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Chapter 21 Solutions-Intermediate Accounting

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CHAPTER 21
Accounting for Leases SOLUTIONS TO EXERCISES
EXERCISE 21-1 (15–20 minutes) (a) This is a capital lease to Adams since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 831/3% (5 ÷ 6) of the asset’s economic life. (b) Computation of present value of minimum lease payments: $9,968 X 4.16986* = $41,565 *Present value of an annuity due of 1 for 5 periods at 10%. (c) 1/1/12 Leased Equipment................................... Lease Liability.................................. Lease Liability.......................................... Cash................................................... 12/31/12 Depreciation Expense............................. Accumulated Depreciation— Capital Leases.............................. ($41,565 ÷ 5 = $8,313) Interest Expense...................................... Interest Payable................................ [($41,565 – $9,968) X .10] 1/1/13 Lease Liability.......................................... Interest Payable....................................... Cash................................................... 41,565 41,565 9,968 9,968 8,313 8,313

3,160 3,160

6,808 3,160 9,968

21-1

EXERCISE 21-2 (20–25 minutes) (a) To Brecker, the lessee, this lease is a capital lease because the terms satisfy the following criteria: 1. 2. The lease term is greater than 75% of the economic life of the leased asset; that is, the lease term is 831/3 % (50/60) of the economic life. The present value of the minimum lease payments is greater than 90% of the fair value of the leased asset; that is, the present value of $10,515 (see below) is 96% of the fair value of the leased asset:

(b) The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual value. The present value therefore is: Monthly payment of $250 for 50

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