Exam 3 Questions with Solutions - Intermediate Financial Accounting II | ACCT 414, Exams of Accounting

Download Exam 3 Questions with Solutions - Intermediate Financial Accounting II | ACCT 414 and more Exams Accounting in PDF only on Docsity! Acct. 414 – Fall 2006 SOLUTION Lease Example #4a On January 1, 2012, Powell Trucking and Cummingham Diesel sign a lease with the following terms: 1. Term: 3 years 2. Payments of $________________ 3. Implicit interest rate (known to lessee) 10% 4. Est. fair value of asset at end of lease $2,500 5. Fair value of asset $130,000 6. Cost of asset $100,000 7. Incremental borrowing rate: 12% 8. First payment due 1/1/12 (at inception) 9. Estimated useful life of asset: 5 years 10. No collection or cost uncertainties for lessor 11. Purchase option at end of lease: $2,500 Determine the payment that the lessor should request: Lease 4a – involves finding the payment that a lessor should charge when they will get the asset back from lessee at end of the lease. The value of the returned asset is called the “unguaranteed residual value” if there is no specific guarantee of the value of the asset. To find the payment – points to remember: a. Use lessor’s implicit rate, b. Must decide whether the lessee will exercise the purchase option (asset is not returned) or if the asset will be returned to the lessor (residual value) Using financial calculator: N=3, i=10%, PV= -130,000 (always FMV and not cost of asset), FV=2,500 (not a BPO but asset will be returned at end of lease since there is no title transfer and no BPO), solve for PMT – annuity due PMT = 46,836 (on calculator) Decision process: 1 No title transfer 2 Purchase option = $2,500 Is this a bargain? NO because it is only projected to be worth $2500 at end of lease 3 LT = 3/5 = 60% of economic life 4 90% of FMV = $117,000. Find PVMLP – lessee and lessor use same interest rate since 10% is less than 12%: PVMLP = 128,122 [n=3, i=10%, pmt=46,836, FV=0, annuity due (BGN)] Therefore capital lease for lessee FOR LESSOR – must compute PVMLP since no TT, BPO, and LT=60% N=3, i=10%, PMT=46,836, FV=0(not a bargain), PVMLP=$128,122. No collection or cost uncertainties for lessor (item 10) There is a dealer’s profit (difference between item 5 and item 6 THEREFORE: Sales type lease for lessor [Note that PVMLP is same for lessee and lessor even though they are using the same interest rate – the reason is the unguaranteed residual value of $2,500 which is NEVER part of the MLP even though UnGRV must be considered when the lessor sets the lease payments]