Question
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
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 |
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