Koffman and Sons signed a four-year lease for a forklift on January 1, 2017. Annual lease payments of $1,606, based on an interest rate of 6%, are to be made every December 31, beginning with December 31, 2017. PV of Annuity of $1 Required: Refer to the table above for present value factors. 1. Assume that the lease is treated as an operating lease. a. Will the value of the forklift appear on Koffman's balance sheet? b. What account will indicate that lease payments have been made?
Leased Assets
Koffman and Sons signed a four-year lease for a forklift on January 1, 2017. Annual lease payments of $1,606, based on an interest rate of 6%, are to be made every December 31, beginning with December 31, 2017.
PV of Annuity of $1Required:
Refer to the table above for present value factors.
1. Assume that the lease is treated as an operating lease.
a. Will the value of the forklift appear on Koffman's
b. What account will indicate that lease payments have been made?
2. Assume that the lease is treated as a capital lease or finance lease.
a. Identify and analyze the effect when the lease is signed.
Activity |
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Accounts |
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Statement(s) |
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Capital leases give the lessee sufficient rights of ownership and control of the property, and are recorded as an asset and depreciated. The present value of the lease payments is recorded as an asset and liability and interest expense is recorded each period based on the remaining obligation times the effective interest rate.
Identify and analyze the transaction by using the following steps:
1. Determine activity – operating, investing or financing.
2. Determine accounts affected and the amount of increases/decreases.
3. Determine the financial statements affected – balance sheet, income statement.
The
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Round answers to the nearest whole dollar.
Balance Sheet | Income Statement | |||||||||||||
Stockholders' | Net | |||||||||||||
Assets | = | Liabilities | + | Equity | Revenues | – | Expenses | = | Income | |||||
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fill in the blank cd3a41fd9013fef_2 |
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fill in the blank cd3a41fd9013fef_4 | fill in the blank cd3a41fd9013fef_5 |
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fill in the blank cd3a41fd9013fef_7 |
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fill in the blank cd3a41fd9013fef_9 | fill in the blank cd3a41fd9013fef_10 |
Explain why the value of the leased asset is not recorded at $6,424 ($1,606 x 4). The leased asset should be reported at the
of the payments which is $fill in the blank cd3a41fd9013fef_12 not at $fill in the blank cd3a41fd9013fef_13
b. Identify and analyze the effect of the first lease payment on December 31, 2017.
Activity |
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Accounts |
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Statement(s) |
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Identify and analyze the transaction by using the following steps:
1. Determine activity – operating, investing or financing.
2. Determine accounts affected and the amount of increases/decreases.
3. Determine the financial statements affected – balance sheet, income statement.
The accounting equation must balance for each transaction.
Determine amortization using the effective interest method (see Exhibit 10-7 below for an example).
Date | Column 1 Lease Payment |
Column 2 Interest Expense |
Column 3 Reduction of Obligation |
Column 4 Lease Obligation |
8% | Col. 1 - Col. 2 | |||
1/1/2017 | - | - | - | $15,972 |
12/31/2017 | $4,000 | $1,278 | $2,722 | 13,250 |
12/31/2018 | 4,000 | 1,060 | 2,940 | 10,310 |
12/31/2019 | 4,000 | 825 | 3,175 | 7,135 |
12/31/2020 | 4,000 | 571 | 3,429 | 3,706 |
12/31/2021 | 4,000 | 294 | 3,706 | 0 |
Column 1 is the total amount of the payment. To compute the interest expense, (column 2) multiply the lease obligation (column 4) by the interest rate. Column 3, the reduction of obligation is computed by subtracting Column 2 from column 1. Column 4 starts out as the present value of the lease obligation. This column is then reduced by the amount in column 3.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Round answers to the nearest whole dollar.
Balance Sheet | Income Statement | |||||||||||||
Stockholders' | Net | |||||||||||||
Assets | = | Liabilities | + | Equity | Revenues | – | Expenses | = | Income | |||||
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fill in the blank bc903f01b05f000_4 | fill in the blank bc903f01b05f000_5 |
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fill in the blank bc903f01b05f000_7 |
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fill in the blank bc903f01b05f000_9 | fill in the blank bc903f01b05f000_10 |
c. Calculate the amount of
$fill in the blank 6c5c3801307d07a_1
d. At what amount would the lease obligation be presented on the balance sheet as of December 31, 2017? Round answers to the nearest whole dollar.
Current liability portion | $fill in the blank 6c5c3801307d07a_2 |
Long-term liability portion | $fill in the blank 6c5c3801307d07a_3 |
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