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Q21-4P_a(3).

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Intermediate Accounting (Kieso)
Found in: Page 1246

Short Answer

Question: (Balance Sheet and Income Statement Disclosure—Lessee) The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.

Inception date

October 1, 2017

Lease term

6 years

Economic life of leased equipment

6 years

Fair value of asset at October 1, 2017

$300,383

Residual value at end of lease term

–0–

Lessor’s implicit rate

10%

Lessee’s incremental borrowing rate

10%

Annual lease payment due at the beginning of each year, beginning with October 1, 2017

$62,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $5,500 per year and are to be paid each October 1, beginning October 1, 2017. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

Date

Annual lease payments/Receipt

Interest (10%)

On Unpaid liability/Receivable

Reduction of Lease Liability?

Receivable

Balance of Lease Liability/Receivable

10/01/17

$300,383

10/01/17

$62,700

$62,700

237,683

10/01/18

$62,700

$23,768

38,932

198,751

10/01/19

$62,700

19,875

42,825

155,926

10/01/20

$62,700

15,593

47,107

108,819

10/01/21

$62,700

10,882

51,818

57,001

10/01/22

$62,700

5,699*

57,001

0

$376,200

$75,817

$300,383

*Rounding error is $1.

Instructions

(a) Assuming the lessee’s accounting period ends on September 30, answer the following questions with respect to this lease agreement.

(3) What items and amounts will appear on the lessee’s income statement for the year ending September 30, 2019?

The depreciation expense is $50,064.

See the step by step solution

Step by Step Solution

Step 1: Meaning of lessee

The person who has the right to use the propertyon lease as specified in the lease agreement is called the lessee. A lessee can use the assets or equipment and pay the rental amount to the lessor.

Step 2: Explaining the item and amounts that appear on the lessee’s income statement for the year ending September 30, 2019

Interest expense

$ 19,875

Lease executory expense

$ 5,500

Depreciation expense

$ 50,064

Working Notes:

Calculation of Depreciation expense

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