Koffman and Sons signed a four-year lease for a forklift on January 1, 2017. Annual lease pa yments of $1,437, based on an interest rate of 10%, are to be made every December 31, beginning with December 31, 2017. PV of Annuity of $1 Required: Refer to the table above for present value factors. 1. Assume that the lease is treated as an operating lease. a. Will the value of the forklift appear on Koffman's balance sheet? No b. What account will indicate that lease payments have been made? Lease expense Feedback From the viewpoint of the lessee, there are two types of lease agreements: operating and capital. In an operating lease, the lessee acquires the right to use an asset for a limited period of time. The lessee is not required to record the right to use the property as an asset or to record the obligation for payments as a liability. 2. Assume that the lease is treated as a capital lease or finance lease. a. Identify and analyze the effect when the lease is signed. Activity Investing and Financing Accounts Leased Asset Increase, Lease Obligation Increase Statement(s) Balance Sheet only Feedback Capital leases give the lessee sufficient rights of ownership and control of the property, and are recorded as an asset and depreciated. The present value of the lease payments is recorded as an asset and liability and interest expense is recorded each period based on the remaining obligation times the effective interest rate. 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. 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. Round answers to the nearest whole dollar. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Leased Asset Lease Obligation No Entry No Entry Explain why the value of the leased asset is not recorded at $5,748 ($1,437 x 4). The leased asset should be reported at the present value of the payments which is $ 1,461 not at $ 4,438 Feedback Partially correct b. Identify and analyze the effect of the first lease payment on December 31, 2017. 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. Determine amortization using the effective interest method (see Exhibit 10-7 below for an example). Date Column 1 Lease Payment Column 2 Interest Expense Column 3 Reduction of Obligation Column 4 Lease Obligation 8% Col. 1 - Col. 2 1/1/2017 - - - $15,972 12/31/2017 $4,000 $1,278 $2,722 13,250 12/31/2018 4,000 1,060 2,940 10,310 12/31/2019 4,000 825 3,175 7,135 12/31/2020 4,000 571 3,429 3,706 12/31/2021 4,000 294 3,706 0 Column 1 is the total amount of the payment. To compute the interest expense, (column 2) multiply the lease obligation (column 4) by the interest rate. Column 3, the reduction of obligation is computed by subtracting Column 2 from column 1. Column 4 starts out as the present value of the lease obligation. This column is then reduced by the amount in column 3. 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. Round answers to the nearest whole dollar. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Cash Lease Obligation No Entry Interest Expense Feedback c. Calculate the amount of depreciation expense for the year 2017. Round answer to the nearest whole dollar. $ 1,109 d. At what amount would the lease obligation be presented on the balance sheet as of December 31, 2017? Round answers to the nearest whole dollar. Current liability portion $ 1,104 Long-term liability portion $ 1,873