Question

In: Accounting

Financial statement impact of a lease On January 1, 2017, Kiger Manufacturing company leased a factory...

Financial statement impact of a lease


On January 1, 2017, Kiger Manufacturing company leased a factory machine for six years. Annual payments of $21,980 are to be made every December 31 beginning December 31, 2017. Interest expense is based on the rate of 9%. The present value of the minimum lease payments is $90,600 and has been determined to be greater than 90% of the fair market value of the machine on January 1, 2017. Kiger uses straight-line depreciation on all assets.


  1. Prepare a table to show the six year amortization of the lease obligation. Enter all amounts as positive numbers. Round all amounts to the nearest whole dollar. If your answer is zero enter “0”.


*Note: due to rounding you will have to adjust the interest expense for 12 3122 in order to result in a zero balance for the lease obligation.


Kiger Manufacturing Company

Effective interest method of amortization


Date

Lease Payment

Interest Expense 9%

Reduction of Obligation

Lease obligation

1/1/17





12/31/17





12/31/18





12/31/19





12/31/20





12/31/21





12/31/22







  1. Identify and analyze the effect of the lease transaction on January 1, 2017.

Activity ________________

Accounts ______________

Statement(s)____________


How does this entry affect the accounting equation?

If a financial statement item is not affected select no entry and leave the amount box blank if the effect on a financial statement item is negative, be sure to enter answer with a -.


Balance

Sheet


Income

Statement


Assets

= Liabilities

+ Stockholders equity

Revenues

- Expenses

= Net Income

___________ ( )

___________ ( )


___________ ( )

___________ ( )



  1. Identify and analyze the effect of all transactions on December 31, 2018 (the second year of the lease)

a. For interest expense

Activity ________________

Accounts ______________

Statement(s)____________


Balance

Sheet


Income

Statement


Assets

= Liabilities

+ Stockholders equity

Revenues

- Expenses

= Net Income

___________ ( )

___________ ( )


___________ ( )

___________ ( )


b. For depreciation expense

Activity ________________

Accounts ______________

Statement(s)____________


How does this entry affect the accounting equation? If a financial statement item is not affected, select no entry and leave the amount box blank. If the effect on the financial statement item is negative, a decrease, be sure to answer B answer with a minus sign. Remember, if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. Round your answer to the nearest whole dollar.


Balance

Sheet


Income

Statement


Assets

= Liabilities

+ Stockholders equity

Revenues

- Expenses

= Net Income

___________ ( )

___________ ( )


___________ ( )

___________ ( )



  1. Prepare the balance sheet presentation as of December 31, 2018 for the leased asset and the lease obligation. Round all amounts to the nearest whole dollar.


Kiger manufacturing company

Balance sheet (partial)

December 31, 2018

—————————————

Long term assets:

______________ $______

______________ ______

$______


Current liabilities:

______________ $______


Long term liabilities:

______________ $______






Solutions

Expert Solution

1. Present value of minimum lease payments = Annual lease payments x PVIFA 9%, n=6 = $ 21,980 x [ { 1 - ( 1 / 1.09 ) 6 } / 0.09 = $ 98,600.

Date Lease Payment Interest Expense Reduction of Obligation Lease Obligation
1/1/17 $ 98,600
12/31/17 21,980 8,874 13,106 85,494
12/31/18 21,980 7,694 14,286 71,208
12/31/19 21,980 6,409 15,571 55,637
12/31/20 21,980 5,007 16,973 38,664
12/31/21 21,980 3,480 18,500 20,164
12/31/22 21,980 1,816 20,164 0

2. January 1, 2017:

Assets = Liabilities + Stockholders' Equity Revenues - Expenses = Net Income
$ 98,600 $ 98,600 0 0 0 0

a. For Interest Expense:

Assets = Liabilities + Stockholders' Equity Revenues - Expenses = Net Income
(8,874) (8,874) (8,874) (8,874)

b. For Depreciation Expense:

Assets = Liabilities + Stockholders' Equity Revenues - Expenses = Net Income
(16,433) (16,433) (16,433) (16,433)

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