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Razan Alyami
200901948
Intermediate Accounting II
a) 1) Determine for margin bakeries and Harman Co. whether the lease is a
capital or operating lease
There is no transfer of ownership, and no bargain purchase option for the
lease.
Regarding the economic life test, Harman Co. lease term is 20 yrs. And the
estimated economic life is 30 yrs. And that shows that it doesn’t meet the 75%
test.
Finally, to check if the present value of the minimum lease payments equals or
exceeds 90% of the fair market value of the asset, we need to do some
calculations to decide whether the lease is capital or operating lease.
90% of fair market value = fair market value x Rate
= 60,000 x 90% = $54,000
PV of rental payments = rental payments x PV of annuity due for 20 yrs at
12%
= 6000 x 8.36578 = $50,194.68
The present value of the minimum lease payments is less than 90% of the fair
market value. This lease is an operating lease.
2) Record the journal entries for the lessee on January 1, 2004.
Rent Expense
Cash
6.000
6,000
b) 1) Determine for margin bakeries and Mendata Co. whether the lease is a
capital or operating lease
There is no transfer of ownership, and no bargain purchase option for the
lease.
Regarding the economic life test, Mendata Co. lease term is 5 yrs. And the
estimated economic life is 7 yrs. And that shows that it doesn’t meet the 75%
test.
Finally, to check if the present value of the minimum lease payments equals or
exceeds 90% of the fair market value of the asset, we need to do some
calculations to decide whether the lease is capital or operating lease.
90% of fair market value = fair market value x Rate
= 20,000 x 90% = $18,000
PV of rental payments = rental payments x PV of annuity due for 3 yrs at 12%
= 5,582.62 x 2.69005 = $15,017.54
PV guaranteed residual value = 7000 (PV For 3 yrs, 12%) = 7000 (0.71178) =
$4,982.46
PV of minimum lease payments = PV of rental payments + PV of guaranteed
residual value
= 15,017.54 + 4, 982.46 = $20,000
The present value of minimum lease payments is greater than 90% of the fair
market value. The lease is a capital lease.
2) Record the journal entries for the lessee on January 1, 2004.
Leased Asset
20,000
Leased Liability
20,000