Textbook Notes (270,000)
CA (160,000)
UTSG (10,000)
Chapter

RSM221H1 Chapter Notes -Amortization Schedule, Income Statement, Capital Budgeting


Department
Rotman Commerce
Course Code
RSM221H1
Professor
Scott Douglass

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EXERCISE 20-4 (20-25 minutes)
(a)
Capitalized amount of the lease:
Excel formula =PV(rate,nper,pmt,fv,type)
Using a financial calculator:
PV $ ? Yields $164,995
I 10.5%
N 8
PMT $ (28,500.00)
FV $ 0
Type 1
(b) This is a capital lease to Xu since the lease term (8 years)
is greater than 75% of the economic life (8 years) of the leased
asset. The lease term is 100% (8 ÷ 8) of the asset’s economic life.
This also meets the requirements of IFRS, under which it is
referred to as a financing lease.
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 $164,995 is 99% of the fair value of
the leased asset: ($164,995 / $166,000 = 99.4%). This
criteria for treating the lease as a capital lease has also
been met. Note that meeting just one of the criteria is
sufficient for classification as a capital lease.
There is no bargain purchase option in this case.

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EXERCISE 20-4 (Continued)
(c) Xu Ltd.
Lease Amortization Schedule
(Lessee)
Dat
e
Annu
al
Lease
Payments
Interest
(10.5%)
on Unpaid
Obligation
Reducti
on
of Lease
Obligation
Bala
nce
of Lease
Obligation
$164,995.00
Jan. 1, 2012 $28,500.00 $28,500.00 136,495.00
Jan. 1, 2013 28,500.00 $14,331.98 14,168.03 122,326.97
Jan. 1, 2014 28,500.00 12,844.33 15,655.67 106,671.30
Jan. 1, 2015 28,500.00 11,200.49 17,299.51 89,371.79
Jan. 1, 2016 28,500.00 9,384.04 19,115.96 70,255.83
Jan. 1, 2017 28,500.00 7,376.86 21,123.14 49,132.70
Jan. 1, 2018 28,500.00 5,158.93 23,341.07 25,791.63
Jan. 1, 2019 28,500.00 2,708.37 25,791.63 (0.00)
$228,000.00 $63,005.00 $164,995.00
(d)
1/1/12 Leased Equipment...................... 164,995
Lease Obligation.................. 164,995
1/1/12 Lease Obligation......................... 28,500
Cash...................................... 28,500
12/31/12 Depreciation Expense................. 20,624
Accumulated Depreciation—
Leased Equipment   ........... 20,624
($164,995 ÷ 8)  

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EXERCISE 20-4 (Continued)
(d) (Continued)
12/31/12 Interest Expense.......................... 14,332
Interest Payable................... 14,332
1/1/13 Interest Payable........................... 14,332
Lease Obligation .......................14,168
Cash...................................... 28,500
12/31/13 Depreciation Expense................. 20,624
Accumulated Depreciation—
Leased Equipment   .......... 20,624
12/31/13 Interest Expense.......................... 12,844
Interest Payable................... 12,844
(e)
Xu Ltd.
Balance sheet (partial)
December 31,
2013 2012
Non-current assets
Property plant and equipment
Leased equipment $164,995 $164,995
Less accumulated depreciation 41,248 _20,624
123,747 144,371
Current liabilities
Interest payable 12,844 14,332
Lease obligation 15,656 14,168
Non-current liabilities
Lease obligation (Note X) 122,327 136,495
Current portion (15,656) (14,168)
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