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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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Chapter 15

Illustrated Solution: Problem 15-41

Accounting for a

Capital Lease


Problem assumption
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
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 value1

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



Part 1 entries for lessee for 2002
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.


Part 1 entries for lessee for 20021
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.



Part 1 entries for lessee for 20022
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


Part 1 entries for lessee for 20023
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


Part 2 entries for lessor for 2002
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.


Part 2 entries for lessor for 20021
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


Part 2 entries for lessor for 20022
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


Part 2 entries for lessor for 20023
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


Part 2 entries for lessor for 20024
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



Part 2 entries for lessor for 20025
Part 2 — Entries for Lessor for 2002

Crosby Equipment Company

Dec. 31 Cash ……………………………………… 130,000

Lease Payments Receivable ……… 130,000


Part 2 entries for lessor for 20026
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


Part 3 balance sheet
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


Part 3 balance sheet1
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………..




Part 3 balance sheet2
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


Part 3 balance sheet3
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……………….


Part 3 balance sheet4
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……………….



Part 3 balance sheet5
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……………….



Part 3 balance sheet6
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


Part 4 income statement
Part 4 — Income Statement

Dannell Tool Co. expenses for 2002—leases:

Interest expense……………………………………………… $ 41,208

Amortization expense………………………………………… 108,417

Total……………………………………………………………. $149,626


Part 4 income statement1
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



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