CHAPTER 21 ACCOUNTING FOR LEASES TRUE-FALSE—Conceptual Answe T F F T F F T F F T F F T F T F T F T T
No! 1. 2. 3. 4. 5. #. %. &. ). 1+. 11. 12. 13. 14. 15. 1#. 1%. 1&. 1). 2+.
"esc#pt#on Benefits of leasing. Accounting for long-term leases. Classifying lease containing purchase option. Accounting for executory costs. epreciating a capitali!e" asset. $essee recor"ing of interest expense. Benefit of leasing to lessor. istinction 'e 'et(een "i "irect-financing an an" sales-type le leases. $essors* classification of leases. irect-financing leases. Accounting for operating lease. Computing annual lease payments. ,uarantee" resi"ual alue "efinition. ,uarantee" s. unguarantee" resi"ual alue. nguarantee" re resi"ual a alue an an" mi minimum le lease pa payments. /et inestment an" guarantee"0unguarantee" resi"ual alue. ifference 'et(een "irect-financing an" sales-type leases. ,ross profit in sales-type lease. eie( of of estimate" un unguarantee" re resi"ual a alue. FAB reuire" lease "isclosures.
$ULTIPLE CHOICE—Conceptual Answe " " ' c a ' ' a c " " c a ' a a " a
No! 21. 22. 23. 24. 25. 25. 2#. 2#. 2%. 2%. 2&. 2). 3+. 31. 32. 33. 34. 35. 35. 3#. 3%. 3&.
"esc#pt#on A"antages of leasing. A"antages of leasing. Basic principle of lease accounting. Conceptual support for treating all leases as a sale0purchase. ss ssenti ential al elem elemen entt of of a leas lease. e. Barg Bargai ain n purc purcha hase se opt optio ion n an" an" mini minimu mum m leas lease e paym paymen ents ts.. Cos Cost amo amoun untt for for a cap capit ital al leas lease. e. $ease accounting 'y lessee. 6no(le"ge of the capitali!ation criteria. Components of minimum lease payments. 7"entification of executory costs. iscount rate use" 'y lessee. epreciation of a lease" asset 'y lessee. ffect of a capital lease on lessee8s "e't. epr eprec ecia iati tion on of a cap capit ital al leas lease. e. 7"entification of lease type for lessor. lements of lease receia'le 'y lessor. ecognition of unearne" lease income.
21 - 2
c
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
3). 3).
ire irect ct-f -fin inan anci cing ng leas lease e rec recei eia a'l 'le. e.
$ULTIPLE CHOICE—Conceptual cont!. Answe " c ' c " c "
No! 4+. 4+. 41. 41. 42. 42. 43. 44. 45. 94#.
"esc#pt#on Thir Thir" " par party ty guar guaran ante tee e of of res resi" i"ua uall al alue ue.. iff iffer eren ence ce 'et( 'et(ee een n "irec "irectt fina financ ncin ing g an" sal sales es-ty -type pe leas lease. e. Amou Amount nt of ree reenu nue e in in sal sales es-t -ty ype lea lease se.. Accounting for a sales-type lease. Accounting for initial "irect costs. isclosing o'ligations un"er capital leases. ,ain0loss recognition in a sale-lease'ac:.
These uestions also appear in the ro'lem-oling urial ,ui"e. These uestions also appear in the tu"y ,ui"e. 9This topic is "ealt (ith in an Appen"ix to the chapter.
$ULTIPLE CHOICE—Co(putat#onal Answe ' c c " a c c " c c a ' " c c " ' ' c a c " a " a ' c c c a ' c
No! 4%. 4&. 4). 5+. 51. 52. 53. 54. 55. 5#. 5%. 5&. 5). #+. #1. #2. #3. #4. #5. ##. #%. #&. #). %+. %1. %2. %3. %4. %5. %#. %%. %&.
"esc#pt#on ;perating lease expense for year. Calculate in interest ex expense an an" "epreciation ex expense fo for le lessee. Calculate minimum annual lease payment. Calculate total annual lease payment. 7"entification of lease type for lessor. 7"entification of lease type for lessee. Calculate "epreciation expense for lessee. 7"entification of lease type for lessee. Calculate lease" asset amount. Calculate total lease o'ligation. Compute interest expense for year. Compute interest expense for year. Calculate lease lia'ility amount. Compute interest expense an" "epreciation expense for year. Compute interest expense an" "epreciation expense for year. Compute "epreciation expense for lease (ith tr transfer of title. 7"entification of lease type for lessee. xpense re recor"e" 'y 'y lessee0operating le lease. Calculate re"uction of lease o'ligation for lessee. 7"entification of lease type for lessor. Calculate lease receia'le. eenues an" expenses recor"e" 'y lessor0operating lease. ;perating lease expense for year. Calculate expense of an operating lease. Calculate income from operating lease. Calculate lease payments. Calculate loss on guarantee" re resi"ual a alue le lease. Calculate interest reenue in sales-type lease. etermine gross profit an" interest reenue. Calculate in interest ex expense an an" "e "epreciation ex expense fo for le lessee. Calculate pr profit an an" in interest in income fo for le lessor0sales-type le lease. Calculate pr profit on on sa sales-type le lease an an" in interest in income.
21 - 2
c
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
3). 3).
ire irect ct-f -fin inan anci cing ng leas lease e rec recei eia a'l 'le. e.
$ULTIPLE CHOICE—Conceptual cont!. Answe " c ' c " c "
No! 4+. 4+. 41. 41. 42. 42. 43. 44. 45. 94#.
"esc#pt#on Thir Thir" " par party ty guar guaran ante tee e of of res resi" i"ua uall al alue ue.. iff iffer eren ence ce 'et( 'et(ee een n "irec "irectt fina financ ncin ing g an" sal sales es-ty -type pe leas lease. e. Amou Amount nt of ree reenu nue e in in sal sales es-t -ty ype lea lease se.. Accounting for a sales-type lease. Accounting for initial "irect costs. isclosing o'ligations un"er capital leases. ,ain0loss recognition in a sale-lease'ac:.
These uestions also appear in the ro'lem-oling urial ,ui"e. These uestions also appear in the tu"y ,ui"e. 9This topic is "ealt (ith in an Appen"ix to the chapter.
$ULTIPLE CHOICE—Co(putat#onal Answe ' c c " a c c " c c a ' " c c " ' ' c a c " a " a ' c c c a ' c
No! 4%. 4&. 4). 5+. 51. 52. 53. 54. 55. 5#. 5%. 5&. 5). #+. #1. #2. #3. #4. #5. ##. #%. #&. #). %+. %1. %2. %3. %4. %5. %#. %%. %&.
"esc#pt#on ;perating lease expense for year. Calculate in interest ex expense an an" "epreciation ex expense fo for le lessee. Calculate minimum annual lease payment. Calculate total annual lease payment. 7"entification of lease type for lessor. 7"entification of lease type for lessee. Calculate "epreciation expense for lessee. 7"entification of lease type for lessee. Calculate lease" asset amount. Calculate total lease o'ligation. Compute interest expense for year. Compute interest expense for year. Calculate lease lia'ility amount. Compute interest expense an" "epreciation expense for year. Compute interest expense an" "epreciation expense for year. Compute "epreciation expense for lease (ith tr transfer of title. 7"entification of lease type for lessee. xpense re recor"e" 'y 'y lessee0operating le lease. Calculate re"uction of lease o'ligation for lessee. 7"entification of lease type for lessor. Calculate lease receia'le. eenues an" expenses recor"e" 'y lessor0operating lease. ;perating lease expense for year. Calculate expense of an operating lease. Calculate income from operating lease. Calculate lease payments. Calculate loss on guarantee" re resi"ual a alue le lease. Calculate interest reenue in sales-type lease. etermine gross profit an" interest reenue. Calculate in interest ex expense an an" "e "epreciation ex expense fo for le lessee. Calculate pr profit an an" in interest in income fo for le lessor0sales-type le lease. Calculate pr profit on on sa sales-type le lease an an" in interest in income.
Accounting for $eases c
%).
7"entification of lease type for lessor.
$ULTIPLE CHOICE—Co(putat#onal cont!. Answe ' " " ' '
No! &+. &1. &2. 9&3. 9&4.
"esc#pt#on etermine "iscount rate implicit in lease payments. $ease-relate" expenses recogni!e" 'y lessee. etermine long-term lease o'ligation fo for lessee. ,ain recogni!e" 'y lessee in a sale-lease'ac:. ale-lease'ac:0operating lease.
$ULTIPLE CHOICE—CPA A)apte) Answe c a " a " " c a " "
No! &5. &#. &%. &&. &). )+. )1. )2. 9)3. 9)4.
"esc#pt#on 7"entification of lease type for lessee. Calculate the lease lia'ility of a lessee. Calculate the lease lia'ility of a lessee. etermine re"uction of lease o'ligation for lessee. Calculate interest expense for lessee. Calculate "epreciation expense for lessee. ecognition of interest reenue in a sales-type lease. Calculate income reali!e" 'y lessor0sales-type le lease. eporting gain on a sale-lease'ac:. Accounting for the gain on a sale-lease'ac:.
E/ERCISES I te ( 21-)5 2121-)# )# 21-)% 2121-)& )& 2121-)) )) 2121-1+ 1++ + 921 921-1 -1+1 +1 921-1+2
"esc#pt#on Capital le lease
our >ourna nall entr entrie ies. s. ;perating lease. $eas $ease e crit criter eria ia for for cla class ssif ific icat atio ion n 'y les lesso sor. r. ire irec ct-fi t-fina nanc ncin ing g leas lease e
PRO%LE$S I te ( 2121-1+ 1+3 3 2121-1+ 1+4 4 2121-1+ 1+5 5
"esc#pt#on $ess $essee ee acc account ountin ing? g?c capit apital al lea leas se. $ess $essee ee acc account ountin ing? g?c capit apital al lea leas se. $ess $essor or acco accoun unti ting ng?" ?"ir irec ectt-fi fina nanc ncin ing g leas lease. e.
21 - 0
21 - 3
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
CHAPTER LEARNING O%ECTIES 1.
xplain the nature@ economic su'stance@ an" a"antages of lease transactions.
2.
escri'e the accounting criteria an" proce"ures for capitali!ing leases 'y the lessee.
3.
Contrast the operating an" capitali!ation metho"s of recor"ing leases.
4.
7"entify the classifications of leases for the lessor.
5.
escri'e the lessor8s accounting for "irect-financing leases.
#.
7"entify special features of lease arrangements that cause uniue accounting pro'lems.
%.
escri'e the effect of resi"ual alues@ guarantee" an" unguarantee"@ on lease accounting.
&.
escri'e the lessor8s accounting for sales-type leases.
).
$ist the "isclosure reuirements for leases.
91+.
n"erstan" an" apply lease accounting concepts to arious lease arrangements.
911.
escri'e the lessee8s accounting for sale-lease'ac: transactions.
Accounting for $eases
21 - 9
SU$$AR4 OF LEARNING O%ECTIES %4 5UESTIONS Ite
Ty
Ite
Ty
Ite
Ty
Ite
Ty
Ite
Ty
Ite
Ty
Ite
Typ
Lean#n* O67ect#8e 1
1.
TF
2.
TF
21.
3. 4. 5. 2#. 2%. 2&.
TF TF TF C C C
2). 3+. 31. 32. 33. 4%.
C C C C C C
4&. 4). 5+. 52. 53. 54.
#.
TF
%.
TF
34.
&. ).
TF TF
3#. 3%.
C C
51. ##.
1+. 11.
TF TF
3&. 3).
C C
#%. #&.
12.
TF
13.
TF
%2.
14.
TF
15.
TF
1#.
1%. 1&. 1).
TF TF TF
41. 42. 43.
C C C
44. %4. %5.
2+.
TF
45.
C
C 22. C 23. Lean#n* O67ect#8e 2 C 55. C #1. C 5#. C #2. C 5%. C #3. C 5&. C #4. C 5). C #5. C #+. C %#. Lean#n* O67ect#8e 0 C 35. C #). Lean#n* O67ect#8e 3 C %1. C 1+1. C %). C Lean#n* O67ect#8e 9 C &+. C )). C )&. 1+5. Lean#n* O67ect#8e : C 1+4. Lean#n* O67ect#8e ; TF 4+. C %3. Lean#n* O67ect#8e < C %%. C )1. C %&. C )2. C )+. C )&. Lean#n* O67ect#8e =
C
24.
C
25.
C
C C C C C C
&1. &2. &5. &#. &%. &&.
C C C C C C
&). )+. )5. )#. 1+3. 1+4.
C C
C
%+.
C
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C
1+5.
C C
1++.
C
1+1.
1+2.
Lean#n* O67ect#8e 11>
4#. /ote
C
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TF True-False C ultiple Choice xercise ro'lem
&4.
C
)3.
C
)4.
21 - :
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
TRUE-FALSE—Conceptual 1.
$easing euipment re"uces the ris: of o'solescence to the lessee@ an" passes the ris: of resi"ual alue to the lessor.
2.
The FAB agrees (ith the capitali!ation approach an" reuires companies to capitali!e all long-term leases.
3.
A lease that contains a purchase option must 'e capitali!e" 'y the lessee.
4.
xecutory costs shoul" 'e exclu"e" 'y the lessee in computing the present alue of the minimum lease payments.
5.
A capitali!e" lease" asset is al(ays "epreciate" oer the term of the lease 'y the lessee.
#.
A lessee recor"s interest expense in 'oth a capital lease an" an operating lease.
%.
A 'enefit of leasing to the lessor is the return of the lease" property at the en" of the lease term.
&.
The "istinction 'et(een a "irect-financing lease an" a sales-type lease is the presence or a'sence of a transfer of title.
).
$essors classify an" account for all leases that "on*t ualify as sales-type leases as operating leases.
1+.
irect-financing leases are in su'stance the financing of an asset purchase 'y the lessee.
11.
n"er the operating metho"@ the lessor recor"s each rental receipt as part interest reenue an" part rental reenue.
12.
7n computing the annual lease payments@ the lessor "e"ucts only a guarantee" resi"ual alue from the fair mar:et alue of a lease" asset.
13.
Dhen the lessee agrees to ma:e up any "eficiency 'elo( a state" amount that the lessor reali!es in resi"ual alue@ that state" amount is the guarantee" resi"ual alue.
14.
Both a guarantee" an" an unguarantee" resi"ual alue affect the lessee*s computation of amounts capitali!e" as a lease" asset.
15.
From the lessee*s ie(point@ an unguarantee" resi"ual alue is the same as no resi"ual alue in terms of computing the minimum lease payments.
1#.
The lessor (ill recoer a greater net inestment if the resi"ual alue is guarantee" instea" of unguarantee".
1%.
The primary "ifference 'et(een a "irect-financing lease an" a sales-type lease is the manufacturer*s or "ealer*s gross profit.
1&.
The gross profit amount in a sales-type lease is greater (hen a guarantee" resi"ual alue exists.
Accounting for $eases
21 - ;
1).
Companies must perio"ically reie( the estimate" unguarantee" resi"ual alue in a sales-type lease.
2+.
The FAB reuires lessees an" lessors to "isclose certain information a'out leases in their financial statements or in the notes.
Tue-False Answes—Conceptual Ite(
Ans!
Ite(
Ans!
Ite(
Ans!
Ite(
1. 2. 3. 4. 5.
T F F T F
#. %. &. ). 1+.
F T F F T
11. 12. 13. 14. 15.
F F T F T
1#. 1%. 1&. 1). 2+.
Ans!
F T F T T
$ULTIPLE CHOICE—Conceptual 21.
a>or reasons (hy a company may 'ecome inole" in leasing to other companies is
22.
Dhich of the follo(ing is an a"antage of leasingE a. ;ff-'alance-sheet financing '. $ess costly financing c. 1++ financing at fixe" rates ". All of these
23.
Dhich of the follo(ing 'est "escri'es current practice in accounting for leasesE a. $eases are not capitali!e". '. $eases similar to installment purchases are capitali!e". c. All long-term leases are capitali!e". ". All leases are capitali!e".
24.
Dhile only certain leases are currently accounte" for as a sale or purchase@ there is theoretic >ustification for consi"ering all leases to 'e sales or purchases. The principal reason that supports this i"ea is that a. all leases are generally for the economic life of the property an" the resi"ual alue of the property at the en" of the lease is minimal. '. at the en" of the lease the property usually can 'e purchase" 'y the lessee. c. a lease reflects the purchase or sale of a uantifia'le right to the use of property. ". "uring the life of the lease the lessee can effectiely treat the property as if it (ere o(ne" 'y the lessee.
21 - <
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
25.
An a. '. c.
2#.
Dhat impact "oes a 'argain purchase option hae on the present alue of the minimum lease payments compute" 'y the lesseeE a. /o impact as the option "oes not enter into the transaction until the en" of the lease term. '. The lessee must increase the present alue of the minimum lease payments 'y the present alue of the option price. c. The lessee must "ecrease the present alue of the minimum lease payments 'y the present alue of the option price. ". The minimum lease payments (oul" 'e increase" 'y the present alue of the option price if@ at the time of the lease agreement@ it appeare" certain that the lessee (oul" exercise the option at the en" of the lease an" purchase the asset at the option price.
2%.
The amount to 'e recor"e" as the cost of an asset un"er capital lease is eual to the a. present alue of the minimum lease payments. '. present alue of the minimum lease payments or the fair alue of the asset@ (hicheer is lo(er. c. present alue of the minimum lease payments plus the present alue of any unguarantee" resi"ual alue. ". carrying alue of the asset on the lessor8s 'oo:s.
2&.
The metho"s of accounting for a lease 'y the lessee are a. operating an" capital lease metho"s. '. operating@ sales@ an" capital lease metho"s. c. operating an" leerage" lease metho"s. ". none of these.
2).
Dhich of the follo(ing is a correct statement of one of the capitali!ation criteriaE a. The lease transfers o(nership of the property to the lessor. '. The lease contains a purchase option. c. The lease term is eual to or more than %5 of the estimate" economic life of the lease" property. ". The minimum lease payments
3+.
inimum lease payments may inclu"e a a. penalty for failure to rene(. '. 'argain purchase option. c. guarantee" resi"ual alue. ". any of these.
31.
xecutory costs inclu"e a. maintenance. '. property taxes. c. insurance. ". all of these.
essential element of a lease coneyance is that the lessor coneys less than his or her total interest in the property. lessee proi"es a sin:ing fun" eual to one year8s lease payments. property that is the su'>ect of the lease agreement must 'e hel" for sale 'y the lessor prior to the "rafting of the lease agreement. ". term of the lease is su'stantially eual to the economic life of the lease" property.
Accounting for $eases
21 - =
32.
7n computing the present alue of the minimum lease payments@ the lessee shoul" a. use its incremental 'orro(ing rate in all cases. '. use either its incremental 'orro(ing rate or the implicit rate of the lessor@ (hicheer is higher@ assuming that the implicit rate is :no(n to the lessee. c. use either its incremental 'orro(ing rate or the implicit rate of the lessor@ (hicheer is lo(er@ assuming that the implicit rate is :no(n to the lessee. ". none of these.
33.
7n computing "epreciation of a lease" asset@ the lessee shoul" su'tract a. a guarantee" resi"ual alue an" "epreciate oer the term of the lease. '. an unguarantee" resi"ual alue an" "epreciate oer the term of the lease. c. a guarantee" resi"ual alue an" "epreciate oer the life of the asset. ". an unguarantee" resi"ual alue an" "epreciate oer the life of the asset.
34.
7n the earlier years of a lease@ from the lessee8s perspectie@ the use of the a. capital metho" (ill ena'le the lessee to report higher income@ compare" to the operating metho". '. capital metho" (ill cause "e't to increase@ compare" to the operating metho". c. operating metho" (ill cause income to "ecrease@ compare" to the capital metho". ". operating metho" (ill cause "e't to increase@ compare" to the capital metho".
35.
A lessee (ith a capital lease containing a 'argain purchase option shoul" "epreciate the lease" asset oer the a. asset8s remaining economic life. '. term of the lease. c. life of the asset or the term of the lease@ (hicheer is shorter. ". life of the asset or the term of the lease@ (hicheer is longer.
3#.
Base" solely upon the follo(ing sets of circumstances in"icate" 'elo(@ (hich set gies rise to a sales-type or "irect-financing lease of a lessorE Transfers ;(nership Contains Bargain Collecti'ility of $ease Any 7mportant By n" ;f $easeE urchase ;ptionE ayments Assure"E ncertaintiesE a. /o Ges Ges /o '. Ges /o /o /o c. Ges /o /o Ges ". /o Ges Ges Ges
3%.
Dhich of the follo(ing (oul" not 'e inclu"e" in the $ease eceia'le accountE a. ,uarantee" resi"ual alue '. nguarantee" resi"ual alue c. A 'argain purchase option ". All (oul" 'e inclu"e"
3&.
7n a lease that is appropriately recor"e" as a "irect-financing lease 'y the lessor@ unearne" income a. shoul" 'e amorti!e" oer the perio" of the lease using the interest metho". '. shoul" 'e amorti!e" oer the perio" of the lease using the straight-line metho". c. "oes not arise. ". shoul" 'e recogni!e" at the lease8s expiration.
21 - 1?
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
3).
7n or"er to properly recor" a "irect-financing lease@ the lessor nee"s to :no( ho( to calculate the lease receia'le. The lease receia'le in a "irect-financing lease is 'est "efine" as a. the amount of fun"s the lessor has tie" up in the asset (hich is the su'>ect of the "irect-financing lease. '. the "ifference 'et(een the lease payments receia'le an" the fair mar:et alue of the lease" property. c. the present alue of minimum lease payments. ". the total 'oo: alue of the asset less any accumulate" "epreciation recor"e" 'y the lessor prior to the lease agreement.
4+.
7f the resi"ual alue of a lease" asset is guarantee" 'y a thir" party a. it is treate" 'y the lessee as no resi"ual alue. '. the thir" party is also lia'le for any lease payments not pai" 'y the lessee. c. the net inestment to 'e recoere" 'y the lessor is re"uce". ". it is treate" 'y the lessee as an a""itional payment an" 'y the lessor as reali!e" at the en" of the lease term.
41.
The primary "ifference 'et(een a "irect-financing lease an" a sales-type lease is the a. manner in (hich rental receipts are recor"e" as rental income. '. amount of the "epreciation recor"e" each year 'y the lessor. c. recognition of the manufacturer8s or "ealer8s profit at the inception of the lease. ". allocation of initial "irect costs 'y the lessor to perio"s 'enefite" 'y the lease arrangements.
42.
A lessor (ith a sales-type lease inoling an unguarantee" resi"ual alue aaila'le to the lessor at the en" of the lease term (ill report sales reenue in the perio" of inception of the lease at (hich of the follo(ing amountsE a. The minimum lease payments plus the unguarantee" resi"ual alue. '. The present alue of the minimum lease payments. c. The cost of the asset to the lessor@ less the present alue of any unguarantee" resi"ual alue. ". The present alue of the minimum lease payments plus the present alue of the unguarantee" resi"ual alue.
43.
For a sales-type lease@ a. the sales price inclu"es the present alue of the unguarantee" resi"ual alue. '. the present alue of the guarantee" resi"ual alue is "e"ucte" to "etermine the cost of goo"s sol". c. the gross profit (ill 'e the same (hether the resi"ual alue is guarantee" or unguarantee". ". none of these.
44.
Dhich of the follo(ing statements is correctE a. 7n a "irect-financing lease@ initial "irect costs are a""e" to the net inestment in the lease. '. 7n a sales-type lease@ initial "irect costs are expense" in the year of incurrence. c. For operating leases@ initial "irect costs are "eferre" an" allocate" oer the lease term. ". All of these.
Accounting for $eases 45.
94#.
21 - 11
The $ease $ia'ility account shoul" 'e "isclose" as a. all current lia'ilities. '. all noncurrent lia'ilities. c. current portions in current lia'ilities an" the remain"er in noncurrent lia'ilities. ". "eferre" cre"its. Dhen a company sells property an" then leases it 'ac:@ any gain on the sale shoul" usually 'e a. recogni!e" in the current year. '. recogni!e" as a prior perio" a">ustment. c. recogni!e" at the en" of the lease. ". "eferre" an" recogni!e" as income oer the term of the lease.
$ult#ple C,o#ce Answes —Conceptual Ite(
21. 22. 23. 24.
Ans!
" " ' c
Ite(
25. 2#. 2%. 2&.
Ans!
a ' ' a
Ite(
2). 3+. 31. 32.
Ans!
c " " c
Ite(
Ans!
33. 34. 35. 3#.
a ' a a
Ite(
3%. 3&. 3). 4+.
Ans!
" a c "
Ite(
41. 42. 43. 44.
Ans!
Ite(
Ans!
c ' c "
45. 94#.
c "
$ULTIPLE CHOICE—Co(putat#onal 4%.
;n ecem'er 1@ 2++&@ ere! Corporation lease" office space for 1+ years at a monthly rental of H)+@+++. ;n that "ate ere! pai" the lan"lor" the follo(ing amounts ent "eposit First month8s rent $ast month8s rent 7nstallation of ne( (alls an" offices
H )+@+++ )+@+++ )+@+++ 4)5@+++ H%#5@+++
The entire amount of H%#5@+++ (as charge" to rent expense in 2++&. Dhat amount shoul" ere! hae charge" to expense for the year en"e" ecem'er 31@ 2++&E a. H)+@+++ '. H)4@125 c. H1&4@125 ". H4)5@+++ 4&.
;n Ianuary 1@ 2++&@ enn Corporation signe" a ten-year noncancela'le lease for certain machinery. The terms of the lease calle" for enn to ma:e annual payments of H1++@+++ at the en" of each year for ten years (ith title to pass to enn at the en" of this perio". The machinery has an estimate" useful life of 15 years an" no salage alue. enn uses the straight-line metho" of "epreciation for all of its fixe" assets. enn accor"ingly accounte" for this lease transaction as a capital lease. The lease payments (ere "etermine" to hae a present alue of H#%1@++& at an effectie interest rate of &. Dith respect to this capitali!e" lease@ enn shoul" recor" for 2++& a. lease expense of H1++@+++. '. interest expense of H44@%34 an" "epreciation expense of H3&@+#&. c. interest expense of H53@#&1 an" "epreciation expense of H44@%34. ". interest expense of H45@#&1 an" "epreciation expense of H#%@1+1.
21 - 12
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
se the follo(ing information for uestions 4) through 54.
Dhat is the amount of the minimum annual lease paymentE <oun"e" to the nearest "ollar.= a. H1&&@23% '. H4%&@23# c. H4&&@23# ". H4)&@23#
5+.
Dhat is the amount of the total annual lease paymentE a. H1&&@23% '. H4%&@23% c. H4&&@23% ". H4)&@23%
51.
From the lessor8s ie(point@ (hat type of lease is inole"E a. ales-type lease '. ale-lease'ac: c. irect-financing lease ". ;perating lease
52.
From the lessee8s ie(point@ (hat type of lease exists in this caseE a. ales-type lease '. ale-lease'ac: c. Capital lease ". ;perating lease
53.
exter@ 7nc. (oul" recor" "epreciation expense on this storage 'uil"ing in 2++& of <oun"e" to the nearest "ollar.= a. H+. '. H25+@+++. c. H3++@+++. ". H4&&@23%.
Accounting for $eases
21 - 10
54.
7f the lease (ere nonrene(a'le@ there (as no purchase option@ title to the 'uil"ing "oes not pass to the lessee at termination of the lease an" the lease (ere only for eight years@ (hat type of lease (oul" this 'e for the lesseeE a. ales-type lease '. irect-financing lease c. ;perating lease ". Capital lease
55.
Kuffman Company leases a machine from $incoln Corp. un"er an agreement (hich meets the criteria to 'e a capital lease for Kuffman. The six-year lease reuires payment of H1+2@+++ at the 'eginning of each year@ inclu"ing H15@+++ per year for maintenance@ insurance@ an" taxes. The incremental 'orro(ing rate for the lessee is 1+J the lessor8s implicit rate is & an" is :no(n 'y the lessee. The present alue of an annuity "ue of 1 for six years at 1+ is 4.%)+%). The present alue of an annuity "ue of 1 for six years at & is 4.))2%1. Kuffman shoul" recor" the lease" asset at a. H5+)@25#. '. H4&&@##1. c. H434@3##. ". H41#@%)).
5#.
;n ecem'er 31@ 2++%@ ool Corporation lease" a ship from enn Company for an eightyear perio" expiring ecem'er 3+@ 2+15. ual annual payments of H2++@+++ are "ue on ecem'er 31 of each year@ 'eginning (ith ecem'er 31@ 2++%. The lease is properly classifie" as a capital lease on ool8s 'oo:s. The present alue at ecem'er 31@ 2++% of the eight lease payments oer the lease term "iscounte" at 1+ is H1@1%3@#&5. Assuming all payments are ma"e on time@ the amount that shoul" 'e reporte" 'y ool Corporation as the total o'ligation un"er capital leases on its ecem'er 31@ 2++& 'alance sheet is a. H1@+)1@+54. '. H1@+++@15). c. H&%1@+54. ". H1@2++@+++.
se the follo(ing information for uestions 5% an" 5&. ;n Ianuary 1@ 2++&@ alton Corporation signe" a fie-year noncancela'le lease for euipment. The terms of the lease calle" for alton to ma:e annual payments of H5+@+++ at the 'eginning of each year for fie years (ith title to pass to alton at the en" of this perio". The euipment has an estimate" useful life of % years an" no salage alue. alton uses the straight-line metho" of "epreciation for all of its fixe" assets. alton accor"ingly accounts for this lease transaction as a capital lease. The minimum lease payments (ere "etermine" to hae a present alue of H2+&@4)3 at an effectie interest rate of 1+. 5%.
7n 2++&@ alton shoul" recor" interest expense of a. H15@&4). '. H2)@151. c. H2+@&4). ". H34@151.
5&.
7n 2++)@ alton shoul" recor" interest expense of a. H1+@&4). '. H12@434. c. H15@&4). ". H1%@434.
21 - 13
5).
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
;n ecem'er 31@ 2++&@ o"" Corporation lease" a plane from Aero Company for an eight-year perio" expiring ecem'er 3+@ 2+1#. ual annual payments of H15+@+++ are "ue on ecem'er 31 of each year@ 'eginning (ith ecem'er 31@ 2++&. The lease is properly classifie" as a capital lease on o""*s 'oo:s. The present alue at ecem'er 31@ 2++& of the eight lease payments oer the lease term "iscounte" at 1+ is H&&+@2#4. Assuming the first payment is ma"e on time@ the amount that shoul" 'e reporte" 'y o"" Corporation as the lease lia'ility on its ecem'er 31@ 2++& 'alance sheet is a. H&&+@2#4. '. H&1&@2)+. c. H%)2@23&. ". H%3+@2#4.
se the follo(ing information for uestions #+ an" #1. ;n Ianuary 1@ 2++&@ Carley Corporation signe" a fie-year noncancela'le lease for euipment. The terms of the lease calle" for Carley to ma:e annual payments of H#+@+++ at the en" of each year for fie years (ith title to pass to Carley at the en" of this perio". The euipment has an estimate" useful life of % years an" no salage alue. Carley uses the straight-line metho" of "epreciation for all of its fixe" assets. Carley accor"ingly accounts for this lease transaction as a capital lease. The minimum lease payments (ere "etermine" to hae a present alue of H22%@44& at an effectie interest rate of 1+. #+.
Dith respect to this capitali!e" lease@ for 2++& Carley shoul" recor" a. rent expense of H#+@+++. '. interest expense of H22@%45 an" "epreciation expense of H45@4&). c. interest expense of H22@%45 an" "epreciation expense of H32@4)3. ". interest expense of H3+@+++ an" "epreciation expense of H45@4&).
#1.
Dith respect to this capitali!e" lease@ for 2++) Carley shoul" recor" a. interest expense of H22@%45 an" "epreciation expense of H32@4)3. '. interest expense of H2+@4#) an" "epreciation expense of H32@4)3. c. interest expense of H1)@+1) an" "epreciation expense of H32@4)3. ". interest expense of H14@4#) an" "epreciation expense of H32@4)3.
#2.
Bar:ley Corporation is a lessee (ith a capital lease. The asset is recor"e" at H45+@+++ an" has an economic life of & years. The lease term is 5 years. The asset is expecte" to hae a mar:et alue of H15+@+++ at the en" of 5 years@ an" a mar:et alue of H5+@+++ at the en" of & years. The lease agreement proi"es for the transfer of title of the asset to the lessee at the en" of the lease term. Dhat amount of "epreciation expense (oul" the lessee recor" for the first year of the leaseE a. H)+@+++ '. H&+@+++ c. H#+@+++ ". H5+@+++
Accounting for $eases
21 - 19
se the follo(ing information for uestions #3 through #&.
Dhat type of lease is this from Kay Corporation8s ie(pointE a. ;perating lease '. Capital lease c. ales-type lease ". irect-financing lease
#4.
7f Kay accounts for the lease as an operating lease@ (hat expenses (ill 'e recor"e" as a conseuence of the lease "uring the fiscal year en"e" ecem'er 31@ 2++&E a. epreciation xpense '. ent xpense c. 7nterest xpense ". epreciation xpense an" 7nterest xpense
#5.
7f the present alue of the future lease payments is H4++@+++ at Ianuary 1@ 2++&@ (hat is the amount of the re"uction in the lease lia'ility for Kay Corp. in the secon" full year of the lease if Kay Corp. accounts for the lease as a capital leaseE <oun"e" to the nearest "ollar.= a. H115@213 '. H123@213 c. H12#@%34 ". H133@+%+
##.
From the ie(point of arly@ (hat type of lease agreement existsE a. ;perating lease '. Capital lease c. ales-type lease ". irect-financing lease
#%.
7f arly recor"s this lease as a "irect-financing lease@ (hat amount (oul" 'e recor"e" as $ease eceia'le at the inception of the leaseE a. H155@213 '. H3&5@))1 c. H4++@+++ ". H4#5@#3&
21 - 1:
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
#&.
Dhich of the follo(ing lease-relate" reenue an" expense items (oul" 'e recor"e" 'y arly if the lease is accounte" for as an operating leaseE a. ental eenue '. 7nterest 7ncome c. epreciation xpense ". ental eenue an" epreciation xpense
#).
ele Company lease" euipment to nea" Company on Iuly 1@ 2++%@ for a one-year perio" expiring Iune 3+@ 2++&@ for H#+@+++ a month. ;n Iuly 1@ 2++&@ ele lease" this piece of euipment to Luir: Company for a three-year perio" expiring Iune 3+@ 2+11@ for H%5@+++ a month. The original cost of the euipment (as H4@&++@+++. The euipment@ (hich has 'een continually on lease since Iuly 1@ 2++3@ is 'eing "epreciate" on a straightline 'asis oer an eight-year perio" (ith no salage alue. Assuming that 'oth the lease to nea" an" the lease to Luir: are appropriately recor"e" as operating leases for accounting purposes@ (hat is the amount of income
se the follo(ing information for uestions %+ an" %1. ""y lease" euipment to Koyle Company on ay 1@ 2++&. At that time the collecti'ility of the minimum lease payments (as not reasona'ly pre"icta'le. The lease expires on ay 1@ 2++). Koyle coul" hae 'ought the euipment from ""y for H3@2++@+++ instea" of leasing it. ""y8s accounting recor"s sho(e" a 'oo: alue for the euipment on ay 1@ 2++&@ of H2@&++@+++. ""y8s "epreciation on the euipment in 2++& (as H3#+@+++. uring 2++&@ Koyle pai" H%2+@+++ in rentals to ""y for the &-month perio". ""y incurre" maintenance an" other relate" costs un"er the terms of the lease of H#4@+++ in 2++&. After the lease (ith Koyle expires@ ""y (ill lease the euipment to another company for t(o years. %+.
Ignoring income taxes @ the amount of expense incurre" 'y Koyle from this lease for the
year en"e" ecem'er 31@ 2++&@ shoul" 'e a. H2)#@+++. '. H3#+@+++. c. H#5#@+++. ". H%2+@+++. %1.
The income 'efore income taxes "erie" 'y ""y from this lease for the year en"e" ecem'er 31@ 2++&@ shoul" 'e a. H2)#@+++. '. H3#+@+++. c. H#5#@+++. ". H%2+@+++.
%2.
Kite Company has a machine (ith a cost of H4++@+++ (hich also is its fair mar:et alue on the "ate the machine is lease" to ich Company. The lease is for # years an" the machine is estimate" to hae an unguarantee" resi"ual alue of H4+@+++. 7f the lessor8s interest rate implicit in the lease is 12@ the six 'eginning-of-the-year lease payments (oul" 'e
Accounting for $eases a. '. c. ". %3.
21 - 1;
H)2@3#1. H&2@4#5. H%&@1&+. H##@##%.
stes Co. lease" a machine to ains Co. Assume the lease payments (ere ma"e on the 'asis that the resi"ual alue (as guarantee" an" stes gets to recogni!e all the profits@ an" at the en" of the lease term@ 'efore the lessee transfers the asset to the lessor@ the lease" asset an" o'ligation accounts hae the follo(ing 'alances $ease" euipment un"er capital lease $ess accumulate" "epreciation--capital lease 7nterest paya'le ;'ligations un"er capital leases
H4++@+++ 3&4@+++ H 1#@+++ H 1@52+ 14@4&+ H1#@+++
7f@ at the en" of the lease@ the fair mar:et alue of the resi"ual alue is H&@&++@ (hat gain or loss shoul" stes recor"E a. H#@4&+ gain '. H%@12+ loss c. H%@2++ loss ". H&@&++ gain %4.
urham Company lease" machinery to anti Company on Iuly 1@ 2++&@ for a ten-year perio" expiring Iune 3+@ 2+1&. ual annual payments un"er the lease are H%5@+++ an" are "ue on Iuly 1 of each year. The first payment (as ma"e on Iuly 1@ 2++&. The rate of interest use" 'y urham an" anti is ). The cash selling price of the machinery is H525@+++ an" the cost of the machinery on urham8s accounting recor"s (as H4#5@+++. Assuming that the lease is appropriately recor"e" as a sale for accounting purposes 'y urham@ (hat amount of interest reenue (oul" urham recor" for the year en"e" ecem'er 31@ 2++&E a. H4%@25+ '. H4+@5++ c. H2+@25+ ". H+
%5.
'y Company lease" euipment to the ills Company on Iuly 1@ 2++&@ for a ten-year perio" expiring Iune 3+@ 2+1&. ual annual payments un"er the lease are H&+@+++ an" are "ue on Iuly 1 of each year. The first payment (as ma"e on Iuly 1@ 2++&. The rate of interest contemplate" 'y 'y an" ills is ). The cash selling price of the euipment is H5#+@+++ an" the cost of the euipment on 'y8s accounting recor"s (as H4)#@+++. Assuming that the lease is appropriately recor"e" as a sale for accounting purposes 'y 'y@ (hat is the amount of profit on the sale an" the interest reenue that 'y (oul" recor" for the year en"e" ecem'er 31@ 2++&E a. H#4@+++ an" H5+@4++ '. H#4@+++ an" H43@2++ c. H#4@+++ an" H21@#++ ". H+ an" H+
21 - 1<
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
se the follo(ing information for uestions %# an" %%. isen Company@ a "ealer in machinery an" euipment@ lease" euipment to Foran@ 7nc.@ on Iuly 1@ 2++&. The lease is appropriately accounte" for as a sale 'y isen an" as a purchase 'y Foran. The lease is for a 1+-year perio"
Assuming that Foran@ 7nc. uses straight-line "epreciation@ (hat is the amount of "epreciation an" interest expense that Foran shoul" recor" for the year en"e" ecem'er 31@ 2++&E a. H225@+++ an" H155@1#+ '. H225@+++ an" H1&+@+++ c. H2%+@+++ an" H155@1#+ ". H2%+@+++ an" H1&+@+++
%%.
Dhat is the amount of profit on the sale an" the amount of interest income that isen shoul" recor" for the year en"e" ecem'er 31@ 2++&E a. H+ an" H155@1#+ '. H#++@+++ an" H155@1#+ c. H#++@+++ an" H1&+@+++ ". H)++@+++ an" H3#+@+++
%&.
ayer Company lease" euipment from $ennon Company on Iuly 1@ 2++&@ for an eightyear perio" expiring Iune 3+@ 2+1#. ual annual payments un"er the lease are H3++@+++ an" are "ue on Iuly 1 of each year. The first payment (as ma"e on Iuly 1@ 2++&. The rate of interest contemplate" 'y ayer an" $ennon is &. The cash selling price of the euipment is H1@@&%5 an" the cost of the euipment on $ennon8s accounting recor"s (as H1@#5+@+++. Assuming that the lease is appropriately recor"e" as a sale for accounting purposes 'y $ennon@ (hat is the amount of profit on the sale an" the interest income that $ennon (oul" recor" for the year en"e" ecem'er 31@ 2++&E a. H+ an" H+ '. H+ an" H#2@4%5 c. H211@&%5 an" H#2@4%5 ". H211@&%5 an" H%4@4%5
se the follo(ing information for uestions %) through &3. Bohl Co. purchases lan" an" constructs a serice station an" car (ash for a total of H3#+@+++. At Ianuary 2@ 2++%@ (hen construction is complete"@ the facility an" lan" on (hich it (as constructe" are sol" to a ma>or oil company for H4++@+++ an" imme"iately lease" from the oil company 'y Bohl. Fair alue of the lan" at time of the sale (as H4+@+++. The lease is a 1+-year@ noncancela'le lease. Bohl uses straight-line "epreciation for its other arious 'usiness hol"ings. The economic life of the facility is 15 years (ith !ero salage alue. Title to the facility an" lan" (ill pass to Bohl at termination of the lease. A partial amorti!ation sche"ule for this lease is as follo(s ayments 7nterest Amorti!ation Balance Ian. 2@ 2++% H4++@+++.++ ec. 31@ 2++% H#5@+)&.13 H4+@+++.++ H25@+)&.13 3%4@)+1.&% ec. 31@ 2++& #5@+)&.13 3%@4)+.1) 2%@#+%.)4 34%@2)3.)3 ec. 31@ 2++) #5@+)&.13 34@%2).3) 3+@3#&.%4 31#@)25.1)
Accounting for $eases
21 - 1=
%).
From the ie(point of the lessor@ (hat type of lease is inole" a'oeE a. ales-type lease '. ale-lease'ac: c. irect-financing lease ". ;perating lease
&+.
Dhat is the "iscount rate implicit in the amorti!ation sche"ule presente" a'oeE a. 12 '. 1+ c. & ". #
&1.
The total lease-relate" expenses recogni!e" 'y the lessee "uring 2++& is (hich of the follo(ingE <oun"e" to the nearest "ollar.= a. H#4@+++ '. H#5@+)& c. H%3@4)+ ". H#1@4)+
&2.
Dhat is the amount of the lessee8s lia'ility to the lessor after the ecem'er 31@ 2++) paymentE <oun"e" to the nearest "ollar.= a. H4++@+++ '. H3%4@)+2 c. H34%@2)4 ". H31#@)25
9&3.
The total lease-relate" income recogni!e" 'y the lessee "uring 2++& is (hich of the follo(ingE a. H -+'. H2@##% c. H4@+++ ". H4+@+++
9&4.
;n Iune 3+@ 2++&@ Colt sol" euipment to an unaffiliate" company for H%++@+++. The euipment ha" a 'oo: alue of H#3+@+++ an" a remaining useful life of 1+ years. That same "ay@ Colt lease" 'ac: the euipment at H%@+++ per month for 5 years (ith no option to rene( the lease or repurchase the euipment. Colt8s rent expense for this euipment for the year en"e" ecem'er 31@ 2++&@ shoul" 'e a. H&4@+++. '. H42@+++. c. H35@+++. ". H2&@+++.
$ult#ple C,o#ce Answes —Co(putat#onal Ite(
4%. 4&. 4). 5+. 51. 52.
Ans
' c c " a c
Ite(
53. 54. 55. 5#. 5%. 5&.
Ans!
c " c c a '
Ite(
5). #+. #1. #2. #3. #4.
Ans!
" c c " ' '
Ite(
#5. ##. #%. #&. #). %+.
Ans!
c a c " a "
Ite(
%1. %2. %3. %4. %5. %#.
Ans!
a ' c c c a
Ite(
%%. %&. %). &+. &1. &2.
Ans!
Ite(
Ans!
' c c ' " "
9&3. 9&4.
' '
21 - 2?
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
Future Malue of ;r"inary Annuity of 1 erio" 1 2 3 4 5 # % & ) 1+
5 1.+++++ 2.+5+++ 3.1525+ 4.31+13 5.525#3 #.&+1)1 &.142+1 ).54)11 11.+2#5# 12.5%%&)
# 1.+++++ 2.+#+++ 3.1&3#+ 4.3%4#2 5.#3%+) #.)%532 &.3)3&4 ).&)%4% 11.4)132 13.1&+%)
& 1.+++++ 2.+&+++ 3.24#4+ 4.5+#11 5.&###+ %.335)2 &.)22&+ 1+.#3##3 12.4&%5# 14.4#
1+ 1.+++++ 2.1++++ 3.31+++ 4.#41++ #.1+51+ %.%15#1 ).4&%1% 11.435&) 13.5%)4& 15.)3%43
12 1.+++++ 2.12+++ 3.3%44+ 4.%%)33 #.352&5 &.1151) 1+.+&)+1 12.2))#) 14.%%5## 1%.54&%4
resent Malue of an ;r"inary Annuity of 1 erio" 1 2 3 4 5 # % & ) 1+
5 .)523& 1.&5)41 2.%2325 3.545)5 4.32)4& 5.+%5#) 5.%% #.4#321 %.1+%&2 %.%21%3
# .)434+ 1.&333) 2.#%3+1 3.4#511 4.2123# 4.)1%32 5.5&23& #.2+)%) #.&+1#) %.3#++)
& .)25)3 1.%&32# 2.5%%1+ 3.31213 3.))2%1 4.#22&& 5.2+#3% 5.%4##4 #.24#&) #.%1++&
1+ .)+)+) 1.%3554 2.4&#&5 3.1#)&# 3.%)+%) 4.3552# 4.&#&42 5.334)3 5.%5)+2 #.1445%
12 .&)2&# 1.#)++5 2.4+1&3 3.+3%35 3.#+4%& 4.11141 4.5#3%# 4.)#%#4 5.32&25 5.#5+22
$ULTIPLE CHOICE—CPA A)apte) &5.
$ease A "oes not contain a 'argain purchase option@ 'ut the lease term is eual to )+ percent of the estimate" economic life of the lease" property. $ease B "oes not transfer o(nership of the property to the lessee 'y the en" of the lease term@ 'ut the lease term is eual to %5 percent of the estimate" economic life of the lease" property. Ko( shoul" the lessee classify these leasesE $ease A $ease B a. ;perating lease Capital lease '. ;perating lease ;perating lease c. Capital lease Capital lease ". Capital lease ;perating lease
&#.
;n ecem'er 31@ 2++&@ en"e!@ 7nc. lease" machinery (ith a fair alue of H&4+@+++ from Cey entals Co. The agreement is a six-year noncancela'le lease reuiring annual payments of H1#+@+++ 'eginning ecem'er 31@ 2++&. The lease is appropriately accounte" for 'y en"e! as a capital lease. en"e!8s incremental 'orro(ing rate is 11. en"e! :no(s the interest rate implicit in the lease payments is 1+. The present alue of an annuity "ue of 1 for # years at 1+ is 4.%)+&. The present alue of an annuity "ue of 1 for # years at 11 is 4.#)5).
Accounting for $eases
21 - 21
7n its ecem'er 31@ 2++& 'alance sheet@ en"e! shoul" report a lease lia'ility of a. H#+#@52&. '. H#&+@+++. c. H%51@344. ". H%##@52&. &%.
;n ecem'er 31@ 2++%@ atten Co. lease" a machine from Bass@ 7nc. for a fie-year perio". ual annual payments un"er the lease are H#3+@+++
&&.
A lessee ha" a ten-year capital lease reuiring eual annual payments. The re"uction of the lease lia'ility in year 2 shoul" eual a. the current lia'ility sho(n for the lease at the en" of year 1. '. the current lia'ility sho(n for the lease at the en" of year 2. c. the re"uction of the lease lia'ility in year 1. ". one-tenth of the original lease lia'ility.
se the follo(ing information for uestions &) an" )+. ;n Ianuary 2@ 2++&@ artine!@ 7nc. signe" a ten-year noncancela'le lease for a heay "uty "rill press. The lease stipulate" annual payments of H15+@+++ starting at the en" of the first year@ (ith title passing to artine! at the expiration of the lease. artine! treate" this transaction as a capital lease. The "rill press has an estimate" useful life of 15 years@ (ith no salage alue. artine! uses straight-line "epreciation for all of its plant assets. Aggregate lease payments (ere "etermine" to hae a present alue of H)++@+++@ 'ase" on implicit interest of 1+. &).
7n its 2++& income statement@ (hat amount of interest expense shoul" artine! report from this lease transactionE a. H+ '. H5#@25+ c. H%5@+++ ". H)+@+++
)+.
7n its 2++& income statement@ (hat amount of "epreciation expense shoul" artine! report from this lease transactionE a. H15+@+++ '. H1++@+++ c. H)+@+++ ". H#+@+++
21 - 22
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
)1.
7n a lease that is recor"e" as a sales-type lease 'y the lessor@ interest reenue a. shoul" 'e recogni!e" in full as reenue at the lease8s inception. '. shoul" 'e recogni!e" oer the perio" of the lease using the straight-line metho". c. shoul" 'e recogni!e" oer the perio" of the lease using the effectie interest metho". ". "oes not arise.
)2.
Castro Co. manufactures euipment that is sol" or lease". ;n ecem'er 31@ 2++&@ Castro lease" euipment to rmler for a fie-year perio" en"ing ecem'er 31@ 2+13@ at (hich "ate o(nership of the lease" asset (ill 'e transferre" to rmler. ual payments un"er the lease are H22+@+++
9)3.
Carey sol" its hea"uarters 'uil"ing at a gain@ an" simultaneously lease" 'ac: the 'uil"ing. The lease (as reporte" as a capital lease. At the time of the sale@ the gain shoul" 'e reporte" as a. operating income. '. an extraor"inary item@ net of income tax. c. a separate component of stoc:hol"ers8 euity. ". a "eferre" gain.
9)4.
;n ecem'er 31@ 2++&@ ein Corp. sol" a machine to yan an" simultaneously lease" it 'ac: for one year. ertinent information at this "ate follo(s ales price Carrying amount resent alue of reasona'le lease rentals
H)++@+++ &25@+++ &5@+++ 12 years
7n ein*s ecem'er 31@ 2++& 'alance sheet@ the "eferre" profit from the sale of this machine shoul" 'e a. H&5@+++. '. H%5@+++. c. H1+@+++. ". H+.
$ult#ple C,o#ce Answes —CPA A)apte) Ite(
&5. &#.
Ans!
c a
Ite(
&%. &&.
Ans!
" a
Ite(
&). )+.
Ans!
" "
Ite(
)1. )2.
Ans!
c a
Ite(
9)3. 9)4.
Ans!
" "
Accounting for $eases
"ERIATIONS — Co(putat#onal No! Answe
"e#8at#on H4)5@+++ 1 P ?= H)4@125.
4%.
'
H)+@+++ O
4&.
c
H#%1@++& P .+& H53@#&1@ H#%1@++& Q 15 H44@%34.
4).
c
H3@+++@+++ Q #.1445% H4&&@23# <M of ;r"inary Annuity Ta'le=.
5+.
"
H4&&@23# O H1+@+++ H4)&@23%.
51.
a
Conceptual@ FM excee"s cost.
52.
c
Conceptual.
53.
c
H3@+++@+++ Q 1+ H3++@+++.
54.
"
&01+ .& R %5 of economic life.
55.
c
5#.
c
H1@1%3@#&5 S H2++@+++ H)%3@#&5 P .1+ H)%@3#) H)%3@#&5 S
5%.
a
5&.
'
H15&@4)3 S
5).
"
H&&+@2#4 S H15+@+++ H%3+@2#4.
#+.
c
H22%@44& P .1+ H22@%45J
#1.
c
H22%@44& S
#2.
"
#3.
'
H155@213 P 2.4&#&5 H3&5@))1J H3&5@))1 ???? )# R )+. H4++@+++
#4.
'
Conceptual.
#5.
c
H4++@+++ S H155@213 S
##.
a
Fails to meet ,roup 77 reuirements.
#%.
c
Fair alue H4++@+++.
21 - 20
21 - 23
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
"ERIATIONS — Co(putat#onal cont!. No! Answe #&. "
"e#8at#on Conceptual.
#).
a
ele nea" Luir:
%+.
"
H%2+@+++.
%1.
a
H%2+@+++ S H#4@+++ S H3#+@+++ H2)#@+++.
%2.
'
H4++@+++ S
%3.
c
H&@&++ S H1#@+++
%4.
c
%5.
c
H5#+@+++ S H4)#@+++ H#4@+++J
%#.
a
H4@5++@+++ 1 ????? P ? H225@+++. 1+ 2
%%.
'
H4@5++@+++ S H3@)++@+++ H#++@+++.
%&.
c
H1@@&%5 S H1@#5+@+++ H211@&%5.
%).
c
Conceptual.
&+.
'
H4+@+++ H4++@+++ ???? 1+ or ????? #.144#9 H4++@+++ H#5@+)&.13 9#.144# M factor of or"inary annuity of H1 for 1+ years at 1+.
&1.
"
&2.
"
H31#@)25 <ee amorti!ation ta'le.=
9&3.
'
9&4.
'
H%@+++ P # H42@+++.
Accounting for $eases
21 - 29
"ERIATIONS — CPA A)apte) No! Answe &5. c
"e#8at#on Conceptual.
&#.
a
&%.
"
H2@5+2@+++ S H#3+@+++ O H3+@+++ H1@)+2@+++ <2++%=. H1@)+2@+++ S H#++@+++ S
&&.
a
Conceptual.
&).
"
H)++@+++ P .1+ H)+@+++.
)+.
"
H)++@+++ Q 15 H#+@+++.
)1.
c
Conceptual.
)2.
a
H%%+@+++ S H#++@+++ H1%+@+++.
9)3.
"
Conceptual.
9)4.
"
H&5@+++ ???? ).44@ V 1+ of FM of asset H)++@+++
∴
it is a minor lease'ac:.
E/ERCISES E@! 21-=9?Capital lease <ssay=.
xplain the proce"ures use" 'y the lessee to account for a capital lease. Solut#on 21-=9
Dhen the capital lease metho" is use"@ the lessee treats the lease transactions as if the asset (ere 'eing purchase". The asset an" lia'ility are recor"e" at the lo(er of <1= the present alue of the minimum lease payments
21 - 2:
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
E@! 21-=:?Capital lease amorti!ation an" >ournal entries.
Din"om Co. as lessee recor"s a capital lease of machinery on Ianuary 1@ 2++&. The seen annual lease payments of H35+@+++ are ma"e at the en" of each year. The present alue of the lease payments at 1+ is H1@%+4@+++. Din"om uses the effectie-interest metho" of amorti!ation an" sum-of-the-years8-"igits "epreciation
ournal entries for 2++&.
Solut#on 21-=:
Annual ayments H35+@+++ 35+@+++
1+ 7nterest H1%+@4++ 152@44+
e"uction ;f $ia'ility H1%)@#++ 1)%@5#+
$ease $ia'ility H1@%+4@+++ 1@524@4++ 1@32#@&4+
$ease" achinery........................................................................ 1@%+4@+++ $ease $ia'ility................................................................... 7nterest xpense.......................................................................... $ease $ia'ility............................................................................... Cash.................................................................................
1%+@4++ 1%)@#++
epreciation xpense <%02& P H1@%+4@+++=.................................. Accumulate" epreciation ...............................................
42#@+++
1@%+4@+++
35+@+++ 42#@+++
E@! 21-=;?;perating lease.
6ir'y Co. purchase" a machine on Ianuary 1@ 2++&@ for H1@+++@+++ for the express purpose of leasing it. The machine is expecte" to hae a fie-year life@ no salage alue@ an" 'e "epreciate" on a straight-line monthly 'asis. ;n April 1@ 2++&@ un"er a cancela'le lease@ 6ir'y lease" the machine to Karley Company for H3++@+++ a year for a four-year perio" en"ing arch 31@ 2+12. 6ir'y incurre" total maintenance an" other relate" costs un"er the proisions of the lease of H15@+++ relating to the year en"e" ecem'er 31@ 2++&. Karley pai" H3++@+++ to 6ir'y on April 1@ 2++&. Instuct#ons Assume the operating metho" is appropriate for parts
n"er the operating metho"@ (hat shoul" 'e the income 'efore income taxes "erie" 'y 6ir'y Co. from this lease for the year en"e" ecem'er 31@ 2++&E Dhat shoul" 'e the amount of rent expense incurre" 'y Karley from this lease for the year en"e" ecem'er 31@ 2++&E
Accounting for $eases
21 - 2;
Solut#on 21-=;
<'=
eenue 4010+&?120310+&
H225@+++ H15+@+++ 15@+++
1#5@+++ H #+@+++
ent expense@ 4010+&?120310+&
E@! 21-=
Dhat are the criteria that must 'e satisfie" for a lessor to classify a lease as a "irect-financing or sales-type leaseE Solut#on 21-=<
7n or"er for a lessor to classify a lease as a "irect-financing or a sales-type lease@ the lease at the "ate of inception must satisfy one or more of the follo(ing ,roup 7 criteria
E@! 21-==?irect-financing lease
xplain the proce"ures use" to account for a "irect-financing lease. Solut#on 21-==
The lessor recor"s the present alue of the minimum lease payments
21 - 2<
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
E@! 21-1?? ?$essor accounting?sales-type lease.
iper Corp. is a manufacturer of truc: trailers. ;n Ianuary 1@ 2++&@ iper Corp. leases ten trailers to unyan Company un"er a six-year noncancela'le lease agreement. The follo(ing information a'out the lease an" the trailers is proi"e" 1.
ual annual payments that are "ue on ecem'er 31 each year proi"e iper Corp. (ith an & return on net inestment
2.
Titles to the trailers pass to unyan at the en" of the lease.
3.
The fair alue of each trailer is H5+@+++. The cost of each trailer to iper Corp. is H45@+++. ach trailer has an expecte" useful life of nine years.
4.
Collecti'ility of the lease payments is reasona'ly pre"icta'le an" there are no important uncertainties surroun"ing the amount of costs yet to 'e incurre" 'y iper Corp.
Instuct#ons
Dhat type of lease is this for the lessorE iscuss. Calculate the annual lease payment. <oun" to nearest "ollar.= repare a lease amorti!ation sche"ule for iper Corp. for the first three years. repare the >ournal entries for the lessor for 2++& an" 2++) to recor" the lease agreement@ the receipt of the lease rentals@ an" the recognition of income
Solut#on 21-1??
7t is a sales-type lease to the lessor@ iper Corp. iper8s
<'=
$ease Amorti!ation che"ule <$essor=
ate 1010+& 120310+& 120310+) 1203101+ <"=
Annual $ease ental
7nterest on $ease eceia'le
$ease eceia'le ecoery
H1+&@15& 1+&@15& 1+&@15&
H4+@+++ 34@54% 2&@#5&
H#&@15& %3@#11 %)@5++
Ianuary 1@ 2++& $ease eceia'le......................................................................... Cost of ,oo"s ol"...................................................................... ales eenue................................................................. 7nentory...........................................................................
$ease eceia'le H5++@+++ 431@&42 35&@231 2%&@%31 5++@+++ 45+@+++ 5++@+++ 45+@+++
Accounting for $eases
21 - 2=
Solut#on 21-1??
ecem'er 31@ 2++& Cash............................................................................................. $ease eceia'le............................................................. 7nterest eenue.............................................................. ecem'er 31@ 2++) Cash............................................................................................. $ease eceia'le............................................................. 7nterest eenue..............................................................
1+&@15& #&@15& 4+@+++ 1+&@15& %3@#11 34@54%
>E@! 21-1?1 ?$essee an" lessor accounting
;n Ianuary 1@ 2++&@ Kartig Company sells lan" to ;rti! Corporation for H#@+++@+++@ an" imme"iately leases the lan" 'ac:. The follo(ing information relates to this transaction 1. The term of the noncancela'le lease is 2+ years an" the title transfers to Kartig Company at the en" of the lease term. 2. The lan" has a cost 'asis of H5@+4+@+++ to Kartig. 3. The lease agreement calls for eual rental payments of H#11@112 at the en" of each year. 4. The lan" has a fair mar:et alue of H#@+++@+++ on Ianuary 1@ 2++&. 5. The incremental 'orro(ing rate of Kartig Company is 1+. Kartig is a(are that ;rti! Corporation set the annual rentals to ensure a rate of return of &. #. Kartig Company pays all executory costs (hich total H255@+++ in 2++&. %. Collecti'ility of the rentals is reasona'ly pre"icta'le@ an" there are no important uncertainties surroun"ing the costs yet to 'e incurre" 'y the lessor. Instuct#ons
repare the >ournal entries for the entire year 2++& on the 'oo:s of Kartig Company to reflect the a'oe sale an" lease transactions ournal entries for the entire year 2++& on the 'oo:s of ;rti! Corporation to reflect the a'oe purchase an" lease transactions.
>Solut#on 21-1?1
Kartig Company <$essee= Ianuary 1@ 2++& Cash............................................................................................. #@+++@+++ $an".................................................................................. nearne" rofit on ale-$ease'ac:.................................
5@+4+@+++ )#+@+++
$ease" $an" n"er Capital $eases............................................. #@+++@+++ $ease $ia'ility...................................................................
#@+++@+++
21 - 0?
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
>Solut#on 21-1?1
Throughout 2++& xecutory Costs <7nsurance an" Taxes=....................................... Accounts aya'le an" Cash.............................................
255@+++
ecem'er 31@ 2++& nearne" rofit on ale-$ease'ac:............................................. eenue from ale-$ease'ac:
4&@+++
7nterest xpense.......................................................................... $ease $ia'ility............................................................................... Cash.................................................................................
255@+++
4&@+++ 4&+@+++ 131@112 #11@112
artial $ease Amorti!ation che"ule ate 1010+& 120310+& <'=
Annual $ease ayment
7nterest &
e"uction of $ease ;'ligation
H#11@112
H4&+@+++
H131@112
Balance H#@+++@+++ 5@&#&@&&&
;rti! Corporation <$essor= Ianuary 1@ 2++& $an"...................................................................................... ....... #@+++@+++ Cash.................................................................................
#@+++@+++
$ease eceia'le......................................................................... #@+++@+++ $an"..................................................................................
#@+++@+++
ecem'er 31@ 2++& Cash............................................................................................. $ease eceia'le............................................................. 7nterest eenue..............................................................
#11@112 131@112 4&+@+++
>E@! 21-1?2 ?ale-lease'ac:.
;n Ianuary 1@ 2++&@ ;(ings Co. sells machinery to A'er Corp. at its fair alue of H4&+@+++ an" leases it 'ac:. The machinery ha" a carrying alue of H42+@+++@ the lease is for 1+ years an" the implicit rate is 1+. The lease payments of H%1@+++ start on Ianuary 1@ 2++&. ;(ings uses straight-line "epreciation an" there is no resi"ual alue. Instuct#ons
repare all of ;(ings8s entries for 2++&. repare all of A'er8s entries for 2++&.
Accounting for $eases
21 - 01
>Solut#on 21-1?2
;(ings Co. <$essee= Ianuary 1@ 2++& Cash............................................................................................. 4&+@+++ achinery......................................................................... nearne" rofit on ale-$ease'ac:.................................
42+@+++ #+@+++
$ease" achinery........................................................................ $ease $ia'ility...................................................................
4&+@+++ 4&+@+++
$ease $ia'ility............................................................................... Cash.................................................................................
%1@+++
ecem'er 31@ 2++& epreciation xpense.................................................................. Accumulate" epreciation?Capital $ease.......................
<'=
%1@+++ 4&@+++ 4&@+++
nearne" rofit on ale-$ease'ac:............................................. epreciation xpense.......................................................
#@+++
7nterest xpense 1+ P
4+@)++
A'er Corp. <$essor= Ianuary 1@ 2++& achinery..................................................................................... Cash.................................................................................
#@+++ 4+@)++
4&+@+++ 4&+@+++
$ease eceia'le......................................................................... achinery.........................................................................
4&+@+++
Cash............................................................................................. $ease eceia'le.............................................................
%1@+++
ecem'er 31@ 2++& 7nterest eceia'le....................................................................... 7nterest eenue..............................................................
4&+@+++ %1@+++ 4+@)++ 4+@)++
21 - 02
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
PRO%LE$S P! 21-1?0?$essee accounting?capital lease.
Korton Company@ as lessee@ enters into a lease agreement on Iuly 1@ 2++&@ for euipment. The follo(ing "ata are releant to the lease agreement 1. The term of the noncancela'le lease is 4 years@ (ith no rene(al option. ayments of H422@#&) are "ue on Iune 3+ of each year. 2. The fair alue of the euipment on Iuly 1@ 2++& is H1@4++@+++. The euipment has an economic life of # years (ith no salage alue. 3. Korton "epreciates similar machinery it o(ns on the sum-of-the-years8-"igits 'asis. 4. The lessee pays all executory costs. 5. Korton8s incremental 'orro(ing rate is 1+ per year. The lessee is a(are that the lessor use" an implicit rate of & in computing the lease payments
7n"icate the type of lease Korton Company has entere" into an" (hat accounting treatment is applica'le. repare the >ournal entries on Korton8s 'oo:s that relate to the lease agreement for the follo(ing "ates <oun" all amounts to the nearest "ollar. 7nclu"e a partial amorti!ation sche"ule.= 1. Iuly 1@ 2++&. 2. ecem'er 31@ 2++&. 3. Iune 3+@ 2++). 4. ecem'er 31@ 2++).
Solut#on 21-1?0
Capitali!e" amount H422@#&) P M of an or"inary annuity for 4 perio"s at & H422@#&) P 3.31213 H1@4++@+++ Because the present alue of the lease payments
<'=
1.
2.
Iuly 1@ 2++& $ease" uipment n"er Capital $eases............................... 1@4++@+++ $ease $ia'ility............................................................. ecem'er 31@ 2++& epreciation xpense............................................................. Accumulate" epreciation?Capital $eases
1@4++@+++
2&+@+++ 2&+@+++ 5#@+++ 5#@+++
Accounting for $eases
21 - 00
Solut#on 21-1?0
$ease Amorti!ation che"ule ate %010+& #03+0+) #03+01+ 3.
4.
Annual $ease ayment H422@#&) 422@#&)
7nterest on npai" ;'ligation
e"uction of $ease ;'ligation
H112@+++ &%@145
H31+@#&) 335@544
Iune 3+@ 2++) 7nterest xpense...................................................................... $ease $ia'ility.......................................................................... Cash.............................................................................. <7nterest paya'le entry assume" to hae 'een reerse" 1010+)= ecem'er 31@ 2++) epreciation xpense.............................................................. Accumulate" epreciation?Capital $eases..................
Balance of $ease ;'ligation H1@4++@+++ 1@+&)@311 %53@%#%
112@+++ 31+@#&) 422@#&)
4)+@+++ 4)+@+++
43@5%3 43@5%3
P! 21-1?3?$essee accounting?capital lease.
For'es Company on Ianuary 1@ 2++&@ enters into a fie-year noncancela'le lease@ (ith four rene(al options of one year each@ for euipment haing an estimate" useful life of 1+ years an" a fair alue to the lessor@ Kolt Corp.@ at the inception of the lease of H3@+++@+++. For'es8s incremental 'orro(ing rate is &. For'es uses the straight-line metho" to "epreciate its assets. The lease contains the follo(ing proisions 1. ental payments of H21)@+++ inclu"ing H1)@+++ for property taxes@ paya'le at the 'eginning of each six-month perio". 2. A termination penalty assuring rene(al of the lease for a perio" of four years after expiration of the initial lease term. 3. An option allo(ing the lessor to exten" the lease one year 'eyon" the last rene(al exercise" 'y the lessee. 4. A guarantee 'y For'es Company that Kolt Corp. (ill reali!e H1++@+++ from selling the asset at the expiration of the lease. Ko(eer@ the actual resi"ual alue is expecte" to 'e H#+@+++. Instuct#ons
Dhat :in" of lease is this to For'es CompanyE Dhat shoul" 'e consi"ere" the lease termE Dhat are the minimum lease paymentsE Dhat is the present alue of the minimum lease paymentsE <M factor for annuity "ue of 2+ semi-annual payments at & annual rate@ 14.133)4J M factor for amount "ue in 2+ interest perio"s at & annual rate@ .45#3).= <oun" to nearest "ollar.= Dhat >ournal entries (oul" For'es recor" "uring the first year of the leaseE <7nclu"e an amorti!ation sche"ule through 1010+) an" roun" to the nearest "ollar.=
21 - 03
Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on
Solut#on 21-1?3
This lease is a capital lease to For'es Company 'ecause its term <1+ years?see computation in ' 'elo(= excee"s %5 of the euipment8s estimate" useful life. 7n a""ition@ the present alue
<'=
The lease term is /oncancela'le perio" A""itional perio" for (hich termination penalty assures rene(al erio" coere" 'y lessor extension option
The minimum lease payments are emi-annual rental payments xecutory costs
esi"ual guarantee inimum lease payments The present alue of the minimum lease payments is Factor for present alue of an annuity "ue@ 2+ perio"s@ 4 emi-annual payments@ net of executory costs
14.133)4 H 2++@+++ 2@&2#@%&&
Factor for present alue of H1 "ue in 2+ interest perio"s at 4 .45#3) esi"ual guarantee P 1++@+++ resent alue of lease payments
Ianuary 1@ 2++& $ease" uipment n"er Capital $eases.................................... 2@&%2@42% $ease $ia'ility................................................................... Ianuary 1@ 2++& $eases $ia'ility............................................................................. roperty Taxes............................................................................. Cash.................................................................................
2++@+++ 1)@+++
Iuly 1@ 2++& $ease $ia'ility............................................................................... roperty Taxes ............................................................................ 7nterest xpense .......................................................................... Cash.................................................................................
)3@1+3 1)@+++ 1+#@&)%
ate 7nitial M 1010+& %010+& 1010+)
? 1+#@&)% 1+3@1%3
H2++@+++ )3@1+3 )#@&2%
45@#3) H2@&%2@42%
2@&%2@42%
21)@+++
$ease Amorti!ation che"ule emi-Annual 7nterest e"uction of $ease ayment 4 $ease ;'ligation H2++@+++ 2++@+++ 2++@+++
years years year years
H 21)@+++ <1)@+++= 2++@+++ P 2+ 4@+++@+++ 1++@+++ H4@1++@+++
/um'er of payments oer lease term
<"=
5 4 1 1+
21)@+++
Balance H2@&%2@42% 2@#%2@42% 2@5%)@324 2@4&2@4)%
Accounting for $eases
21 - 09
Solut#on 21-1?3
ecem'er 31@ 2++& epreciation xpense.................................................................. Accumulate" epreciation?Capital $eases..................... 7nterest xpense.......................................................................... 7nterest aya'le ............................................................... 9
2&1@2439 2&1@243 1+3@1%3 1+3@1%3
P! 21-1?9?$essor accounting?"irect-financing lease.
Ien:s@ 7nc. enters into a lease agreement as lessor on Ianuary 1@ 2++&@ to lease an airplane to /ational Airlines. The term of the noncancela'le lease is eight years an" payments are reuire" at the en" of each year. The follo(ing information relates to this agreement 1. /ational Airlines has the option to purchase the airplane for H)@+++@+++ (hen the lease expires at (hich time the fair alue is expecte" to 'e H15@+++@+++. 2. The airplane has a cost of H3&@+++@+++ to Ien:s@ an estimate" useful life of fourteen years@ an" a salage alue of !ero at the en" of that time <"ue to technological o'solescence=. 3. /ational Airlines (ill pay all executory costs relate" to the lease" airplane. 4. Annual year-en" lease payments of H5@%##@425 allo( Ien:s to earn an & return on its inestment. 5. Collecti'ility of the payments is reasona'ly pre"icta'le@ an" there are no important uncertainties surroun"ing the costs yet to 'e incurre" 'y Ien:s. Instuct#ons
Dhat type of lease is thisE iscuss. repare a lease amorti!ation sche"ule for the lessor for the first t(o years <2++&-2++)=. <oun" all amounts to nearest "ollar.= repare the >ournal entries on the 'oo:s of the lessor to recor" the lease agreement@ to reflect payments receie" un"er the lease@ an" to recogni!e income@ for the years 2++& an" 2++).
Solut#on 21-1?9
The lease is a "irect-financing type lease from the lessor8s point of ie( or a capital lease from the lessee8s point of ie(. The lease contains a 'argain purchase option (hich satisfies one of the criteria for classification as a "irect-financing lease. The option to 'uy for H)@+++@+++ at the termination of the lease (hen the asset is expecte" to hae a fair alue of H15@+++@+++ constitutes a 'argain purchase option. A""itionally@ the payments are collecti'le@ an" there are no uncertainties as to future lessor costs.
<'= ate 1010+& 120310+& 120310+)
$essor8s $ease Amorti!ation che"ule Annual 7nterest on $ease eceia'le $ease ental $ease eceia'le ecoery $ease eceia'le H3&@+++@+++ H5@%##@4259 H3@+4+@+++ H2@%2#@425 35@2%3@5%5 5@%##@425 2@&21@&&# 2@)44@53) 32@32)@+3#
9H3&@+++@+++ S
