Problem 1

Required:
a) Determine what type of lease this would be for the lessor and calculate the following: (show all work)
The lease is a sales type lease because the lease term exceeds 75% of the asset's estimated
economic life, the collectibility of payments is reasonably assured, and Kingdom Leasing realized
an element of profit sale from the financing charge.
Present value of an annuity due of $1 for 10 periods discounted at 10%
Lease payments
PV of 10 rental payments
Add present value of est. residual value of 30,000 in 10yrs at 10%
Lease receivable at inception

Sales price = $405,541 (present value of the 10 annual lease payments)

or
$417,107 (initial PV) less the PV of the unguaranteed residual
value of $11,566

Cost of sales = $250,000 (cost of asset) - $11,566

= $238,434

b) Prepare Kingdom's amortization schedule for the lease terms.

Lease Amortization Schedule (Annuity due basis)
(A)

Beginning of Year
Initial PV
1
2
3
4
5
6
7
8
9
10
End of 10

Annual Lease Pmt

plus res. Value
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$20,000
$600,000

(B)
=(D) x 10%
Interest (10%)

(C)
=(A) - (B)
Reduction of lease
liability

$0
$35,711
$33,282
$30,610
$27,671
$24,438
$20,882
$16,970
$12,667
$7,934
$2,727
$210,164

c) Prepare all the journal entries for Kingdom for 2012. Assume a calendar year fiscal year.

$60,000
$24,289
$26,718
$29,390
$32,329
$35,562
$39,118
$43,030
$47,333
$52,066
$17,273
$389,836

1-Jan-12
Lease Receivable
Cost of Goods Sold
Sales Revenue
Inventory

417,107
238,434
405,541
250,000

Selling Expense
Cash

6,500
6,500

Cash
Lease Receivable

60,000
60,000

31-Dec-12
Interest receivable
Interest revenue

35,711
35,711

Problem 2
Required:
a) Determine what type of lease this would be for the lessee and calculate the initial obligation.
The lease is a capital lease because the lease term exceeds 75% of the assets
economic life and the present value of the minimum lease payments exceeds
90% of the fair value of the leased asset.
Initial Obligation Under Capital lease:
Minimum lease payments
PV of annuity die for 10 period at 10%

$60,000
6.75902
$405,541

b) Prepare Knight Inc.'s amortization schedule for the lease terms.

(A)

Beginning of Year
Initial PV
1
2
3
4
5
6
7
8
9
10

(B)
=(D) x 10%

Annual Lease Pmt

plus res. Value
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000

Interest (10%)
$0
$34,554
$32,010
$29,210
$26,132
$22,745
$19,019
$14,921
$10,413
$5,454

(C)
=(A) - (B)
Reduction of lease
liability
$60,000
$25,446
$27,990
$30,790
$33,868
$37,255
$40,981
$45,079
$49,587
$54,546

$600,000

$194,458

c) Prepare all the journal entries for Knight Inc. for 2012. Assume a calendar year fiscal year.
1-Jan-12
Leased Equipment
Lease liability
Lease liability
Cash

31-Dec-12
Interest expense
Interest payable
Depreciation expense
Accum Depr.

405,541
405,541
60,000
60,000

34,554
34,554
40,554
40,554

$405,542

asing realized

6.75902
60,000
405,541
11,566
417,107

(D)
=Bal. - (C)

Lease liability
417,107
357,107
332,818
306,099
276,709
244,380
208,818
169,700
126,670
79,337
27,271

(D)
=Bal. - (C)

Lease liability
405,541
345,541
320,095
292,105
261,315
227,447
190,191
149,210
104,131
54,545
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