Question

E12-5

A,B,C,D,E

On January 2, 2005

cember 31, 2004, assum assuming to 3. EXERCISES, PROBLEMS, AND CASES TO ACCOMPANY FINANCIAL ACCOUNTING December 31, 2004? 2008, the day be et bond liability on December 31, 2008 d. What will be the economic value of the bond on December change in market interest rates? c. How will the bond be presented on the balance sheet on Dec [ What will be the amount of the net bond liability on Dece fore the bond matures? e maturity date of the entry that will be made on January 1, 2009, the matu bond. oder a three-year lease with t value of the lease dered a capital lease, de If the lease is con- E12-5 On lanuary 2, 2005, Noblick Corporation leased equipment under a thre payments of $3,000 on each December 31 of the lease term. The payments at a discount rate of 10% IS $7,460. If the lease is considered preciation expense (straight-line) and interest expense are recognized. If the sidered an operating lease, then rent expense is recognized. Required: What factors must Noblick consider in determining whether the lease is lease or an operating lease? b. What will be the total expense recognized on Noblick's income statement over three years if the lease is considered an operating lease? 6 case: cWhat will be the total expense recognized on Noblick's income statement over the three years if the lease is considered a capital lease? d. Which lease will result in the highest income in each of the three years? Explain. e. Which lease will result in the highest cash flow in each of the three years? Explain. -6 On January 1, 2005, Kasper Corporation leased telephone equipment from Telecommu- nications Company. The lease requires three annual payments of $12,000 on January 1, 2006, 2007, and 2008. The present value of the lease payments at a discount rate of 10% is $32,826. Straight-line depreciation is used on all equipment with no salvage value. Required: a. If the lease is considered an operating lease, compute the total expense that would recognized in 2005. b. If the lease is considered a capital lease, compute the total expense that wou ognized in 2005. Jones Corporation takes out a 30-year. 8.5% fixed-rate mortgage of $121,000 1,2004. The principal and interest payments are $933 per month, Required: ed-rate mortgage of $121,000 on January Complete the following debt payment sch mortgage:

Answer 1

a. Factors to be considered in determining whether the lease is a capital lease or an operating lease:

Capital lease is the lease that transfers substantially all the risks and rewards incident to ownership of an asset. In case of capital lease, the lessee records the leased asset as a fixed asset, depreciation expense for leased asset (over the lease term), liability for the present value of leased asset using discount rate i.e. incremental borrowing rate of lessee's.

In case of operating lease, lessee records each lease payment as operating expense.

b. Total expense recognized under operating lease $3000 every year.

c. If lease considered as capital lease, expense to be recognized over the three years:

Depreciation every year = Present value / lease term = 7460 / 3 = 2487 every year

Interest @ 10% = 7460 * 10% = 746

Difference = 9000 -7460 - 746 = 794 gain on account of lease

d. Finance lease will result in highest income in each of the three years since the transactions are recorded based on present value, depreciation and interest recorded. Total cash outflow $3000 every year.

e. Highest cash flow will be same for both types of lease as the lease payment is $ 3000 every year.