Question

Accounting Principles Homework Problems Chapter 15 1. Below are three different lease transactions that occurred for Hollman Corporation in 2020. Assume that all lease contracts start on January 1, 2020. In no case does Hollman receive title to the leased properties during or at the end of the lease term. Type of property Yearly rental Lease term Estimated Economic Life Fair value of lease asset Present value of the lease rental payments Bargain purchase option Heath Office Computer Printers $5,000 6 years 7 years $27,500 Lessor Dale Co. Equipment $4,200 4 years 7 years $19,000 Joe's Auto Delivery Van $3,700 2 years 5 years $11,000 $26,000 None $13,000 None $6,400 None Instructions a. Which of the above leases are operating leases and which are capital leases? Explain why! b. How should the lease transaction for Dale Co. be recorded in 2020? c. How should the lease transaction for Heath Office be recorded on January 1, 2020?

Answer 1

To classify a lease transaction as a capital lease if it is non-cancelled and if one or more of the four class standards are met: II. III. The settlement contains that ownership of the asset transfer to the lessee. The settlement contains a deal of purchase choice. The non-cancelled lease term is same to 75% or greater of the predicted economic life of the asset. The existing value of the minimum hire payments is same to or equal to 90% of the price of the asset. IV. Hollman corporation needs to report the Health office lease as a capital lease due to the fact: The lease time period is more than 75% of the predicted economic life of the leased assets, and The existing price of the lease is 90% or equal to market value of the computer. It is noted that one condition need to be met to require capitalization. (6) The lease transaction for Dale Co. is recorded in 2020:

Credit Account Titles Rent Expense Cash Debit $4,200 $4,200 Health office lease is a capital lease. Record joumal entries as follows: Credit Account Titles Lease asset Lease liability Debit $26.000 $26.000