The collectibility of the lease payments is reasonably predictable, and there ar
ID: 2523483 • Letter: T
Question
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 lessee assumes responsibility for all executory costs, which amount to $5,500 per year and are to be paid each October 1, beginning October 1, 2014. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.
The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.
Date
10/01/14 10/01/14 10/01/15 10/01/16 10/01/17 10/01/18 10/01/19
Annual Lease Payment/ Receipt
Interest (10%) on Unpaid Liability/Receivable
$23,768 19,875 15,593 10,882
5,699*
$75,817
Reduction of Lease Liability/Receivable
Balance of Lease Liability/Receivable
$300,383 237,683 198,751 155,926 108,819
57,001 –0–
*Rounding error is $1.
Instructions
$
62,700 62,700 62,700 62,700 62,700 62,700
$
62,700 38,932 42,825 47,107 51,818 57,001
$376,200
$300,383
(Balance Sheet and Income Statement Disclosure—Lessee) The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.
Inception date Lease term Economic life of leased equipment Fair value of asset at October 1, 2014 Residual value at end of lease term Lessor’s implicit rate Lessee’s incremental borrowing rate Annual lease payment due at the beginning of
October 1, 2014 6 years 6 years $300,383 –0– 10% 10%
each year, beginning with October 1, 2014
$62,700
(b) Assuming the lessee’s accounting period ends on December 31, answer the following questions with respect to this lease agreement. (1) What items and amounts will appear on the lessee’s income statement for the year ending
December 31, 2014? (2) What items and amounts will appear on the lessee’s balance sheet at December 31, 2014? (3) What items and amounts will appear on the lessee’s income statement for the year ending
December 31, 2015? (4) What items and amounts will appear on the lessee’s balance sheet at December 31, 2015?
Explanation / Answer
part 1 Interest Expenses ($23768 * 3/12 = $5942) $5,942 Lease Executory Expenses ($5500 * 3/12 = $1375) $1,375 Depreciation Expenses (300383 / 6 = 50064, 50064 *3/12 = $12516 $12,516 part 2 Current Liability Lease Liability $38,932 Interest Payable $5,942 Long Term Liability Lease Liability $198,751 Property, Plant & Equipment leased Equipment $300,383 Acc. Depreciaation ($12,516) $287,867 Current Assets Prepaid Lease Executory Cost ($5500 * 9/12= $4125) $4,125 part 3 Interest Expenses [($23768 - $5942) + ($19875* 3/12)] $22,795 Lease Executory Expenses $5,500 Depreciation Expenses (300383 / 6 = 50064) $50,064 part 4 Current Liability Lease Liability $42,825 Interest Payable ($19875 * 3/12 = $4969) $4,969 Long Term Liability Lease Liability $155,926 Property, Plant & Equipment leased Equipment $300,383 Acc. Depreciaation ($12516 + $50064 = $62580) $237,803 Current Assets Prepaid Lease Executory Cost ($5500 * 9/12= $4125) $4,125