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Name: 19

Problem: P21-4, Balance Sheet and Income Statement


Disclosure - Lessee, File 21p-4
Course: X120C Intermediate Accounting III
Date: Homework #5
Select your name from the pull-down menu; no other input will work. If your name is not on the list or
you can't select it use one of the numbered lines at the end of the list instead. If you use a number
you will need to hand-write your name on the hard copy before you turn it in.

Round all amounts in the homework assignment to the nearest dollar ($1), except percentages.

The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and
McKee Electronics, a lessee, for a computer system.

Inception date: 10/01/07


Lease term: 7 years
Economic life of lease equipment: 7 years
Fair value of asset at October 1, 2007: $214,746
Residual value at end of lease term: $0
Lessor's implicit rate: 11%
Lessee's incremental borrowing rate: 10%
Annual lease payment due at the beginning of each year,
beginning with October 1, 2007: $40,100

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties
surrounding the costs yet to be incurred by the lessor. The lessee assumes
responsibility for all executory costs, which amount to $2,700 per year, and are paid each
October 1, beginning October 1, 2007. (This $2,700 is not included in the rental payment of $40,100.) The
asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used
for all equipment.
The following amortization schedule has been prepared correctly for use by both the lessor and the
lessee in accounting for this lease. The lease is to be accounted for properly for property as a capital
lease by the lessee and as a direct-finance lease by the lessor.

Interest
Reduction of Balance of
(10%) on
Annual lease Lease Lease
Unpaid
Date: Payment / Obligation / Obligation /
Obligation /
Receipt: Net Net
Net
Investment: Investment:
investment:
10/01/07 $214,746
1 10/01/07 $40,100 $40,100 174,646
2 10/01/08 40,100 $17,465 22,635 152,011
3 10/01/09 40,100 15,201 24,899 127,112
4 10/01/10 40,100 12,711 27,389 99,723
5 10/01/11 40,100 9,972 30,128 69,595
6 10/01/12 40,100 6,960 33,140 36,455
7 10/01/13 40,100 3,645 36,455 0
$280,700 $65,954 $214,746

Problem 21-4 Solution, Page 1 of 3, 11/13/2010, 6:04 PM


Name: 19
Problem: P21-4, Balance Sheet and Income Statement
Disclosure - Lessee, File 21p-4
Course: X120C Intermediate Accounting III
Date: Homework #5

Instructions:
(a) Assuming the lessee's accounting period ends on September 30, answer the following questions
with respect to this lease agreement:

(1) What items and amounts will appear on the lessee's income statement for the year ending
September 30, 2008?

Interest expense (See amortization schedule) $17,465


Lease executory expense $2,700
Depreciation expense ($214,746 ÷ 7 = $30,678) $30,678

(2) What items and amounts will appear on the lessee's balance sheet at September 30, 2008?

Current liabilities:
Lease liability $22,635
Interest payable $17,465

Long-term liabilities:
Lease liability $152,011

Property, plant and equipment:


Leased computer under capital lease $214,746
Accumulated depreciation $30,678

(3) What items and amounts will appear on the lessee's income statement for the year ending
September 30, 2009?

Interest expense (See amortization schedule) $15,201


Lease executory expense $2,700
Depreciation expense ($214,746 ÷ 7 = $30,678) $30,678

(4) What items and amounts will appear on the lessee's balance sheet at September 30, 2009?

Current liabilities:
Lease liability $24,899
Interest payable $15,201

Long-term liabilities:
Lease liability $127,112

Property, plant and equipment:


Leased computer under capital lease $214,746

Problem 21-4 Solution, Page 2 of 3, 11/13/2010, 6:04 PM


Name: 19
Problem: P21-4, Balance Sheet and Income Statement
Disclosure - Lessee, File 21p-4
Course: X120C Intermediate Accounting III
Date: Homework #5
Accumulated depreciation $61,356

(5) What items and amounts will appear on the lessee's income statement for the year ending
September 30, 2010?

Interest expense (See amortization schedule) $12,711


Lease executory expense $2,700
Depreciation expense ($214,746 ÷ 7 = $30,678) $30,678

(6) What items and amounts will appear on the lessee's balance sheet at September 30, 2010?

Current liabilities:
Lease liability $27,389
Interest payable $12,711

Long-term liabilities:
Lease liability $99,723

Property, plant and equipment:


Leased computer under capital lease $214,746
Accumulated depreciation $92,034

Problem 21-4 Solution, Page 3 of 3, 11/13/2010, 6:04 PM