
Concept explainers
1 (a)
Compute the lessor’s (Company B) periodic rental receipts.
1 (a)

Explanation of Solution
Compute the lessor’s (Company B) periodic rental receipts:
Therefore, the periodic rental of Company B is $17,160.24.
1 (b)
Compute the present value of the special property rights under the lease for Company M (Lessee Company).
1 (b)

Explanation of Solution
Compute the present value of the special property rights under the lease for Company M:
Therefore, the present value of the special property rights under the lease for Company M is $50,000.
1 (c)
Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company.
1 (c)

Explanation of Solution
Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company:
Summary Table for 2016 and 2017 | ||||
Company M | ||||
Lease payment required | Interest Expense (14%) | Reduction of Lease Obligation | Balance of Lease Obligation | |
Company B | ||||
Date | Lease payment received | Interest Revenue (14%) | Amount of Net Investment Recovered | Net Investment |
January 1,2016 | $50,000.00 | |||
January 1,2016 | $17,160.24 | $7,000.00 | $10,160.24 | $39,839.76 |
December 31,2016 | $17,160.24 | $5,577.57 | $11,582.67 | $28,257.09 |
January 1,2017 | $17,160.24 | $3,955.99 | $13,204.25 | $15,052.84 |
December 31,2017 | $17,160.24 | $2,107.40 | $15,052.84 | $0.00 |
Table (1)
Notes to the above table:
2 (a)
Compute the lessor’s periodic rental receipts.
2 (a)

Explanation of Solution
Compute the lessor’s periodic rental receipts:
Therefore, the lessor’s periodic rental receipts $15,052.84.
2 (b)
Compute the present value of the special property rights under the lease for Company M (Lessee Company).
2 (b)

Explanation of Solution
Compute the present value of the special property rights under the lease for Company M:
Therefore, present value of the special property rights are $50,000.
2 (c)
Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company
2 (c)

Explanation of Solution
Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company.
Summary Table for 2016 and 2017 | ||||
Company M | ||||
Lease payment required |
Interest Expense (14%) | Balance of Lease Obligation | ||
Company B | ||||
Date | Lease payment received |
Interest Revenue (14%) | Net Investment | |
January 1,2016 | $50,000.00 | |||
January 1,2016 | $15,052.84 | $0.00 | 34,947.16 | |
December 31,2016 | $0.00 | $4,892.60 | 39,839.76 | |
January 1,2017 | $15,052.84 | 0.00 | 24,786.92 | |
December 31,2017 | $0.00 | 3,470.17 | 28,257.09 | |
January 1,2018 | 15,052.84 | 0 | 13,204.25 | |
December 31,2018 | 0 | 1,848.59 | 15,052.84 | |
January 1,2019 | 15,052.84 | 0 | 0 |
Table (2)
Notes:
3
Prepare the
3

Explanation of Solution
Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and
stockholders’ equities . - Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Prepare the journal entries for the Company B and Company M for the year 2016:
In the books of Company M:
Date | Accounts title and explanation | Post Ref. | Debit($) | Credit($) |
January 1,2016 | Leased Equipment | 50,000.00 | ||
Capital Lease Obligation | 50,000.00 | |||
(To record the capital lease at inception) | ||||
January 1,2016 | Capital Lease Obligation | 15,052.84 | ||
Cash | 15,052.84 | |||
(To record the capital lease payment) | ||||
December 31,2016 | 12,500.00 | |||
| 12,500.00 | |||
(To record the depreciation expense) | ||||
December 31,2016 | Interest Expense | 4,892.60 | ||
Accrued Interest on Capital Lease Obligation | 4,892.60 | |||
(To record the interest expense) |
Table (3)
In the books of Company B:
Date | Accounts title and explanation | Post Ref. | Debit($) | Credit($) |
January 1,2016 | Equipment Leased to Others | 50,000.00 | ||
Cash | 50,000.00 | |||
(To record the payment of capital lease at inception) | ||||
January 1,2016 | Lease Receivable | 60,211.36 | ||
Equipment Leased to Others | 50,000.00 | |||
Unearned Interest: Leases | 10,211.36 | |||
(To record the lease receivable in a capital lease) | ||||
January 1,2016 | Cash | 15,052.84 | ||
Lease Receivable | 15,052.84 | |||
(To record the receipt lease payment) | ||||
December 31,2016 | Unearned Interest: Leases | 4,892.60 | ||
Interest Revenue: Leases | 4,892.60 | |||
(To recognize the interest revenue for the year) |
Table (4)
4
Show the way that Company M and Company B report their asset and liability amount on their
4

Explanation of Solution
Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare Company M’s balance sheet as on December 31, 2016:
Company M | |
Balance Sheet(Partial) | |
As on December 31, 2016 | |
Particulars | Amount ($) |
Assets | |
Property, Plant and Equipment: | |
Leased Equipment $50,000.00 | |
Less, accumulated depreciation $12,500.00 | $37,500 |
Liabilities | |
Current Liabilities: | |
Accrued interest on capital lease obligation | $4,892.60 |
Capital Lease Obligation | $10,160.24 |
Non-Current Liabilities: | |
Capital Lease Obligation | $24,786.92 |
Table (5)
Prepare Company B’s balance sheet as on December 31, 2016:
Company B | |
Balance Sheet(Partial) | |
As on December 31, 2016 | |
Particulars | Amount ($) |
Assets | |
Current Assets: | |
Net Investment in direct financing lease | $15,052.84 |
Non-Current Assets: | |
Net Investment in direct financing lease | $24,786.92 |
Table (6)
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Chapter 20 Solutions
Intermediate Accounting: Reporting and Analysis, 2017 Update
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