ACCT-202 Lecture Notes - Lecture 8: Kazoo

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Published on 5 Mar 2020
School
Georgetown University
Department
Accounting
Course
ACCT-202
1
Solution to Sample Lease Problems
1. On January 1, 1997, Buckeye Company leased equipment from Irish, Inc. for 8 years. Buckeye
is required to make 8 payments of $8,000 at the beginning of each year starting on
January 1, 1997. The interest rate is 6%. There is a bargain purchase option (treated as a
guaranteed residual) of $1,000. The equipments economic life is 10 years and its
residual value after 10 years is $0. Irish is a leasing company whose business is simply to
finance leases. Irish does not manufacture or deal in this type of equipment. Buckeye has
a very high credit rating (#1 in the industry as a matter of fact). Therefore, Irish fully
expects to collect the lease payments from Buckeye. Finally, Irish is reasonably certain
about its future cash outflows relating to this lease.
a. What type of lease is this for Buckeye (lessee)? Why?
Financing lease because the lease term is 80% of asset’s life which is more
than 75%.
b. What type of lease is this for Irish (lessor)? Why?
Direct Financing Capital Lease
Financing lease because: (a) the lease term is 80% of asset’s life which is
greater than 75%; (b) reasonably certain of collectability of payments; and
(c) reasonably sure of future cash outflows relating to lease.
Direct financing because Irish is not profiting from the “sale”
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2
c. Make all of Buckeyes required journal entries for 1997 assuming Buckeye
classifies this as a financing lease.
PV = {$8,000, PV of AD, 6%, 8} + {1,000, PV of SCF, 6%, 8}
= $53,286
Date
Account Title
Debit
Credit
1/1/97
Leased Equipment
53,286
Lease Payable
53,286
1/1/97
Lease Payable
8,000
Cash
8,000
12/31/97
Interest Expense
2,717
Interest Payable
2,717
{($53,286 $8,000) x .06}
12/31/97
Lease Payable
5,283
Lease Payable Current
5,283
{$8,000 - $2,717}
12/31/97
Amortization Expense
5,329
Leased Equipment
5,329
{$53,286 / 10}
d. Make all of Irishs required journal entries for 1997 assuming Irish classifies this
as a direct financing lease.
Date
Account Title
Debit
Credit
1/1/97
Lease Receivable
53,286
Equipment
53,286
1/1/97
Cash
8,000
Lease Receivable
8,000
12/31/97
Interest Receivable
2,717
Interest Revenue
2,717
{($53,286 $8,000) x .06}
12/31/97
Lease Receivable Current
5,283
Lease Receivable
5,283
{$8,000 - $2,717}
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Document Summary

Solution to sample lease problems: on january 1, 1997, buckeye company leased equipment from irish, inc. for 8 years. Buckeye is required to make 8 payments of ,000 at the beginning of each year starting on. There is a bargain purchase option (treated as a guaranteed residual) of ,000. The equipment"s economic life is 10 years and its residual value after 10 years is sh. Irish is a leasing company whose business is simply to finance leases. Irish does not manufacture or deal in this type of equipment. Buckeye has a very high credit rating (#1 in the industry as a matter of fact). Therefore, irish fully expects to collect the lease payments from buckeye. Financing lease because: (a) the lease term is 80% of asset"s life which is greater than 75%; (b) reasonably certain of collectability of payments; and (c) reasonably sure of future cash outflows relating to lease.