a. b.

Finance lease lessor's cost < FV Sales Type lease date

c. annual payment PV of annuity due PV of periodic rental payments Bargain-purchase option PV n = 5, i = 10% PV of bargain-purchase option PV of periodic rental payments PV of bargain-purchase option Lease liability d. Leased Equipment Under 1/5/2010 Finance Leases lease Liability lease Liability cash 12/31/2010 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation-Finance Leases 1/1/2011 Interest Payable Interest Expense 1/5/2011 Interest Expense lease Liability Cash 12/31/2011 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation-Finance Leases 18,829.49 4.169865446 78,516.44 9,000.00 0.62092 5,588.29 78,516.44 5,588.29 84,104.73 1/5/2010 1/5/2010 1/5/2011 1/5/2012 1/5/2013 1/5/2014 4/30/2015

84,105 18,829.49 18,829.49 4,351.68 8,410 8,410 4,351.68 4,351.68 84,105

4,351.68 6,527.52 12,301.97 18,829.49 3,531.55 8,410 8,410 3,531.55

Annual Lease Payment 18,829.49 18,829.49 18,829.49 18,829.49 18,829.49 9,000.00

Interst liability

Reduction of Lease Liability 18,829.49 12,301.97 13,532.16 14,885.38 16,373.92 8,181.82

Lease Liability 84,105 65,275.24 52,973.28 39,441.11 24,555.73 8,181.82 0.00

6,527.52 5,297.33 3,944.11 2,455.57 818.18

a.

Entries for Secada are as follows: 1/1/2011 Building Cash 12/31/2011 Cash Rental Revenue Depreciation Expense Accumulated Depreciation-Building Property Tax Expense Insurance Expense Cash 12/31/2011 Rent expense Cash 3000 dari 30000/10 85,000 10,000 220,000 220,000 95,000 3,600,000 220,000 72,000 72,000 220,000 3,600,000

b. c.

Peking Duck Co. (Lessee) 1/1/2011 cash computer unearned profit on sale leaseeback Leased Computer Under Finance leased leased liability Throughout 2011 Executory Costs Account Payable or Cash 12/31/2011 unearned profit on sale leaseeback depreciation expense depreciation expense accumulated depreciation Interest Expense lease liability cash Leasor 1/1/2011 computer cash lease receivable computer 12/31/2011 cash lease receivable interest revenue

510,000 410,000 920,000

510,000 510,000

9,000 9,000

6,000 51,000 51,000 6,000

51,000 32,000 83,000

510,000 510,000 83,000 32,000 51,000 510,000 510,000

a.

Sale-leaseback arrangements are treated as though two transactions were a single financing transaction if the lease qualifies as a finance lease. Any gain or loss on the sale is deferred and amortized over the lease term (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee). In this case, the lease qualifies as a finance lease because the lease term (10 years) is 83% of the remaining economic life of the leased property (12 years). Therefore, at 12/31/11, all of the gain of $160,000 ($560,000 $400,000) would be deferred and amortized over 10 years. Since the sale took place on 12/31/11, there is no amortization for 2011.

b. A sale-leaseback is usually treated as a single financing transaction in which any profit on the sale is deferred and amortized by the seller. In this situation the seller-lessee accounts for the lease as an operating lease with the sale and the leaseback accounted for as separate transactions. Therefore, the full gain ($480,000 $420,000, or $60,000) is recognized. c. The profit on the sale of $99,000 should be deferred and amortized over the lease term. Since the leased asset is being depreciated using the sum-of-the-years depreciation method, the deferred gain should also be reported in the same manner. Therefore, in the first year, $18,000 (10/55 X $99,000) of the gain would be recognized. d.