P21-1 The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and

Vance Company, a lessee.

Inception date January 1, 2012

Annual lease payment due at the beginning of
each year, beginning with January 1, 2012 $124,798
Residual value of equipment at end of lease term,
guaranteed by the lessee $50,000
Lease term 6 6 years
Economic life of leased equipment 6 years
Fair value of asset at January 1, 2012 $600,000
Lessor's implicit rate 12%
Lessee's incremental borrowing rate 12%

The lessee assumes responsibility for all executory costs, which are expected to amount to $5,000 per year. The asset
will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000.
The lessee uses the straight-line depreciation method for all equipment

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(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.

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(b) Prepare all of the journal entries for the lessee for 2012 and 2013 to record the lease agreement, the lease payments,

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and all expenses related to this lease. Assume the lessee's annual accounting period ends on December 31.
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-This lease is a capital lease to the lessee because the lease term
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(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

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X 4.60478 PV of an annuity due of 1 for n = 6, i = 12%

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$574,668* PV of periodic rental payments

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$50,000 Guaranteed residual value

X .50663 PV of 1 for n = 6, i = 12%
$25,332 PV of guaranteed residual value
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$ 574,668* PV of periodic rental payments

+ 25,332 PV of guaranteed residual value
$ 600,000 PV of minimum lease payments
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-PV of payments = 100% of FV = $600,000

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1/1/12
Leased Equipment 600,000
Lease Liability 600,000
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Lease Liability 124,798

Cash 124,798

During 2012
Executory Costs 5,000
Cash 5,000

12/31/12

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Interest Expense 57,024
Interest Payable 57,024

Depn. Expense 91,667

Accumulated Depn. 91,667
([$600,000 - $50,000] ÷ 6)

1/1/13
Interest Payable 57,024
Lease Liability 67,774
Cash 124,798

During 2013
Executory Costs 5,000
Cash 5,000

12/31/13

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Interest Expense 48,891
Interest Payable 48,891

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 P21-2
(a) The $550,000 is the present value of the five annual lease payments of
$137,899 less the $6,000 attributable to the payment for taxes, insurance,
and maintenance. In other words, it is the present value of five
$131,899 payments to be made at the beginning of each year
discounted at 10%, (the implicit or incremental rates since the lessee
knows the implicit rate). The cost of taxes, insurance, and maintenance
represents periodic services to be performed in the future by the lessor
and should not be capitalized. The amount capitalized represents the
completed service element by the lessor company in that it has made
the property available; the taxes, insurance, and maintenance
represent the uncompleted, unrendered services of the lessor.

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(b) Leased Equipment Under Finance Leases ........... 550,000

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Lease Liability................................................... 550,000
($131,899 X Annuity Due Factor for rs e
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5 years at 10% = $131,899 X 4.16986 =
$550,000)
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Taxes, Insurance, and Maintenance Expense ...... 6,000

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Lease Liability ......................................................... 131,899

Cash .................................................................. 137,899
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(c) Depreciation Expense............................................. 220,000

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Accumulated Depreciation—Finance
Leases ........................................................... 220,000
($550,000 X 40% = $220,000)
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(d) Interest Expense ..................................................... 41,810

Interest Payable................................................ 41,810
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(See amortization schedule)

(e) Taxes, Insurance, and Maintenance Expense ...... 6,000

Interest Payable....................................................... 41,810
Lease Liability ......................................................... 90,089
Cash .................................................................. 137,899
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 PROBLEM 21-8 (Continued)

CAGE COMPANY (Lessee)

Lease Amortization Schedule
Annual Reduction
Lease of Lease
Interest (10%) Lease
Date Payment on Liability Liability Liability
1/1/11 $550,000

1/1/11 $131,899 $131,899 418,101

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1/1/12 131,899 $41,810 90,089 328,012

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1/1/13 131,899 32,801 99,098 228,914

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(f) CAGE COMPANY
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Statement of
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Financial
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Position
December 31,
2011
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Assets Liabilities

Property, plant, and equipment: Non-current:

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Leased property under

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finance leases
$550,000 Lease liability $328,012
Less: Accumulated Current:
depreciation 220,000 Interest payable 41,810
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$330,000 Lease liability 90,089*

*See Lease Amortization Schedule in part (e) above.

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