In: Accounting
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.
*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 |
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12/31/17 |
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12/31/18 |
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12/31/19 |
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12/31/20 |
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12/31/21 |
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12/31/22 |
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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 |
___________ ( ) |
___________ ( ) |
|
___________ ( ) |
___________ ( ) |
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a. For interest expense
Activity ________________
Accounts ______________
Statement(s)____________
Balance |
Sheet |
|
Income |
Statement |
|
Assets |
= Liabilities |
+ Stockholders equity |
Revenues |
- Expenses |
= Net Income |
___________ ( ) |
___________ ( ) |
|
___________ ( ) |
___________ ( ) |
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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 |
___________ ( ) |
___________ ( ) |
|
___________ ( ) |
___________ ( ) |
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Kiger manufacturing company
Balance sheet (partial)
December 31, 2018
—————————————
Long term assets:
______________ $______
______________ ______
$______
Current liabilities:
______________ $______
Long term liabilities:
______________ $______
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) |