Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 20, Problem 10P

1 (a)

To determine

Compute the lessor’s (Company B) periodic rental receipts.

1 (a)

Expert Solution
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Explanation of Solution

Compute the lessor’s (Company B) periodic rental receipts:

Peridic Rental Receipts = Cost of AssetPVfactor of 4 receipts at 14%                                      = $50,0002.913712                                      = $17,160.24

Therefore, the periodic rental of Company B is $17,160.24.

1 (b)

To determine

Compute the present value of the special property rights under the lease for Company M (Lessee Company).

1 (b)

Expert Solution
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Explanation of Solution

Compute the present value of the special property rights under the lease for Company M:

PVof the special property rights = (Periodic rental payment×PV gactor for 4 payments at 14%)= $17,160.24×2.913712= $50,000 

Therefore, the present value of the special property rights under the lease for Company M is $50,000.

1 (c)

To determine

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company.

1 (c)

Expert Solution
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Explanation of Solution

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company:

Summary Table for 2019
Company M
 Lease payment requiredInterest Expense (14%)Reduction of Lease ObligationBalance of Lease Obligation
January 1,2019   $50,000.00
January 1,2019$17,160.24 $7,000.00$10,160.24 $39,839.76
December 31,2019$17,160.24 $5,577.57 $11,582.67 $28,257.09
January 1,2020$17,160.24 $3,955.99$13,204.25$15,052.84
December 31,2020$17,160.24 $2,107.40$15,052.84$0.00
 
Company B
DateLease payment receivedInterest Revenue (14%)Amount of Net Investment Recovered Net Investment
January 1,2019   $50,000.00
January 1,2019$17,160.24 $7,000.00$10,160.24 $39,839.76
December 31,2019$17,160.24 $5,577.57 $11,582.67 $28,257.09
January 1,2020$17,160.24 $3,955.99$13,204.25$15,052.84
December 31,2020$17,160.24 $2,107.40$15,052.84$0.00

Table (1)

Notes to the above table:

Interest Revenue/Expense = $50,000×14%(Reduction of Lease Obligation/Amount of Net Investment Recovered)= $17,160.24$7,000Balance of Lease Obligation/Net Investment = $50,000$10,160.24

2 (a)

To determine

Compute the lessor’s periodic rental receipts.

2 (a)

Expert Solution
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Explanation of Solution

Compute the lessor’s periodic rental receipts:

Peridic Rental Receipts = Cost of AssetPV factor of 4 receipts in advance at 14%                                      = $50,0003.321632                                      = $15,052.84

Therefore, the lessor’s periodic rental receipts $15,052.84.

2 (b)

To determine

Compute the present value of the special property rights under the lease for Company M (Lessee Company).

2 (b)

Expert Solution
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Explanation of Solution

Compute the present value of the special property rights under the lease for Company M:

PVof the special property rights =(Periodic rental payment×PV factor for 4 payments in advane at 14%)= $15,052.84×3.321632= $50,000

Therefore, present value of the special property rights are $50,000.

2 (c)

To determine

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company

2 (c)

Expert Solution
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Explanation of Solution

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company.

Summary Table for 2019 and 2017
Company M
 DateLease payment required

Interest Expense

(14%)

 Balance of Lease Obligation
January 1,2019   $50,000.00
January 1,2019$15,052.84 $0.00  34,947.16
December 31,2019$0.00 $4,892.60  39,839.76
January 1,2017$15,052.84 0.00 24,786.92
December 31,2017$0.00 3,470.17 28,257.09
January 1,201815,052.840 13,204.25
December 31,201801,848.59 15,052.84
January 1,201915,052.840 0
 
Company B
DateLease payment received

Interest Revenue

(14%)

  Net Investment
January 1,2019   $50,000.00
January 1,2019$15,052.84 $0.00  34,947.16
December 31,2019$0.00 $4,892.60  39,839.76
January 1,2017$15,052.84 0.00 24,786.92
December 31,2017$0.00 3,470.17 28,257.09
January 1,201815,052.840 13,204.25
December 31,201801,848.59 15,052.84
January 1,201915,052.840 0

Table (2)

Notes:

Net Investment= Previous balance-Lease payment received+Interest RevenueInterest Revenue(December 31,2016)= $34,947.16×14%Interest Revenue(December 31,2018) is adjusted for $0.01 for rounding error.

Net Investment(01/01/2016)=Lease ReceivableUnearned Interest: Leases=$60,211.36$10,211.36=$50,000

Net Investment(31/12/2016)=Lease ReceivableUnearned Interest: Leases=$45,158.52$5,318.76= $39,839.76

Net Investment(31/12/2017)=Lease ReceivableUnearned Interest: Leases=$30,105.68$1,848.59=$28,257.09

Net Investment(31/12/2018)=Lease ReceivableUnearned Interest: Leases=$15,052.84$0.00=$15,052.84

Lease Receiveble(01/01/2016)= $15,052.84×4Unearned Interest: Leases(01/01/2016) = $60,211.36-$50,000.00

3

To determine

Prepare the journal entries for the Company B and Company M for the year 2019.

3

Expert Solution
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Explanation of Solution

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare the journal entries for the Company B and Company M for the year 2019:

In the books of Company M:

DateAccounts title and explanationPost Ref.Debit($)Credit($)
January 1,2019Right of use asset 50,000.00 
    Lease liability  50,000.00
 (To record the capital lease at inception)   
  
January 1,2019Lease liability 15,052.84 
    Cash  15,052.84
 (To record the capital lease payment)   
  
December 31,2019Amortization expense  12,500.00 
    Right of use asset  12,500.00
 (To record the depreciation expense)   
  
December 31,2019Interest Expense 4,892.60 
    Lease liability  4,892.60
 (To record the interest expense)   

Table (3)

In the books of Company B:

DateAccounts title and explanationPost Ref.Debit($)Credit($)
January 1,2019Lease Receivable 50,000.00 
    Sales revenue  50,000.00
 (To record the payment of capital lease at inception)   
  
January 1,2019Cost of goods sold 48,000.00 
    Equipment Leased to Others  48,000.00
 (To record the lease receivable in a capital lease)   
  
January 1,2019Cash 15,052.84 
    Lease Receivable  15,052.84
 (To record the receipt lease payment)   
  
December 31,2019Lease Receivable 4,892.60 
    Interest income  4,892.60
 (To recognize the interest revenue for the year)   

Table (4)

4

To determine

Show the way that Company M and Company B report their asset and liability amount on their balance sheet at December 31, 2019

4

Expert Solution
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Explanation of Solution

Balance Sheet:  Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare Company M’s balance sheet as on December 31, 2019:

Company M
Balance Sheet(Partial)
As on December 31, 2019
Particulars Amount ($)
Assets  
Property, Plant and Equipment:  
Right of use asset$50,000.00 
Less: Accumulated depreciation$12,500.00$37,500
   
Liabilities and shareholders’ equity  
Current Liabilities:  
Lease liability $15,052.84
   
Non-Current Liabilities:  
Lease liability $24,786.92

Table (5)

Prepare Company B’s balance sheet as on December 31, 2019:

Company B
Balance Sheet(Partial)
As on December 31, 2019
Particulars Amount ($)
Assets 
Current Assets: 
Lease receivable$15,052.84
Non-Current Assets: 
Lease receivable$24,786.92

Table (6)

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Chapter 20 Solutions

Intermediate Accounting: Reporting And Analysis

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