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Accounting for a Capital Lease

Chapter 15. Illustrated Solution: Problem 15-41. Accounting for a Capital Lease. Problem Assumption. This is a capitalized lease that qualifies as a sales-type lease for both Dannell Tool Co., the lessee, and Crosby Equipment Co., the lessor. Present Value. Dannell Tool Company.

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Accounting for a Capital Lease

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  1. Chapter 15 Illustrated Solution: Problem 15-41 Accounting for a Capital Lease

  2. Problem Assumption This is a capitalized lease that qualifies as a sales-type lease for both Dannell Tool Co., the lessee, and Crosby Equipment Co., the lessor.

  3. Present Value Dannell Tool Company The first task is to compute the present value of the lease payments for Dannell. In this case, Dannell can use Crosby’s implicit interest rate of 10% because it is known and is lower than Dannell’s incremental borrowing rate.

  4. PV = $130,000(PVAF) n PV = $130,000(4.1699) n Present Value Dannell Tool Company The first task is to compute the present value of the lease payments for Dannell. In this case, Dannell can use Crosby’s implicit interest rate of 10% because it is known and is lower than Dannell’s incremental borrowing rate. Present value of an annuity due, $130,000 payment, 5 periods, 10% (refer to Table VI, Present Value of an Annuity Due on p. B-25): PV = $542,087 n

  5. Lease Amortization Table

  6. Part 1 — Entries for Lessee for 2002 Dannell Tool Company Jan. 2 Leased Equipment ……………………… 542,087 Obligations Under Capital Leases … 542,087 To record capital lease.

  7. Part 1 — Entries for Lessee for 2002 Dannell Tool Company Jan. 2 Leased Equipment ……………………… 542,087 Obligations Under Capital Leases … 542,087 To record capital lease. Jan. 2 Obligations Under Capital Leases ……… 130,000 Cash …………………………………… 130,000 To record first lease payment.

  8. Lease Amortization Table

  9. Part 1 — Entries for Lessee for 2002 Dannell Tool Company Dec. 31 Obligations Under Capital Leases ……… 88,791 Interest Expense …………………………. 41,209 Cash …………………………………… 130,000

  10. Part 1 — Entries for Lessee for 2002 Dannell Tool Company Straight-line amortization with zero salvage value. Amortization expense each year: $542,087  5 = $108,417 Dec. 31 Amortization Expense on Leased Equipment ……………………………… 108,417 Accumulated Amortization on Leased Equipment ……………… 108,417

  11. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company Initial direct costs are deferred until the time of sale. They will be included in Cost of Goods Sold.

  12. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company Initial direct costs are deferred until the time of sale. They will be included in Cost of Goods Sold. Jan. 2 Deferred Initial Direct Costs ……………... 17,000 Cash ………………………………… 17,000

  13. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company In a sales-type lease, record all expected lease payments as a receivable, with the amount of interest recorded as an unearned revenue. Sales revenue is equal to the capitalized value of the lease using the implicit interest rate. Jan. 2 Lease Payments Receivable …………… 650,000 Unearned Interest Revenue ………… 107,913 Sales …………………………………… 542,087

  14. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company In a sales-type lease, record all expected lease payments as a receivable, with the amount of interest recorded as an unearned revenue. Sales revenue is equal to the capitalized value of the lease using the implicit interest rate. Jan. 2 Lease Payments Receivable …………… 650,000 Unearned Interest Revenue ………… 107,913 Sales …………………………………… 542,087 Jan. 2 Cost of Goods Sold ……………………… 357,000 Inventory ……………………………… 340,000 Deferred Initial Direct Costs ………… 17,000

  15. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company No interest is recorded with the first lease payment. Jan. 2 Cash ……………………………………….. 130,000 Lease Payments Receivable ………… 130,000

  16. Lease Amortization Table

  17. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company Dec. 31 Cash ……………………………………… 130,000 Lease Payments Receivable ……… 130,000

  18. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company Dec. 31 Cash ……………………………………… 130,000 Lease Payments Receivable ……… 130,000 Dec. 31 Unearned Interest Revenue ……………. 41,209 Interest Revenue ……………………… 41,209

  19. Part 3 — Balance Sheet Dannell Tool Company Balance Sheet (Partial) December 31, 2002 Assets Land, buildings, and equipment: Leased equipment under capital leases…. $542,087 Less: Accumulated amortization on leased equipment under capital leases………… 108,417 Net value…………………. $433,670

  20. Part 3 — Balance Sheet Dannell Tool Company Balance Sheet (Partial) December 31, 2002 Assets Land, buildings, and equipment: Leased equipment under capital leases…. $542,087 Less: Accumulated amortization on leased equipment under capital leases………… 108,417 Net value…………………. $433,670 Liabilities Current liabilities: Obligations under capital leases—current portion.. Long-term liabilities: Obligations under capital leases, exclusive of $??,??? included in current liabilities………..

  21. Lease Amortization Table

  22. Lease Amortization Table

  23. Part 3 — Balance Sheet Dannell Tool Company Balance Sheet (Partial) December 31, 2002 Assets Land, buildings, and equipment: Leased equipment under capital leases…. $542,087 Less: Accumulated amortization on leased equipment under capital leases………… 108,417 Net value…………………. $433,670 Liabilities Current liabilities: Obligations under capital leases—current portion.. $97,670 Long-term liabilities: Obligations under capital leases, exclusive of $97,670 included in current liabilities……….. 225,626

  24. Part 3 — Balance Sheet Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Current assets: Lease payments receivable—current portion…. Less: Unearned interest revenue………………. Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets………….. Less: Unearned interest revenue……………….

  25. Part 3 — Balance Sheet Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Current assets: Lease payments receivable—current portion…. $130,000 Less: Unearned interest revenue………………. Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets………….. $260,000 Less: Unearned interest revenue……………….

  26. Lease Amortization Table

  27. Part 3 — Balance Sheet Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Current assets: Lease payments receivable—current portion…. $130,000 Less: Unearned interest revenue………………. 32,330 $97,670 Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets………….. $260,000 Less: Unearned interest revenue……………….

  28. Lease Amortization Table

  29. Part 3 — Balance Sheet Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Current assets: Lease payments receivable—current portion…. $130,000 Less: Unearned interest revenue………………. 32,330 $97,670 Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets………….. $260,000 Less: Unearned interest revenue………………. 34,374 225,626

  30. Part 4 — Income Statement Dannell Tool Co. expenses for 2002—leases: Interest expense……………………………………………… $ 41,208 Amortization expense………………………………………… 108,417 Total……………………………………………………………. $149,626

  31. Part 4 — Income Statement Crosby Equipment Co. revenue for 2002—leases: Gross profit from lease: Sales…………………………………………… $542,087 Cost of goods sold……………………………. 357,000 $185,087 Interest revenue………………………………… 41,209 Total……………………………………………… $226,296

  32. End of Problem

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