Leased Computer $150,690 Accumulated Depreciation ($25,115)

Kieso, Weygandt, Warfield, Young, Wiecek
Intermediate Accounting, Ninth Canadian Edition
PROBLEM 20-8 (a) 1. Interest expense (See amort. schedule) Lease executory expense Depreciation expense ($150,690 6) Property, plant, and equipment: Leased computer Accumulated depreciation Current liabilities: Lease obligation Interest payable Long-term liabilities: Lease obligation 3. Interest expense (See amort. schedule) Lease executory expense Depreciation expense ($150,690 6) $10,216 $2,500 $25,115 $150,690 ($25,115)
2.
$20,284 $10,216 $99,906 $8,492 $2,500 $25,115 $150,690 ($50,230)
4. Property, plant, and equipment: Leased computer Accumulated depreciation Current liabilities: Lease obligation Interest payable Long-term liabilities: Lease obligation
$22,008 $8,492 $77,898
Solutions Manual 20-1 Chapter 20 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited
PROBLEM 20-8 (Continued)
(b) 1.
Interest expense ($10,216 X 3/12 ) Lease executory expense ($2,500 X 3/12) Depreciation expense ($150,690 6 = $25,115 X 3/12) Current assets: Prepaid lease executory costs ($2,500 X 9/12 = $1,875) Property, plant, and equipment: Leased computer Accumulated depreciation Current liabilities: Lease obligation Interest payable Long-term liabilities: Lease obligation
$2,554 $625 $6,279
2.
$1,875
$150,690 ($6,279) $20,284 $2,554 $99,906 $9,785 $2,500 $25,115
3.
Interest expense [($10,216 $2,554) + ($8,492 X 3/12) = $7,662 + [$2,123 = $9,785] Lease executory expense Depreciation expense ($150,690 6)
PROBLEM 20-8 (Continued) 4. Current assets: Prepaid lease executory costs ($2,500 X 9/12 = $1,875) Property, plant, and equipment: Leased computer Accumulated depreciation ($6,279 + $25,115 = $31,394) Current liabilities: Lease obligation Interest payable ($8,492 X 3/12) Long-term liabilities: Lease obligation $1,875
$150,690 ($31,394)
$22,008 $2,123 $77,898
(c) For McKee Electronics Ltd.(the lessee): Rather than using quantitative factors such as the 75 percent and the 90 percent hurdles often referred to as the bright lines used in PE GAAP, IFRS criteria use qualitative factors to establish whether or not the risks and rewards of ownership are transferred to the lessee, and supports classification as a finance lease: 1. There is reasonable assurance that the lessee will obtain ownership of the leased property by the end of the lease term. If there is a bargain purchase option in the lease, it is assumed that the lessee will exercise it and obtain ownership of the asset. 2. The lease term is long enough that the lessee will receive substantially all of the economic benefits that are expected to be derived from using the leased property over its life.
PROBLEM 20-8 (Continued) 3. The lease allows the lessor to recover substantially all of its investment in the leased property and to earn a return on the investment. Evidence of this is provided if the present value of the minimum lease payments is close to the fair value of the leased asset. 4. The leased assets are so specialized that, without major modification and cost to the lessor, they are of use only to the lessee.
PROBLEM 20-12 (a) January 31, 2011 Leased Equipment...................................... 173,448 Lease Obligation.................................. (To record leased asset and related obligation) 173,448
PV of monthly payment of $41,000 X 4.16987*...............$170,964 PV of residual value of $4,000 X .62092**..................... 2,484 Present value of minimum lease payments...................$173,448 * (PV factor for annuity due for 5 years at 10%) ** (PV factor for $1 for 5 years at 10%) Excel formula =PV(rate,nper,pmt,fv,type) Using a financial calculator: PV $ ? Yields $ 173,448.17 I 10% N 5 PMT $ (41,000) FV $ (4,000) Type 1 January 31, 2011 Lease Obligation......................................... 41,000 Cash...................................................... (To record the first rental payment) (b) December 31, 2011 Depreciation Expense................................. 22,713 Accumulated DepreciationLeased Equipment........................................ (To record depreciation of the leased asset based upon a cost to Dubois of $173,448 and a life of 7 years X 11/ 12)
41,000
22,713
PROBLEM 20-12 (Continued) December 31, 2011 Interest Expense................................................. 12,141 Interest Payable........................................... (To record accrual of interest on lease obligation $13,245 X 11 / 12) January 31, 2012 Interest Payable.................................................. 12,141 Interest Expense................................................. 1,104 Lease Obligation................................................. 27,755 Cash............................................................. (To record annual payment on lease obligation) During year Property Tax Expense....................................... XXX Insurance Expense............................................ XXX Maintenance Expense...................................... XXX Cash............................................................. (To record payment for executory costs) Dubois Steel Corporation (Lessee) Lease Amortization Schedule (Annuity Due Basis) Annual Interest (10%) Reduction Balance Lease on Unpaid of Lease of Lease Payment Obligation Obligation Obligation $173,448 $41,000 $ 0 $41,000 132,448 41,000 13,245 27,755 104,693 41,000 10,469 30,531 74,162 41,000 7,416 33,584 40,578 41,000 4,058 36,942 3,636 4,000 364* 3,636
12,141
41,000
XXX
Date 1/31/11 1/31/11 1/31/12 1/31/13 1/31/14 1/31/15 1/31/16 * rounded
PROBLEM 20-12 (Continued) (c) December 31, 2012 Depreciation Expense..................................... Accumulated DepreciationLeased Equipment............................................. (To record annual depreciation on assets leased $173,448 7) 24,778 24,778
December 31, 2012 Interest Expense.............................................. 9,597 Interest Payable....................................... (To record accrual of interest on lease obligation $10,469 X 11 12) January 31, 2013 Interest Payable.................................................. 9,597 Interest Expense................................................. 872 Lease Obligation................................................. 30,531 Cash............................................................. (To record annual payment on lease obligation)
9,597
41,000
(d)
Dubois Steel Corporation Balance Sheet December 31, 2012

Current liabilities: Interest payable Lease obligation Long-term: Lease obligation
Property, plant, and equipment: Leased equipment $173,448 Less: Accumulated depreciation 47,491 $125,957
$9,597 30,531 74,162
PROBLEM 20-12 (Continued) (e) The transaction securing the equipment using the finance lease would not be reported on the statement of cash flows for the year ending December 31, 2011. This is non-cash investing transaction, which should be described in the notes to the financial statements. The first lease payment would appear as a cash outflow for the debt repayment in the financing activities section of the statement. When using the direct method, for the operating activities of the cash flow statement, no amounts need to appear. On the other hand using the indirect method, adjustments to net income would include the adding back of depreciation expense in the amount of $22,713 and the increase in the interest payable in the amount of $9,597. (f) Based on these new facts, the lease would be reported as an operating lease by Dubois as the risks and rewards of ownership are not transferred to the lessee. Consequently, no balances would appear on the balance sheet of Dubois at December 31, 2012. No amount would appear on the statement of cash flows as the amount of rent expense would correspond to the lease payment made of $41,000.
PROBLEM 20-14 (a) For the lessee under PE GAAP, rather than using quantitative factors described under part (b) below for IFRS, quantitative criteria such as: 1. the term of the lease exceeding 75% of the remaining economic life of the asset, 2. the present value of the minimum lease payments exceeding 90% of the fair value of the asset, or 3. the presence of a bargain purchase option will be applied as the basis for the classification of the lease. (b) It will be classified as a direct financing lease for Provincial Airlines Corp. because: (1) the lease term is 75% or more of the assets economic life and (2) the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset. (c) The IFRS criteria use qualitative factors to establish whether or not the risks and rewards of ownership are transferred to the lessee, and supports classification as a finance lease: 1. There is reasonable assurance that the lessee will obtain ownership of the leased property by the end of the lease term. If there is a bargain purchase option in the lease, it is assumed that the lessee will exercise it and obtain ownership of the asset. 2. The lease term is long enough that the lessee will receive substantially all of the economic benefits that are expected to be derived from using the leased property over its life. 3. The lease allows the lessor to recover substantially all of its investment in the leased property and to earn a return on the investment. Evidence of this is provided if the present value of the minimum lease payments is close to the fair value of the leased asset. 4. The leased assets are so specialized that, without major modification, they are of use only to the lessee. The lease would be classified as a finance lease.
PROBLEM 20-14 (Continued) (d) Initial Obligation Under Capital Leases: Minimum lease payments ($25,000) X PV of an annuity due for 10 periods at 8% (7.24689) Excel formula =PV(rate,nper,pmt,fv,type) Using a financial calculator: PV $ ? I 8% N 10 PMT $ (25,000) FV $ 0 Type 1 (e)
$181,172
Yields $181,172
Provincial Airlines Corp. (Lessee) Lease Amortization Schedule (Annuity due basis and URV) Annual Lease Payment (a) $25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 $250,000 Interest (8%) on Unpaid Obligation (b) *$12,494* *11,493* *10,413* *9,246* *7,985* *6,624* *5,154* *3,566* *1,853* *$68,828* Reduction of Lease Lease Obligation Obligation (c) (d) $181,172 $ 25,000 156,172 12,506 143,666 13,507 130,159 14,589 115,572 15,754 99,818 17,015 82,803 18,376 64,427 19,846 44,581 21,434 23,147 23,147 0 $181,172
Beginning of Year Initial PV 1 2 3 4 5 6 7 8 9 10
*Rounding error is $1.
PROBLEM 20-14 (Continued) (a) Annual lease payment required by lease contract. (b) Preceding balance of (d) X 8%, except beginning of first year of lease term. (c) (a) minus (b). (d) Preceding balance minus (c). (f) Lessees journal entries: 181,172 181,172
Beginning of the Year Leased Equipment........................................... Lease Obligation...................................... (To record the lease of equipment using capital lease method) Lease Obligation.............................................. Cash.......................................................... (To record the first rental payment)
25,000
25,000
End of the Year Interest Expense.............................................. 12,494 Interest Payable....................................... (To record accrual of annual interest on lease obligation) Depreciation Expense..................................... Accumulated DepreciationLeased Equipment............................................. (To record depreciation expense for first year [$181,172 10]) 18,117
12,494
18,117
PROBLEM 20-14 (Continued) (g) Refer to the calculations and table of P20-13 for the amounts using the guaranteed residual value in the calculations of payments made by the lessee Provincial Airlines Corp. Beginning of the Year Leased Equipment........................................... Lease Obligation...................................... (To record the lease of equipment using capital lease method) Lease Obligation.............................................. Cash.......................................................... (To record the first rental payment)
188,120 188,120
25,000
25,000
End of the Year Interest Expense.............................................. 13,050 Interest Payable....................................... (To record accrual of annual interest on lease obligation) Depreciation Expense..................................... Accumulated DepreciationLeased Equipment............................................. (To record depreciation expense for first year [$188,120 - $15,000 10]) 17,312
13,050
17,312
PROBLEM 20-14 (Continued) (h) The residual value of $45,000 will not be included in calculation of the present value of the minimum lease payments. Rather, the bargain purchase option of $15,000 will be the future outflow in the calculations below. The bargain purchase option will permit depreciation of the equipment over its economic life of 12 years.
Excel formula =PV(rate,nper,pmt,fv,type) Using a financial calculator: PV $ ? Yields $188,120 I 8% N 10 PMT $ (25,000) FV $ (15,000) Type 1 Beginning of the Year Leased Equipment........................................... 188,120 Lease Obligation...................................... (To record the lease of equipment using capital lease method) Lease Obligation.............................................. 25,000 Cash.......................................................... (To record the first rental payment) End of the Year Interest Expense.............................................. 13,050 Interest Payable....................................... (To record accrual of annual interest on lease obligation) [($188,120 - $25,000) X 8%] Depreciation Expense..................................... Accumulated DepreciationLeased Equipment............................................. (To record depreciation expense for first year [$188,120 12]) 15,677 15,677
188,120
25,000
13,050

Leased Computer $150,690 Accumulated Depreciation ($25,115)

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Leased Computer $150,690 Accumulated Depreciation ($25,115)

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Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

$20,284 $10,216 $99,906 $8,492 $2,500 $25,115 $150,690 ($50,230)

$22,008 $8,492 $77,898

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

PROBLEM 20-8 (Continued)

$2,554 $625 $6,279

$150,690 ($6,279) $20,284 $2,554 $99,906 $9,785 $2,500 $25,115

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

$22,008 $2,123 $77,898

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Date 1/31/11 1/31/11 1/31/12 1/31/13 1/31/14 1/31/15 1/31/16 * rounded

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Dubois Steel Corporation Balance Sheet December 31, 2012

$9,597 30,531 74,162

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Beginning of Year Initial PV 1 2 3 4 5 6 7 8 9 10

*Rounding error is $1.

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

Kieso, Weygandt, Warfield, Young, Wiecek

Intermediate Accounting, Ninth Canadian Edition

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