Leased Assets

Koffman and Sons signed a four-year lease for a forklift on January 1, 2017. Annual lease payments of $1,290, based on an interest rate of 8%, 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

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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 $5,160 ($1,290 x 4). The leased asset should be reported at the present value of the payments which is $ not at $

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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

Partially correct

c. Calculate the amount of depreciation expense for the year 2017. Round answer to the nearest whole dollar. $

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	$
Long-term liability portion	$