PROBLEM 21-1

(a) This is a capital lease to Jensen since the lease term is greater
than 75% of the economic life of the leased asset. The lease term
is 78% (7 ÷ 9) of the asset’s economic life.

This is a capital lease to Glaus because collectibility of the lease

payments is reasonably predictable, there are no important
uncertainties surrounding the costs yet to be incurred by the
lessor, and the lease term is greater than 75% of the asset’s
economic life. Since the fair value ($700,000) of the equipment
exceeds the lessor’s cost ($525,000), the lease is a sales-type
lease.

(b) Calculation of annual rental payment:

$700,000 – ($100,000 X .51316)*

5.35526** = $121,130

**Present value of $1 at 10% for 7 periods.

**Present value of an annuity due at 10% for 7 periods.

(c) Computation of present value of minimum lease payments:

PV of annual payments: $121,130 X 5.23054** =
$633,575
PV of guaranteed residual value: $100,000 X .48166** =
48,166
$681,741
**Present value of an annuity due at 11% for 7 periods.
**Present value of $1 at 11% for 7 periods.

(d) 1/1/14 Leased Equipment................................ 681,741

Lease Liability...............................
681,741

Lease Liability....................................... 121,130

Cash...............................................
121,130
PROBLEM 21-1 (Continued)

12/31/14 Depreciation Expense.......................... 83,106

Accumulated Depreciation—
Capital Leases
($681,741 – $100,000) ÷ 7..........
83,106

Interest Expense................................... 61,667

Interest Payable
($681,741 – $121,130) X .11......
61,667

1/1/15 Lease Liability....................................... 59,463

Interest Payable.................................... 61,667
Cash...............................................
121,130

12/31/15 Depreciation Expense.......................... 83,106

Accumulated Depreciation—
Capital Leases..........................
83,106

Interest Expense................................... 55,126

Interest Payable............................
55,126
[($681,741 – $121,130 –
$59,463) X .11]

(e) 1/1/14 Lease Receivable.................................. 700,000

Cost of Goods Sold.............................. 525,000
Sales Revenue...............................
700,000
Inventory........................................
525,000

Cash....................................................... 121,130
Lease Receivable..........................
121,130

12/31/14 Interest Receivable............................... 57,887

 Interest Revenue
[($700,000 – $121,130) X .10]....
57,887

1/1/15 Cash....................................................... 121,130

Lease Receivable..........................
63,243
Interest Receivable.......................
57,887

12/31/15 Interest Receivable............................... 51,563

Interest Revenue
($700,000 – $121,130 –
$63,243) X .10...............................
51,563

PROBLEM 21-6

Note: This lease is a capital lease to the lessee because the lease
term
(six years) exceeds 75% of the remaining economic life of the asset (six
years). Also, the present value of the minimum lease payments
exceeds 90% of the fair value of the asset.

$ 124,798 Annual rental payment

X 4.60478 PV of an annuity-due of 1 for n = 6, i = 12%
$ 574,668* PV of periodic rental payments

$ 50,000 Guaranteed residual value

X .50663 PV of 1 for n = 6, i = 12%
$ 25,332 PV of guaranteed residual value

$ 574,668* PV of periodic rental payments

+ 25,332 PV of guaranteed residual value
$ 600,000 PV of minimum lease payments

(a) VANCE COMPANY (Lessee)

Lease Amortization Schedule
 Annual
Lease Reduction
Payment Interest (12%) of Lease Lease
Date Plus GRV on Liability Liability Liability
1/1/14 $600,000
1/1/14 $124,798 $ –0– $124,798 475,202
1/1/15 124,798 * 57,024 67,774 407,428
1/1/16 124,798 48,891 75,907 331,521
1/1/17 124,798 39,783 85,015 246,506
1/1/18 124,798 29,581 95,217 151,289
1/1/19 124,798 18,155 106,643 44,646
12/31/19 50,000 * 5,354* 44,646 0
$798,788 $198,788 $600,000
*Rounding error is $1.
**Rounding error is $3.

(b) January 1, 2014

Leased Equipment................................................... 600,000
Lease Liability...................................................
600,000

Lease Liability.......................................................... 124,798

Cash...................................................................
124,798

During 2014
Executory Costs...................................................... 5,000
Cash...................................................................
5,000

December 31, 2014

Interest Expense...................................................... 57,024
Interest Payable................................................
57,024
 Depreciation Expense............................................. 91,667
Accumulated Depreciation—Capital
Leases ([$600,000 – $50,000] ÷ 6)................
91,667

January 1, 2015
Interest Payable....................................................... 57,024
Interest Expense...............................................
57,024

Interest Expense...................................................... 57,024

Lease Liability.......................................................... 67,774
Cash...................................................................
124,798

During 2015
Executory Costs...................................................... 5,000
Cash...................................................................
5,000

December 31, 2015

Interest Expense...................................................... 48,891
Interest Payable................................................
48,891

Depreciation Expense............................................. 91,667

Accumulated Depreciation—Capital
Leases...........................................................
91,667

(Note to instructor: The guaranteed residual value was subtracted

for purposes of determining the depreciable base. The reason is
that at the end of the lease term, hopefully, this balance can offset
the remaining lease obligation balance. To depreciate the leased
asset to zero might lead to a large gain in the final years if the asset
has a value at least equal to its guaranteed amount.)
 PROBLEM 21-7

(a) December 31, 2014

Leased Equipment................................................... 166,794
Lease Liability...................................................
166,794
(To record leased asset and related
liability at the present value of
5 future annual payments of $40,000
discounted at 10%, $40,000 X 4.16986)

December 31, 2014

Lease Liability.......................................................... 40,000
Cash...................................................................
40,000
(To record the first rental payment)

(b) December 31, 2015

Depreciation Expense............................................. 23,828
Accumulated Depreciation—Capital
Leases...........................................................
23,828
(To record depreciation of the leased
asset based upon a cost to Ludwick of
$166,794 and a life of 7 years)

December 31, 2015

Interest Expense...................................................... 12,679
Lease Liability.......................................................... 27,321
Cash...................................................................
40,000
(To record annual payment on lease
liability of which $12,679 represents
interest at 10% on the unpaid principal
of $126,794)
PROBLEM 21-7 (Continued)

LUDWICK STEEL COMPANY (Lessee)

Lease Amortization Schedule
(Annuity Due Basis)

Annual Reduction
Lease Interest (10%) of Lease Lease
Date Payment on Liability Liability Liability
12/31/14 — — — $166,794
12/31/14 $40,000 $ 0 $40,000 126,794
12/31/15 40,000 12,679 27,321 99,473
12/31/16 40,000 9,947 30,053 69,420
12/31/17 40,000 6,942 33,058 36,362
12/31/18 40,000 3,638* 36,362 0

*Rounding error of $2

(c) December 31, 2016

Depreciation Expense................................................ 23,828
Accumulated Depreciation—Capital
Leases...............................................................
23,828
(To record annual depreciation on assets
leased)

Interest Expense......................................................... 9,947

Lease Liability............................................................. 30,053
Cash......................................................................
40,000
(To record annual payment on lease
liability of which $9,947 represents
interest at 10% on the unpaid principal
of $99,473)
PROBLEM 21-7 (Continued)

(d) LUDWICK STEEL COMPANY

Balance Sheet (Partial)
December 31, 2016

Property, plant, and equipment: Current liabilities:

Leased equipment $166,794 Lease liability $33,058
Less: Accumulated Long-term liabilities:
depreciation— Lease liability 36,362
capital leases 47,656
$119,138

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) George 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..................................................... X$
40,000
Present value of the 10 rental payments.......................
270,361
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.........................................
$278,072
2. Sales price is $270,361 (the present value of the 10 annual
lease payments); or, the initial PV of $278,072 minus the PV
of the unguaranteed residual value of $7,711.

3. Cost of sales is $172,289 (the $180,000 cost of the asset less

the present value of the unguaranteed residual value).
PROBLEM 21-10 (Continued)

(b) GEORGE COMPANY (Lessor)

Lease Amortization Schedule
Annuity Due Basis, Unguaranteed Residual Value

Annual Lease Interest (10%) Lease

Beginning Payment Plus on Lease Receivable Lease
of Year Residual Value Receivable Recovery Receivable
(a) (b) (c) (d)
Initial PV $ 0 $ 0 $ 0 $278,072
1 40,000 0 40,000 238,072
2 40,000 23,807 16,193 221,879
3 40,000 22,188 17,812 204,067
4 40,000 20,407 19,593 184,474
5 40,000 18,447 21,553 162,921
6 40,000 16,292 23,708 139,213
7 40,000 13,921 26,079 113,134
8 40,000 11,313 28,687 84,447
9 40,000 8,445 31,555 52,892
10 40,000 5,289 34,711 18,181
End of 10 20,000 * 1,819* 18,181 0
$420,000 *$141,928 $278,072

*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..................................................... 278,072
Cost of Goods Sold................................................. 172,289
Sales Revenue..................................................
270,361
Inventory............................................................
180,000
(To record the sale and the cost of goods
sold in the lease transaction)
Selling Expenses..................................................... 4,000
Cash................................................................... 4,000

Cash............................................................................. 40,000
Lease Receivable.................................................
40,000
(To record receipt of the first lease
payment)

End of the Year

Interest Receivable..................................................... 23,807
Interest Revenue..................................................
23,807
(To record interest earned during the
first year of the lease)
 PROBLEM 21-11

(a) The lease is a capital lease because: (1) the lease term exceeds
75% of the asset’s economic life and (2) the present value of the
minimum lease payments exceeds 90% of the fair value of the
leased asset.

Initial Lease Liability:

Minimum lease payments ($40,000) X PV of an
annuity due for 10 periods at 10% (6.75902)................
$270,361

(b) NATIONAL AIRLINES (Lessee)

Lease Amortization Schedule
(Annuity-due basis and URV)

Interest (10%) Reduction

Beginning Annual Lease on Lease of Lease Lease
of Year Payment Liability Liability Liability
(a) (b) (c) (d)
Initial PV — — — $270,361
1 $ 40,000 — $ 40,000 230,361
2 40,000 $ 23,036 16,964 213,397
3 40,000 21,340 18,660 194,737
4 40,000 19,474 20,526 174,211
5 40,000 17,421 22,579 151,632
6 40,000 15,163 24,837 126,795
7 40,000 12,680 27,320 99,475
8 40,000 9,948 30,052 69,423
9 40,000 6,942 33,058 36,365
10 40,000 3,635* 36,365 0
$400,000 $129,639 $270,361

*Rounding error is $1.

(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) Lessee’s journal entries:

Beginning of the Year

Leased Equipment................................................... 270,361
Lease Liability...................................................
270,361
(To record the lease of computer
equipment using capital lease method)

Lease Liability.......................................................... 40,000

Cash...................................................................
40,000
(To record the first rental payment)

End of the Year

Interest Expense...................................................... 23,036
Interest Payable................................................
23,036
(To record accrual of annual interest on
lease liability)

Depreciation Expense............................................. 27,036

Accumulated Depreciation—Capital
Leases...........................................................
27,036
(To record depreciation expense for
first year [$270,361 ÷ 10])
 PROBLEM 21-13

(a) The noncancelable lease is a sales-type capital 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 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 $60,000
made at the beginning of each period for 10 years,
$60,000 X 6.75902 (PV of an annuity due @ 10%).........
$405,541
Present value of guaranteed residual value,
$15,000 X .38554..............................................................
5,783
Present value of minimum lease payments...............
$411,324

2. Sales price is the same as the present value of

minimum lease payments...............................................
$411,324

3. Cost of sales is the cost of manufacturing the

x-ray machine..................................................................
$250,000
(b) AMIRANTE INC. (Lessor)
Lease Amortization Schedule
(Annuity due basis, guaranteed residual value)

Annual Lease Interest (10%) Recovery

Beginning Payment Plus on Lease of Lease Lease
of Year Residual Value Receivable Receivable Receivable
(a) (b) (c) (d)
Initial PV — — — $411,324
1 $ 60,000 — $ 60,000 351,324
2 60,000 $ 35,132 24,868 326,456
3 60,000 32,646 27,354 299,102
4 60,000 29,910 30,090 269,012
5 60,000 26,901 33,099 235,913
6 60,000 23,591 36,409 199,504
7 60,000 19,950 40,050 159,454
8 60,000 15,945 44,055 115,399
9 60,000 11,540 48,460 66,939
10 60,000 6,694 53,306 13,633
End of 10 15,000 * 1,367* 13,633 0
$615,000 *$203,676 $411,324

*Rounding error is $4.00.

(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..................................................... 411,324
Cost of Goods Sold................................................. 250,000
 Sales Revenue..................................................
411,324
Inventory............................................................
250,000

Selling Expenses..................................................... 14,000

Accounts Payable.............................................
14,000
(To record the incurrence of initial direct
costs relating to the lease)
PROBLEM 21-13 (Continued)

Cash............................................................................. 60,000
Lease Receivable.................................................
60,000
(To record receipt of the first lease
payment)

End of the Year

Interest Receivable..................................................... 35,132
Interest Revenue..................................................
35,132
(To record interest earned during the first
year of the lease)
 PROBLEM 21-14

(a) The noncancelable lease is a capital lease because: (1) the lease
term is for 83% (10 ÷ 12) of the economic life of the leased asset
and (2) the present value of the minimum lease payments
exceeds 90% of the fair market value of the leased asset.

Initial Lease Liability:

PV of lease payments, $60,000 X 6.75902........................
$405,541
PV of guaranteed residual value, $15,000 X .38554.........
5,783
Initial lease liability.............................................................
$411,324

(b) CHAMBERS MEDICAL (Lessee)

Lease Amortization Schedule
(Annuity-Due Basis, GRV)

Annual Lease Interest (10%) Reduction

Beginning Payment Plus on Unpaid of Lease Lease
of Year GRV Liability Liability Liability
(a) (b) (c) (d)
Initial PV $ 0 $ 0 $ 0 $411,324
1 60,000 0 60,000 351,324
2 60,000 35,132 24,868 326,456
3 60,000 32,646 27,354 299,102
4 60,000 29,910 30,090 269,012
5 60,000 26,901 33,099 235,913
6 60,000 23,591 36,409 199,504
7 60,000 19,950 40,050 159,454
8 60,000 15,945 44,055 115,399
9 60,000 11,540 48,460 66,939
10 60,000 6,694 53,306 13,633
End of 10 15,000 * 1,367* 13,633 0
$615,000 *$203,676 $411,324
 *Rounding error is $4.

(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) Lessee’s journal entries:

Beginning of the Year

Leased Equipment................................................... 411,324
Lease Liability...................................................
411,324
(To record the lease of x-ray equipment
using capital lease method)

Lease Liability.......................................................... 60,000

Cash...................................................................
60,000
(To record payment of annual lease
obligation)

End of the Year

Interest Expense...................................................... 35,132
Interest Payable................................................
35,132
(To record accrual of annual interest on
lease obligation)

Depreciation Expense............................................. 39,632

Accumulated Depreciation—Capital
Leases...........................................................
39,632
(To record depreciation expense for
year 1 using straight-line method
[($411,324 – $15,000) ÷ 10 years])