Question

For each of the following leases, calculate the depreciation expense for the first month. Use straight line depreciation where appropriate.

	Party	Type of Lease	Reason for Classification	Cost of Asset	Lease Value	Life of Asset	Life of Lease	Interest Rate
1.	Lessor	Operating		20,000	15,000	60	36	6%
2.	Lessor	Capital	90% PVMLP	20,000	18,500	60	36	6%
3.	Lessee	Operating		20,000	15,300	60	36	6%
4.	Lessee	Operating		20,000	16,080	72	48	6%
5.	Lessee	Operating		20,000		60	8	6%
6.	Lessee	Capital	75% Life	20,000	17,200	42	36	6%
7.	Lessee	Capital	90% PVMLP	20,000	18,600	84	60	6%
8.	Lessee	Capital	Bargain Purchase for $116	20,000	20,000	84	60	6%
9.	Lessee	Capital	Transfer at end of lease	20,000	20,000	72	60	6%
10.	Lessee	Capital	75% Life	20,000	17,100	50	40	6%

	Single Sum		Annuity
Months	5%	6%	5%	6%
36	0.8610	0.8356	33.3657	32.8710
48	0.8191	0.7871	43.4230	42.5803
60	0.7792	0.7414	52.9907	51.7256
72	0.7413	0.6983	62.0928	60.3395

Answer 1

1. In Case of Capital Lease , Leased Asset will be Recorded by Lessee at Lower of :

Fair Value of Asset
Present Value of Minimum Lease Payments

Based on above the Value at which Leased Asset is Recognized will be Depreciated over the Life of the Lease not Life of the Asset.

2. In Case of Operating Lease The Lessor Records Depreciation on Asset as usual while the Lessee only Records the Lease Rentals.

Depreciation Expense for 1 Month:

Name of Party	Type of Party                                                (Capital Lease)	Value of Lease Recognized	Life of Lease                                      (In Months)	Depreciation Expense per Month
	(Value of Lease Recognized /Life of Lease)
Party 6	Lessee	17200	36	477.7778
Party 7	Lessee	18600	60	310.0000
Party 9	Lessee	20000	60	333.3333
Party 10	Lessee	17100	40	427.5000

Party 2 : Lessor Capital Lease

There will be No Depreciation Expense in the Books of Lessor in case of Capital Lease as Book Value of Asset is reduced by Value of Leased Asset.
Depreciation Charge will be recorded by Lessee in its Books as shown above.

Party 3 , 4 , 5 : Lessee Operating Lease

There will be No Depreciation Expense in the Books of Lessee in case of Opearting Lease as no Leased Asset is Recognized , Only the Asset's Lease Rental Payment is Recorded in Income Statement.

Party 1 : Lessor Operating Lease

Name of Party	Type of Party                                                (Operating Lease)	Cost of Asset	Life of Assets                                      (In Months)	Depreciation Expense per Month
	(Cost of Asset /Life of Lease)
Party 1	Lessor	20000	60	333.3333

Party 8 : Lesse Capital Lease

Present Value of Minimum Lease Payments + Guaranteed Residual Value
20,000 + (116 * 0.7414)
20,086

Since It is More Than Fair Value of Asset i.e. 20,000 So Leased Asset will be Recognized atthe Lower Value.

Name of Party	Type of Party                                                (Capital Lease)	Value of Lease Recognized	Life of Lease                                      (In Months)	Depreciation Expense per Month
	(Value of Lease Recognized /Life of Lease)
Party 8	Lessee	20000	60	333.3333