Financial Statement Impact of a Lease On January 1, 2017, Muske Trucking Company leased a semitractor and trailer for five years. Annual payments of $28,300 are to be made every December 31 beginning December 31, 2017. Interest expense is based on a rate of 8%. The present value of the minimum lease payments is $112,994 and has been determined to be greater than 90% of the fair market value of the asset on January 1, 2017. Muske uses straight-line depreciation on all assets. Required: 1. Prepare a table to show the five-year amortization of the lease obligation. Enter all amounts as positive numbers. If required, round all calculations and answers to the nearest dollar. *Note: Due to rounding you will have to adjust the interest expense for 12/31/21 to result in a zero balance for the lease obligation. Muske Trucking Company Effective Interest Method of Amortization Date Lease Payment Interest Expense 8% Reduction of Obligation Lease Obligation 1/01/17 $ 12/31/17 $ $ $ 12/31/18 12/31/19 12/31/20 12/31/21 Feedback Use the present value of the minimum lease payments for the beginning of Lease Obligation. Record lease payment. Determine the interest expense. Determine reduction. Subtract the reduction amount from the lease obligation for the new lease obligation. At the end of the term, the lease obligation equals zero. 2. Identify and analyze the effect of the lease transaction on January 1, 2017. Activity Investing and Financing Accounts Leased Truck Increase, Lease Obligation Increase Statement(s) Balance Sheet only Feedback Identify and analyze the transaction by using the following steps: 1. Determine activity operating, investing or financing. 2. Determine accounts affected and the amount of increases/decreases. 3. Determine the financial statements affected balance sheet, income statement. The accounting equation must balance for each transaction. There are two types of leases: operating leases and capital leases. An operating lease does not account for the property as an asset or the obligation for payments as a liability. Capital leases give the lessee sufficient rights of ownership and control of the property, recorded as an asset and depreciated. The present value of the lease payments is recorded as a liability and an asset. Interest expense is recorded each period based on the remaining obligation times the effective interest rate. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Leased Truck Lease Obligation No Entry 0 No Entry 0 0 Feedback Partially correct 3. Identify and analyze the effect of all of the transactions on December 31, 2018 (the second year of the lease). a. For lease payment and interest expense: Activity Operating and Financing Accounts Cash Decrease, Lease Obligation Decrease, Interest Expense Increase Statement(s) Balance Sheet and Income Statement Feedback Identify and analyze the transaction by using the following steps: 1. Determine activity operating, investing or financing. 2. Determine accounts affected and the amount of increases/decreases. 3. Determine the financial statements affected balance sheet, income statement. The accounting equation must balance for each transaction. There are two types of leases: operating leases and capital leases. An operating lease does not account for the property as an asset or the obligation for payments as a liability. Capital leases give the lessee sufficient rights of ownership and control of the property, recorded as an asset and depreciated. The present value of the lease payments is recorded as a liability and an asset. Interest expense is recorded each period based on the remaining obligation times the effective interest rate. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Cash Lease Obligation No Entry 0 Interest Expense Feedback Partially correct b. For Depreciation Expense: Activity Operating Accounts Accumulated Depreciation - Leased Truck Increase, Depreciation Expense Increase Statement(s) Balance Sheet and Income Statement Feedback Identify and analyze the transaction by using the following steps: 1. Determine activity operating, investing or financing. 2. Determine accounts affected and the amount of increases/decreases. 3. Determine the financial statements affected balance sheet, income statement. The accounting equation must balance for each transaction. There are two types of leases: operating leases and capital leases. An operating lease does not account for the property as an asset or the obligation for payments as a liability. Capital leases give the lessee sufficient rights of ownership and control of the property, recorded as an asset and depreciated. The present value of the lease payments is recorded as a liability and an asset. Interest expense is recorded each period based on the remaining obligation times the effective interest rate. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. For depreciation expense: Round your answers to the nearest whole dollar. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Accumulated Depreciation - Leased Truck No Entry 0 No Entry 0 Depreciation Expense - Leased Truck Feedback Partially correct 4. Prepare the balance sheet presentation as of December 31, 2018, for the leased asset and the lease obligation. Muske Trucking Company Balance Sheet (Partial) December 31, 2018 Long-term assets: Leased truck $ Accumulated depreciation $ Current liabilities: Lease Obligation $ Long-term liabilities: Lease Obligation $ Feedback Consider which accounts and the current balances that would be disclosed on the balance sheet. Feedback Partially correct