Explanation Lease: This is a contractual agreement between two parties, lessor, the owner of the leased asset and the lessee, the person who leases the asset. In this contract, lessor transfers the right to use his assets to lessee for a stipulated period of time, and lessee pays lessor for granting him the right to use the assets. Capital lease: A lease would be classified as capital lease, if any of the following criteria are fulfilled in the lease contract: The lease term would be 75% or more than the useful life of the leased asset. The ownership of the leased asset would be transferred to lessee on the completion of the lease term. Lessee can purchase the leased asset at a price lower than the market value. The total of present value of lease payments would be 90% or more than the market value of the leased asset, at the time, lease contract is signed. If none of the above criteria is met, the lease contract is classified as operating lease . Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset. Amortization: Amortization is a process in which the cost of intangible assets is spread equally over the limited or definite useful life of asset. Prepare depreciation and amortization schedule . Table (1) Computations: Book value of servers on January 1, 2013: Step 1: Create a new spreadsheet, save it, and insert the data related to the lease, as shown in Figure (1). Figure (1) Step 2: Select cell B10 and click the function button ( f x ) to insert PV function. Step 3: Insert all the values “Rate”, “Nper”, “Pmt”, and “Fv” values in the respective fields of the PV function window. Step 4: Click the OK button of the PV function window, to view the present value of lease payments as $1,166,895.38, on the cell B10 as shown in Figure (2).

Complete the depreciation and amortization schedule.

FINANCIAL ACCOUNTING 9TH

16th Edition

ISBN: 9781308821672

Author: Libby

Publisher: MCG/CREATE

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

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Chapter S, Problem 3E

To determine