Monk Company, a dealer in machinery and equipment, leased equipment with a ten-y

Question

Monk Company, a dealer in machinery and equipment, leased equipment with a ten-year remaining useful life to Leland, Inc. on January 1, 2016. This lease was accounted for as a capital lease. The lease is for an eight-year period. The first of eight equal payments of $3,000 is due at signing on January 1, 2016. The equipment will be returned to Monk (the lessor) at the end of the lease term. There is no bargain purchase option and there is no guaranteed residual value. The lessor's implicit rate is 7% and the lessee's incremental borrowing rate is 9% 1. Complete the first three rows of an amortization table for this capital lease: Principal Reduction Ending Balance Interest Beginning Balance Payment Amount Payment Date 2. What amount would Leland record as an asset on January 1, 2016 at the lease signing? 3. What amounts would Leland record as a) interest expense and b) depreciation expense in their income statement for 2016? 4. What amounts would Leland record for a) the leased asset -net of depreciation, b) interest payable, c) the current portion of the lease liability, and d) the noncurrent portion of the lease liability on their balance sheet for the fiscal year ending 12/31/16? 5. Now change the facts a little bit. Assume that the lease contract gives Leland the 2023). This price is very low relative to the expected value of the asset at that point, so exists, the lessee must a) include the bargain purchase option price in their calculation over the asset's remaining useful life (rather than the lease term). Calculate the leased option to purchase the equipment for $1,000 at the end of the lease term (Dec. 31, this would be considered a bargain purchase option. When a bargain purchase option of the present value of future lease payments and b) depreciate the leased equipment asset (net of depreciation) that would be reported on Leland's balance sheet for the fiscal year ending 12/31/16

Explanation / Answer

1.

Value of Asset = 3000 * PVAF for 7 years(1/1.09)^7 = 3000*5.03 = 15090

2. Asset will be recorded at 15090

3. Interest expense will be 0 for 2016 and depreciation will be 15090/8 = 1886.25

4. a)12090-1886.25 = 10203.75 b)1088.1 c)3000 d) 12090

Payment Date Beginning Balance Payment Amount Interest Principal Reduction Ending Balance 1/1/2016 15090 3000 0 3000 12090 1/1/2017 12090 3000 1088.1 1911.9 10178.1 1/1/2018 10178.1 3000 916.029 2083.971 8094.129

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