Question
1.Karen Wilson Construction Company is considering the acquisition of a new bulldozer. Big Tools, Inc. has offered to lease the equipment to Wilson Company for
1.Karen Wilson Construction Company is considering the acquisition of a new bulldozer. Big Tools, Inc. has offered to lease the equipment to Wilson Company for all 12 years of its useful life at annual year-end lease payments of $24,500. Each payment will include 9% interest. At the end of 12 years of lease payments, Big Tools, Inc. will allow Wilson to keep the bulldozer.
Required:
a. At what amount should the bulldozer and lease obligation be capitalized on Wilsons balance sheet?
b. Prepare an amortization table for the lease.
c.. Explain why a $24,500 lease payment doesnt cause the amount owed to decrease by $24,500.
d. Explain why Wilsons interest expense gets smaller for each successive year of the lease.
e. Record the entry to capitalize the bulldozer and lease obligation on Wilsons books.
f. Using the format presented in this chapter, record the entry to recognize the first year-end lease payment.
g. What amounts will the B/S, I/S, and SCF show in year three with respect to this bulldozer lease?
h. What ratios are most affected by capital (vs. operating) lease accounting?
i. Optional (advanced): What amounts would be included in the lease footnote in year 3?
j. In class (most lease payments are made at the beginning of the periodhow is this handled in Excel?)
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