Problems - Chapter 20

Question 1

P20 - 1

(a) calculate the PV of the lease payments

has the option to buy the software for $5,000

Answer 1

1. subtract any executory costs

I=

N=

PMT =

FV = 0 (because it’s not a bargain, the FV stays 0, only a BPO is keyed in as FV)

COMP PV

2. add the downpayment to the total lease payments (if there was any)
3. be careful if the payments are in the beginning (BGN) or at the END

Question 2

20-1

(b) entries for an operating lease (from the LESEE perspective)

Answer 2

1. downpayment = prepaid rent => it will be amortized over the term of the lease
2. dr. Rent Expense
   dr. Operating expenses (= executory costs, if any)
   cr. Cash

Question 3

20-1

(c) Prepare an amortization schedule

Answer 3

• if the first payment is in the beginning, for that line you won’t have Interest expense
• PMT is usually the same
• Interest expense = rate x Balance of Lease Obligation
• last payment = BPO or GRV (if any) - it was the FV when calculating the PV of the lease payments

Question 4

20-1

(d) Prepare all necessary journal entries and adjusting journal entries for a FINANCE LEASE (from the LESSEE point of view)

Answer 4

1. record the lease:
   dr. XX under Lease = PV of the lease payments
   cr. Obligation under Lease
2. record the first PMT (immediately if it was in the BGN of the lease)
   dr. Obligation under Lease
   cr. Cash

The end of the year entries:

• record interest expense:
  dr. Interest expense 2073
  cr. Interest payable/Lease Liability 2073

(prorate if necessary)

• record depreciation expense:
  dr. Depr exp
  cr. Acc depr - xx under lease

(be careful as to how many years you use for depreciation!)

Record the next payment:

dr. Interest Payable/Lease Liability 2073
dr. Obligation under Lease
cr. Cash = the PMT amount

Question 5

20-1

(e) Summarize and contrast the effects on financial statements for the year ending December 31

Answer 5

1. Operating Lease:
   - no liabilities
   - current asset (if there was a preapid downpayment)
   - possible more cash outflow
2. Capital Lease:
   - interest expense and depreciation expense on the Income Statement
   - Non-current assets: XX under lease
   less: Accumulated depr
   - Current liabilities:

* interest expense accrued (what is owed for the next period

* current portion of obligation under lease (= next 12 months)

• Non-current liabilities:

* obligation under lease ( subtract the current portion)

*