 |
|
|
|
$91,000.00 |
|
5/1/04 |
$ 21,227.65 |
|
$21,227.65 |
69,772.35 |
|
5/1/05 |
21,227.65 |
*$
6,977.24 |
14,250.41 |
55,521.94 |
|
5/1/06 |
21,227.65 |
5,552.19 |
15,675.46 |
39,846.48 |
|
5/1/07 |
21,227.65 |
3,984.65 |
17,243.00 |
22,603.48 |
|
5/1/08 |
21,227.65 |
2,260.35 |
18,967.30 |
3,636.18 |
|
4/30/09 |
4,000.00 |
*
363.82* |
3,636.18 |
0 |
|
|
$110,138.25 |
$19,138.25 |
$91,000.00 |
|
*Rounding
error is 20 cents.
(d) 5/1/04 Leased
Equipment Under
Capital Leases.......................................................... 91,000.00
Lease
Liability.................................................................... 91,000.00
Lease
Liability.............................................................. 21,227.65
Cash.................................................................................... 21,227.65
12/31/04 Interest Expense.......................................................... 4,651.49
Interest
Payable.................................................................. 4,651.49
($6,977.24 X 8/12 = $4,651.49)
Depreciation
Expense..............................................
6,066.67
Accumulated
Depreciation
—Capital Leases........................................................ 6,066.67
($91,000.00 ÷ 10 =
($9,100.00;
$9,100.00 X
(8/12 = $6,066.67)
1/1/05 Interest
Payable........................................................
4,651.49
Interest
Expense............................................................ 4,651.49
5/1/05 Interest
Expense......................................................
6,977.24
Lease
Liability.......................................................... 14,250.41
Cash................................................................................ 21,227.65
12/31/05 Interest Expense......................................................
3,701.46
Interest
Payable.............................................................. 3,701.46
($5,552.19 X 8/12 =
($3,701.46)
12/31/05 Depreciation Expense..............................................
9,100.00
Accumulated
Depreciation
—Capital Leases........................................................ 9,100.00
($91,000.00 ÷ 10 years =
($9,100.00)
(Note: Because a bargain purchase option was
involved, the leased asset is depreciated over its economic life rather than
over the lease term.)
EXERCISE 21-15
Elmer’s
Restaurants (Lessee)*
1/1/04 Cash .................................................... 680,000.00
Computer................................................................................... 600,000.00
Unearned
Profit on Sale-
Leaseback.............................................................................. 80,000.00
Leased Computer Under Capital
Leases............................................................................ 680,000.00
Lease
Liability........................................................................... 680,000.00
($110,666.81 X 6.14457)
Throughout
2004
Executory Costs................................................................
9,000.00
Accounts
Payable or Cash......................................................... 9,000.00
12/31/04 Unearned Profit on Sale-
Leaseback......................................................................
8,000.00
Depreciation
Expense**........................................................... 8,000.00
($80,000 ÷ 10)
12/31/04 Depreciation Expense.......................................................
68,000.00
Accumulated
Depreciation........................................................ 68,000.00
($680,000 ÷ 10)
Interest Expense...............................................................
68,000.00
Lease Liability...................................................................
42,666.81
Cash........................................................................................... 110,666.81
**Lease should be
treated as a capital lease because present value of minimum lease payments
equals the fair value of the computer. Also, the lease term is greater than 75%
of the economic life of the asset, and title transfers at the end of the lease.
**The
credit could also be to a revenue account.
Note:
1. The
present value of an ordinary annuity at 10% for 10 periods should be
used to capitalize the asset. In this case, Elmer’s Restaurants would use the
implicit rate of the lessor because it is lower than its own incremental
borrowing rate and known to Elmer’s Restaurants.
2. The
unearned profit on the sale-leaseback should be amortized on the same basis
that the asset is being depreciated.
Partial
Lease Amortization Schedule
|
Date |
Annual
Lease Payment |
Interest
(10%) |
Amortization |
Balance |
|
1/1/04 |
|
|
|
$680,000.00 |
|
12/31/04 |
$110,666.81 |
$68,000.00 |
$42,666.81 |
637,333.19 |
Liquidity Finance Co. (Lessor)*
1/1/04 Computer...............................................................
680,000.00
Cash.................................................................................. 680,000.00
Lease Receivable..................................................... 680,000.00
Computer.......................................................................... 680,000.00
12/31/04 Cash .................................... 110,666.81
Lease
Receivable............................................................. 42,666.81
Interest
Revenue............................................................. 68,000.00
*Lease
should be treated as a direct financing lease because the present value of the
minimum lease payments equals the fair value of the computer, and (1)
collectibility of the payments is reasonably assured, (2) no important
uncertainties surround the costs yet to be incurred by the lessor, and (3) the
cost to the lessor equals the fair market value of the asset at the inception
of the lease.
|
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.
$22,000 Annual Lease Payments X PV of
annuity due at 9% for 5 years
$22,000
X 4.23972 = $93,273.84, which is less than $144,000.00
(90% X $160,000.00)
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................................................................................................... 22,000
Cash.................................................................................................................... 22,000
Lessor’s Entries
Insurance Expense...........................................................................................
500
Tax Expense.....................................................................................................
2,000
Maintenance Expense......................................................................................
650
Cash or Accounts Payable.................................................................................. 3,150
Depreciation Expense...................................................................................... 12,500
Accumulated
Depreciation—Crane................................................................... 12,500
[($160,000 – $10,000) ÷ 12]
Cash 22,000
Rental Revenue.................................................................................................. 22,000
(c) M. K. Gumowski as lessee must disclose in
the income statement the $22,000
of rent expense and in the notes the future minimum rental payments required as of January 1 (in total, $88,000) and
for each of the succeeding four years: 2006—$22,000; 2007—$22,000;
2008—$22,000; 2009—$22,000. Nothing relative to this lease would appear on the
lessee’s balance sheet.
Synergetics as lessor must disclose in
the balance sheet or in the notes the cost of the leased crane ($160,000) and
the accumulated depreciation of $12,500 separately from assets not leased.
Additionally, Synergetics must disclose in the notes the minimum future
rentals as a total of $88,000, and for each of the succeeding four years:
2006—$22,000; 2007—$22,000; 2008—$22,000; 2009—$22,000.
|
PROBLEM
21-3 |
(a) The lease should be treated as a capital
lease by Cascade 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 Barbara Hardy Inc. the transaction
is a sales-type lease because a manufacturer’s profit accrues to Hardy. This
lease arrangement also represents the manufacturer’s financing the transaction
over a period of 10 years.
Present Value of Lease Payments
$620,956 X 7.24689* $4,500,000
*Present value of an annuity
due at 8% for 10 years.
Dealer Profit
Sales (present value of lease
payments) $4,500,000
Less cost of engines 3,900,000
Profit on sale $ 600,000
(b) Leased Engines Under Capital Leases................................................ 4,500,000
Lease Liability.............................................................................................. 4,500,000
(c) Lease Receivable.................................................................................. 4,500,000
Cost of Goods Sold................................................................................ 3,900,000
Sales.............................................................................................................. 4,500,000
Inventory...................................................................................................... 3,900,000
(d) Lessee (January 1, 2005)
Lease Liability.......................................................................................
620,956
Cash.............................................................................................................. 620,956
Lessor (January 1, 2005)
Cash 620,956
Lease Receivable......................................................................................... 620,956
(e) CASCADE
INDUSTRIES
Barbara
Hardy Inc.
Lease
Amortization Schedule
|
Date |
Annual
Lease Receipt/ Payment |
Interest
on Receivable/ Liability at 8% |
Reduction
in Receivable/ Liability |
Lease
Receivable/ Liability |
|
1/1/05 |
|
|
|
4,500,000 |
|
1/1/05 |
620,956 |
|
620,956 |
3,879,044 |
|
1/1/06 |
620,956 |
310,324 |
310,632 |
3,568,412 |
|
1/1/07 |
620,956 |
285,473 |
335,483 |
3,232,929 |
Lessee (December 31, 2005)
Interest Expense...................................................................................
310,324
Interest Payable........................................................................................... 310,324
Lessor (December 31, 2005)
Interest Receivable...............................................................................
310,324
Interest Revenue......................................................................................... 310,324
(f) CASCADE
INDUSTRIES
Balance
Sheet
December
31, 2005
|
Property, plant, and
equipment: |
Current liabilities: |
|
|
|
Leased
property under capital leases |
$4,500,000 |
Interest
payable |
$ 310,324 |
|
Less
accumulated depreciation |
450,000* |
Lease
liability |
310,632** |
|
Long-term
liabilities: |
|
||
|
|
$4,050,000 |
Lease
liability (See schedule) |
3,568,412*** |
***$4,500,000
÷ 10 = $450,000
***($620,956
– $310,324)
***No portion of this amount paid
within the next year.
Note:
The title Obligations under capital leases is often used instead of lease
liability.
BARBARA
HARDY INC.
Balance
Sheet
December
31, 2002
Assets
Current assets:
Interest receivable $ 310,324
Lease receivable 310,632
Noncurrent assets:
Lease receivable (See
schedule) $3,568,412*
Note: The title Net investment in
sales-type leases is often shown instead of lease receivable.
|
PROBLEM
21-4 |
a) 1. $15,846 Interest expense (See
amortization schedule)
$5,500 Lease executory expense
$33,376 Depreciation expense
($200,255 ÷ 6 = $33,376)
2. Current
liabilities:
$25,954 Lease liability
$15,846 Interest payable
Long-term
liabilities:
$132,501 Lease liability
Property,
plant, and equipment:
$200,255 Leased computer
under capital lease
($33,376) Accumulated
depreciation
3. $13,250 Interest expense (See
amortization schedule)
$5,500 Lease executory expense
$33,376 Depreciation expense
($200,255 ÷ 6 = $33,376)
4. Current
liabilities:
$28,550 Lease liability
$13,250 Interest payable
Long-term
liabilities:
$103,951 Lease liability
Property,
plant, and equipment:
$200,255 Leased computer
under capital lease
($66,752) Accumulated depreciation
(b) 1. $3,962 Interest expense ($15,846 X
3/12 = $3,962)
$1,375 Lease executory expense
($5,500 X 3/12 = $1,375)
$8,344 Depreciation expense($200,255
÷ 6 = $33,376;($33,376 X 3/12 = $8,344)
2. Current
liabilities:
$25,954 Lease liability
$3,962 Interest payable
Long-term
liabilities:
$132,501 Lease liability
Property,
plant, and equipment:
$200,255 Leased computer under
capital lease
($8,344) Accumulated
depreciation
Current
assets:
$4,125 Prepaid lease
executory costs ($5,500 X 9/12 =
$4,125)
3. $15,197 Interest expense
[($15,846 – $3,962) + ($13,250 X 3/12) = [$11,884 + $3,313 = $15,197]
$5,500 Lease executory expense
$33,376 Depreciation expense ($200,255
÷ 6 = $33,376)
4. Current
liabilities:
$28,550 Lease liability
$3,313 Interest payable
($13,250 X 3/12 = $3,313)
Long-term
liabilities:
$103,951 Lease liability
Property,
plant, and equipment:
$200,255 Leased computer under
capital lease
($41,720) Accumulated
depreciation ($8,344 + $33,376 =
$41,720)
Current
assets:
$4,125 Prepaid lease executory costs
($5,500 X 9/12 = $4,125)
interest
is recognized on August 1 because the agreement began on that date. Cash
payment includes $4,000 of maintenance cost.
Entries on August 31, 2004:
(1) Interest
Expense...................................................................................
34,914
Interest Payable........................................................................................... 34,914
Explanation and computation:
Interest accrued on the unpaid balance of the lease obligations from August 1
to August 31, 2004, is computed as follows:
($3,537,354 – $46,000) X .01 = $34,914.
(2) Depreciation Expense...........................................................................
19,652
Accumulated
Depreciation—Capital
Leases...................................................................................................... 19,652
|
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) Thomas Hanson 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 $ 30,000
Present value of the 10
rental payments 202,771
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 $210,482
(2) Sales
price is $202,771 (the present value of the 10 annual lease payments); or, the
initial PV of $210,482 minus the PV of the unguaranteed residual value of
$7,711.
(3) Cost
of sales is $127,289 (the $135,000 cost of the asset less the present value of
the unguaranteed residual value).
(b) THOMAS
HANSON 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 |
Recovery of Lease Receivable |
Lease
Receivable |
|
|
(a) |
(b) |
(c) |
(d) |
|
Initial
PV |
— |
— |
— |
$210,482 |
|
1 |
$ 30,000 |
— |
$ 30,000 |
180,482 |
|
2 |
30,000 |
*$ 18,048 |
11,952 |
168,530 |
|
3 |
30,000 |
16,853 |
13,147 |
155,383 |
|
4 |
30,000 |
15,538 |
14,462 |
140,921 |
|
5 |
30,000 |
14,092 |
15,908 |
125,013 |
|
6 |
30,000 |
12,501 |
17,499 |
107,514 |
|
7 |
30,000 |
10,751 |
19,249 |
88,265 |
|
8 |
30,000 |
8,827 |
21,173 |
67,092 |
|
9 |
30,000 |
6,709 |
23,291 |
43,801 |
|
10 |
30,000 |
4,380 |
25,620 |
18,181 |
|
End
of 10 |
20,000 |
* 1,819* |
18,181 |
0 |
|
|
$320,000 |
*$109,518 |
$210,482 |
|
*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......................................................................................... 210,482
Cost of Sales................................................................................................. 127,289
Sales.................................................................................................................. 202,771
Computer Inventory......................................................................................... 135,000
(To record the sale and the cost of sales in the lease
transaction)
Selling Expense............................................................................................
4,000
Cash.................................................................................................................. 4,000
(To record payment of the initial direct costs relating to the
lease)
Cash......................................................................................................... 30,000
Lease Receivable............................................................................................... 30,000
(To record receipt of the first lease payment)
End of the Year
Interest Receivable.......................................................................................... 18,048
Interest Revenue............................................................................................... 18,048
(To record interest earned during the first year of the lease)
|
PROBLEM
21-13 |
(a) The 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 market 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
$50,000 made at the beginning of each period for
10 years, $50,000 X 6.75902 (PV of an annuity due @ 10%) $337,951
Present value of guaranteed residual
value, $15,000 X .38554 5,783
Present value of minimum
lease payments $343,734
2. Sales
price is the same as the present value of minimum lease payments $343,734
3. Cost
of sales is the cost of manufacturing the x-ray machine $210,000
(b) LAURA
JENNINGS 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 |
— |
— |
— |
$343,734 |
|
1 |
$ 50,000 |
— |
$ 50,000 |
293,734 |
|
2 |
50,000 |
$ 29,373 |
20,627 |
273,107 |
|
3 |
50,000 |
27,311 |
22,689 |
250,418 |
|
4 |
50,000 |
25,042 |
24,958 |
225,460 |
|
5 |
50,000 |
22,546 |
27,454 |
198,006 |
|
6 |
50,000 |
19,801 |
30,199 |
167,807 |
|
7 |
50,000 |
16,781 |
33,219 |
134,588 |
|
8 |
50,000 |
13,459 |
36,541 |
98,047 |
|
9 |
50,000 |
9,805 |
40,195 |
57,852 |
|
10 |
50,000 |
5,785 |
44,215 |
13,637 |
|
End
of 10 |
15,000 |
* 1,363* |
13,637 |
0 |
|
|
$515,000 |
*$171,266 |
$343,734 |
|
*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) Lessor’s
journal entries:
Beginning of the Year
Lease Receivable......................................................................................... 343,734
Cost of Sales................................................................................................. 210,000
Sales.................................................................................................................. 343,734
X-ray Machine Inventory................................................................................. 210,000
Selling Expense................................................................................................ 14,000
Cash or Payable.................................................................................................. 14,000
(To record the incurrence of initial direct costs relating to
the lease)
Cash 50,000
Lease Receivable............................................................................................... 50,000
(To record receipt of the first lease payment)
End of the Year
Interest Receivable.......................................................................................... 29,373
Interest Revenue............................................................................................... 29,373
(To record interest earned during the first year of the lease)
CASE 21-3
(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 FASB 13 for classifying a lease as a capital lease.
Lease L 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 M should be classified as a
capital lease because the lease contains a bargain purchase option.
Lease N 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 L, Shinault 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 the minimum lease payments during the lease term. This amount excludes that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon. 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 M, Shinault Company should record as a liability at the inception of the lease an amount determined in the same manner as for Lease L, and the payment called for in the bargain purchase option should be included in the minimum lease payments at its present value.
For Lease N, Shinault Company should not record a liability at the inception of the lease.
(c) For Lease L, Shinault 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 M, Shinault Company should allocate each minimum lease payment in the same manner as for Lease L.
For Lease N, Shinault Company should charge minimum lease (rental) payments to rental expense as they become payable.
CASE 21-5
(a) The appropriate amount for the leased aircraft on Brad Hayes Corporation’s balance sheet after the lease is signed is $1,000,000, the fair market value of the plane. In this case, fair market value is less than the present value of the net rental payments plus purchase option ($1,022,226). When this occurs, the asset is recorded at the fair market value.
(b) The leased aircraft will be reflected on Brad Hayes Corporation’s balance sheet as follows:
Noncurrent assets
Leased property under capital leases $1,000,000
Less: Accumulated depreciation 61,667
$ 938,333
Current liabilities
Lease liability
Interest payable $ 77,600
Lease liability (Note A) 60,180
$ 137,780
Noncurrent liabilities
Lease liability (Note A) $ 802,040
The following items relating to the leased aircraft will be reflected on Brad Hayes Corporation’s income statement:
Depreciation expense (Note A) $61,667
Interest expense 77,600
Maintenance expense 6,900
Insurance and tax expense 4,000
Note A
The company leases a Viking turboprop aircraft under a capital lease. The lease runs until December 31, 2014. The annual lease payment is paid in advance on January 1 and amounts to $141,780, of which $4,000 is for insurance and property taxes. The aircraft is being depreciated on the straight-line basis over the economic life of the asset. The depreciation on the aircraft included in the current year’s depreciation expense and the accumulated depreciation on the air- craft amount to $61,667.
Computations
Depreciation expense:
Capitalized amount $1,000,000
Salvage value 75,000
$ 925,000
Economic life 15 years
Annual depreciation $61,667
Liability amounts:
Lease liability 1/1/05 $1,000,000
Payment 1/1/05 137,780
Lease liability 12/31/05 862,220
Lease payment due 1/1/06 $137,780
Interest on lease ($862,220 X .09) 77,600
Reduction of principal 60,180
Noncurrent liability 12/31/05 $ 802,040