15-1 Accounting for a Capital Lease Chapter 15 Illustrated Solution: Problem 15-41

15-2 Problem Assumption This is a capitalized lease that qualifies as a sales-type lease for both Dannell Tool Co., the lessee, and Crosby Equipment Co., the lessor.

15-3 Present Value The first task is to compute the present value of the lease payments for Dannell. In this case, Dannell can use Crosby’s implicit interest rate of 10% because it is known and is lower than Dannell’s incremental borrowing rate. Dannell Tool Company

15-4 Present Value The first task is to compute the present value of the lease payments for Dannell. In this case, Dannell can use Crosby’s implicit interest rate of 10% because it is known and is lower than Dannell’s incremental borrowing rate. Present value of an annuity due, $130,000 payment, 5 periods, 10% (refer to Table VI, Present Value of an Annuity Due on p. B-25): PV = $130,000(PVAF) n PV = $130,000(4.1699) n PV = $542,087 n Dannell Tool Company

15-5 Lease Amortization Table

15-6 Jan. 2Leased Equipment………………………542,087 Obligations Under Capital Leases…542,087 To record capital lease. Part 1 — Entries for Lessee for 2002 Dannell Tool Company

15-7 Jan. 2Leased Equipment………………………542,087 Obligations Under Capital Leases…542,087 To record capital lease. Part 1 — Entries for Lessee for 2002 Jan. 2Obligations Under Capital Leases………130,000 Cash……………………………………130,000 To record first lease payment. Dannell Tool Company

15-8 Lease Amortization Table

15-9 Dec. 31Obligations Under Capital Leases………88,791 Interest Expense………………………….41,209 Cash……………………………………130,000 Part 1 — Entries for Lessee for 2002 Dannell Tool Company

15-10 Straight-line amortization with zero salvage value. Amortization expense each year: $542,087  5 = $108,417 Dannell Tool Company Part 1 — Entries for Lessee for 2002 Dec. 31Amortization Expense on Leased Equipment………………………………108,417 Accumulated Amortization on Leased Equipment………………108,417

15-11 Initial direct costs are deferred until the time of sale. They will be included in Cost of Goods Sold. Crosby Equipment Company Part 2 — Entries for Lessor for 2002

15-12 Initial direct costs are deferred until the time of sale. They will be included in Cost of Goods Sold. Crosby Equipment Company Jan. 2Deferred Initial Direct Costs……………...17,000 Cash…………………………………17,000 Part 2 — Entries for Lessor for 2002

15-13 Jan. 2Lease Payments Receivable……………650,000 Unearned Interest Revenue…………107,913 Sales……………………………………542,087 In a sales-type lease, record all expected lease payments as a receivable, with the amount of interest recorded as an unearned revenue. Sales revenue is equal to the capitalized value of the lease using the implicit interest rate. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company

15-14 Jan. 2Lease Payments Receivable……………650,000 Unearned Interest Revenue…………107,913 Sales……………………………………542,087 Jan. 2Cost of Goods Sold………………………357,000 Inventory………………………………340,000 Deferred Initial Direct Costs…………17,000 In a sales-type lease, record all expected lease payments as a receivable, with the amount of interest recorded as an unearned revenue. Sales revenue is equal to the capitalized value of the lease using the implicit interest rate. Part 2 — Entries for Lessor for 2002 Crosby Equipment Company

15-15 No interest is recorded with the first lease payment. Crosby Equipment Company Jan. 2Cash………………………………………..130,000 Lease Payments Receivable…………130,000 Part 2 — Entries for Lessor for 2002

15-16 Lease Amortization Table

15-17 Dec. 31Cash………………………………………130,000 Lease Payments Receivable………130,000 Part 2 — Entries for Lessor for 2002 Crosby Equipment Company

15-18 Dec. 31Cash………………………………………130,000 Lease Payments Receivable………130,000 Dec. 31Unearned Interest Revenue…………….41,209 Interest Revenue………………………41,209 Part 2 — Entries for Lessor for 2002 Crosby Equipment Company

15-19 Dannell Tool Company Balance Sheet (Partial) December 31, 2002 Part 3 — Balance Sheet Assets Land, buildings, and equipment: Leased equipment under capital leases….$542,087 Less: Accumulated amortization on leased equipment under capital leases………… 108,417 Net value………………….$433,670

15-20 Dannell Tool Company Balance Sheet (Partial) December 31, 2002 Part 3 — Balance Sheet Assets Land, buildings, and equipment: Leased equipment under capital leases….$542,087 Less: Accumulated amortization on leased equipment under capital leases………… 108,417 Net value………………….$433,670 Liabilities Current liabilities: Obligations under capital leases—current portion.. Long-term liabilities: Obligations under capital leases, exclusive of $??,??? included in current liabilities………..

15-21 Lease Amortization Table

15-22 Lease Amortization Table

15-23 Dannell Tool Company Balance Sheet (Partial) December 31, 2002 Part 3 — Balance Sheet Assets Land, buildings, and equipment: Leased equipment under capital leases….$542,087 Less: Accumulated amortization on leased equipment under capital leases………… 108,417 Net value………………….$433,670 Liabilities Current liabilities: Obligations under capital leases—current portion..$97,670 Long-term liabilities: Obligations under capital leases, exclusive of $97,670 included in current liabilities………..225,626

15-24 Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Part 3 — Balance Sheet Current assets: Lease payments receivable—current portion…. Less: Unearned interest revenue………………. Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets………….. Less: Unearned interest revenue……………….

15-25 Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Part 3 — Balance Sheet Current assets: Lease payments receivable—current portion….$130,000 Less: Unearned interest revenue………………. Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets…………..$260,000 Less: Unearned interest revenue……………….

15-26 Lease Amortization Table

15-27 Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Part 3 — Balance Sheet Current assets: Lease payments receivable—current portion….$130,000 Less: Unearned interest revenue………………. 32,330$97,670 Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets…………..$260,000 Less: Unearned interest revenue……………….

15-28 Lease Amortization Table

15-29 Crosby Equipment Company Balance Sheet (Partial) December 31, 2002 Part 3 — Balance Sheet Current assets: Lease payments receivable—current portion….$130,000 Less: Unearned interest revenue………………. 32,330$97,670 Noncurrent assets: Lease payments receivable, exclusive of $130,000 included in current assets…………..$260,000 Less: Unearned interest revenue………………. 34,374225,626

15-30 Part 4 — Income Statement Dannell Tool Co. expenses for 2002—leases: Interest expense………………………………………………$ 41,208 Amortization expense………………………………………… 108,417 Total…………………………………………………………….$149,626

15-31 Crosby Equipment Co. revenue for 2002—leases: Gross profit from lease: Sales……………………………………………$542,087 Cost of goods sold……………………………. 357,000$185,087 Interest revenue………………………………… 41,209 Total………………………………………………$226,296 Part 4 — Income Statement

15-32 End of Problem