Question

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 $5,500 per year and are to be paid each October 1, beginning October 1, 2014. (This $5,500 is not included in the rental payment of $62,700.) 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 as a capital lease by the lessee and as a direct-financing lease by the lessor.
Date
10/01/14 10/01/14 10/01/15 10/01/16 10/01/17 10/01/18 10/01/19
Annual Lease Payment/ Receipt
Interest (10%) on Unpaid Liability/Receivable
$23,768 19,875 15,593 10,882
5,699*
$75,817
Reduction of Lease Liability/Receivable
Balance of Lease Liability/Receivable
$300,383 237,683 198,751 155,926 108,819
57,001 –0–
*Rounding error is $1.
Instructions
$
62,700 62,700 62,700 62,700 62,700 62,700
$
62,700 38,932 42,825 47,107 51,818 57,001
$376,200
$300,383

(Balance Sheet and Income Statement Disclosure—Lessee) The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.
Inception date Lease term Economic life of leased equipment Fair value of asset at October 1, 2014 Residual value at end of lease term Lessor’s implicit rate Lessee’s incremental borrowing rate Annual lease payment due at the beginning of
October 1, 2014 6 years 6 years $300,383 –0– 10% 10%
each year, beginning with October 1, 2014
$62,700

(b) Assuming the lessee’s accounting period ends on December 31, 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
December 31, 2014? (2) What items and amounts will appear on the lessee’s balance sheet at December 31, 2014? (3) What items and amounts will appear on the lessee’s income statement for the year ending
December 31, 2015? (4) What items and amounts will appear on the lessee’s balance sheet at December 31, 2015?

Answer 1

part 1
Interest Expenses	($23768 * 3/12 = $5942)	$5,942
Lease Executory Expenses	($5500 * 3/12 = $1375)	$1,375
Depreciation Expenses	(300383 / 6 = 50064, 50064 *3/12 = $12516	$12,516
part 2
Current Liability
Lease Liability		$38,932
Interest Payable		$5,942
Long Term Liability
Lease Liability		$198,751
Property, Plant & Equipment
leased Equipment	$300,383
Acc. Depreciaation	($12,516)	$287,867
Current Assets
Prepaid Lease Executory Cost	($5500 * 9/12= $4125)	$4,125
part 3
Interest Expenses	[($23768 - $5942) + ($19875* 3/12)]	$22,795
Lease Executory Expenses		$5,500
Depreciation Expenses	(300383 / 6 = 50064)	$50,064
part 4
Current Liability
Lease Liability		$42,825
Interest Payable	($19875 * 3/12 = $4969)	$4,969
Long Term Liability
Lease Liability		$155,926
Property, Plant & Equipment
leased Equipment	$300,383
Acc. Depreciaation	($12516 + $50064 = $62580)	$237,803
Current Assets
Prepaid Lease Executory Cost	($5500 * 9/12= $4125)	$4,125