Analyzing, Interpreting, and Capitalizing Operating Leases

On January 1, 2020, Alexander Mack Adventures Inc. entered into land leases that grant unrestricted access to property in Texas where the company plans to build an RV resort. Lease details follow.

Details of lease contract for land
Least term	15	years
Annual lease payment	$525,000	due at each year end
Upfront fees	$472,500	paid in cash
Cost of debt capital	9%
Lessee responsible for property tax and insurance

The company also leased computer equipment with the following details.

Details of lease contract for computer equipment
Least term	4	years
Annual lease payment	$25,928.00
Upfront fees	$5,250
Cost of debt capital	9%
Lessee has option to purchase equipment for $1 at end of lease

Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces below with two decimal places.

a. Given the lease contract facts, determine the classification for each of the two leases (operating or finance).

b. Determine the amount of the lease liability that Alexander Mack will add to its balance sheet at the inception of each lease.

Amount of land lease liability:

Amount of computer equipment lease liability:

c. What asset will the company add to its balance sheet for each lease?

	Asset name	Amount of land asset
	AnswerRight-of-use assetPPELease assetN/A	Answer

	Asset name	Amount of computer equipment asset
	AnswerRight-of-use assetPPELease assetN/A	Answer

d. For each lease, prepare an amortization schedule that shows the interest and principal portions of each lease payment.

	Land Lease:		Implicit Interest	Lease Amortization	Lease Liability, End
		Lease Liability,	(Lease Liability,	(Lease payment	(Lease Liability, Start
	Year	Start	Start x cost of debt)	Implicit interest)	Lease Amortization)
	1	Answer	Answer	Answer	Answer
	2	Answer	Answer	Answer	Answer
	3	Answer	Answer	Answer	Answer
	4	Answer	Answer	Answer	Answer
	5	Answer	Answer	Answer	Answer
	6	Answer	Answer	Answer	Answer
	7	Answer	Answer	Answer	Answer
	8	Answer	Answer	Answer	Answer
	9	Answer	Answer	Answer	Answer
	10	Answer	Answer	Answer	Answer
	11	Answer	Answer	Answer	Answer
	12	Answer	Answer	Answer	Answer
	13	Answer	Answer	Answer	Answer
	14	Answer	Answer	Answer	Answer
	15	Answer	Answer	Answer	Answer

	Computer equipment lease:		Implicit Interest	Lease Amortization	Lease Liability, End
		Lease Liability,	(Lease Liability,	(Lease payment	(Lease Liability, Start
	Year	Start	Start x cost of debt)	Implicit interest)	Lease Amortization)
	1	Answer	Answer	Answer	Answer
	2	Answer	Answer	Answer	Answer
	3	Answer	Answer	Answer	Answer
	4	Answer	Answer	Answer	Answer

e. What will be the income statement effect of the land lease in 2020?

	Income statement effect of land lease
	Answer

f. What will be the income statement effect of the equipment lease in 2020?

	Income statement effect of equipment lease
	Answer

g. For fiscal 2020, what additional disclosure would Alexander Mack make in its footnotes pertaining to the remaining land lease payments?

		December 2020
	2021	Answer
	2022	Answer
	2023	Answer
	2024	Answer
	2025	Answer
	Thereafter	Answer
	Total undiscounted lease payments
	Imputed interest	Answer
	Total operating lease liability
	Weighted average remaining lease life in years	Answer
	Weighted average discount rate	Answer

h. On December 31, 2021, what amount will be on the balance sheet (asset and liability) for each of the leases?

	Lease	Asset	Liability
	Operating lease: Land	Answer	Answer
	Finance lease: Computer equipment	Answer	Answer