Project 1 - Leases (amortization tables JEs) by trevorbowman


									ACCT 414 -Fall 2008 Project #1 LEASE AMORTIZATION SCHEDULES & JOURNAL ENTRIES Consider a lease with the following terms: a. b. c. The lessor is Kamiak Equipment. The cost of the equipment is $500,000; the fair market value is estimated to be $600,000. No initial direct costs are incurred by the lessor. The term of the lease is 6 years, with annual rentals of $126,750. The first payment is made at the inception of the lease and subsequent payments are made at one year intervals. The estimated useful life of the equipment is 9 years. The lessee agrees to pay all executory costs (taxes, insurance, maintenance). The lessee has an option to purchase the equipment for $10,000 at the end of the lease. If the option is not exercised, the equipment is returned to the lessor. At the end of the lease, the equipment has an expected fair value of $50,000. There are no cost uncertainties involved in the lease. Kamiak Equipment is concerned about the collectability of the lease payments since Mountain Sports Inc. is a recently established small business. The lessee is Mountain Sports Inc. Its incremental borrowing rate is 12%. The lessee does not know the lessor's implicit interest rate. Inception of the lease: August 1, 2008. Accounting: Both lessor and lessee have fiscal years that coincide with the calendar year and therefore make any necessary accruals on December 31. You may assume that both companies use the straight-line depreciation method with no salvage value.

d. e. f. g. h. i. j.

Required: a) Determine the lessor’s implicit interest rate (not given and not known to the lessee). b) Classify the lease from the perspective of the lessor and lessee under US GAAP – a sentence or three will do. c) Based on what you know so far, how would the lease be classified under IFRS? Another short essay will be fine. d) Construct separate amortization tables for both the lessee and the lessor (even if you think it is an operating lease). e) Prepare the necessary journal entries for the first three years for both the lessee and the lessor, including year-end accruals. The amortization tables must be prepared using Excel. Do NOT try to show the effect of year-end accruals -- look at the examples in the powerpoint slides or other materials. The journal entries may be prepared “by hand” and typed into Excel (if you don’t use formulas, please EXPLAIN computations, for example how did you compute depreciation expense?).

For the essays, you could draft them in Word and then paste into Excel as a “word object” using the “paste special function.” There are other alternatives, of course – just be sure the essays are part of the file and easy to find. For full credit, your spreadsheet must compute the present value of the minimum lease payments using formulas or functions like PV or NPV. You must also use Excel functions to find the implicit interest rate – see template provided on web page. Try for a professional looking project with clearly labeled tabs. PLEASE SUBMIT ELECTRONICALLY IN A SINGLE FILE: (you may use multiple sheets within the file) 1. Two amortization tables (lessor and lessee). On the lessor’s amortization tables, CLEARLY show the implicit interest rate taken to at least two decimal places (e.g., 8.59%) 2. A brief paragraph between amortization tables and journal entries that explains the reasons you classified the lease as operating, capital (lessee) or operating, direct financing or sales-type (lessor) under US GAAP 3. Another brief paragraph explaining the IFRS classification. 4. Lessor journal entries for 2008, 2009 and 2010 for problems 1 and 2 5. Lessee journal entries for 2008, 2009 and 2010 for problems 1 and 2 ASSIGNMENT DUE: Thursday, Sept. 25, 2008 no later than 5:00 PM. Only electronic submissions are accepted for this assignment. Follow the “file protocol” document instructions for naming your file. In other words, be sure the file name includes YOUR name as well as “Proj1.” Send file to my teaching assistant, Joel Cohen with cc to NO LATE ASSIGNMENTS WILL BE ACCEPTED SINCE ASSIGNMENTS WILL BE RETURNED TO STUDENTS AS SOON AS EACH ONE IS GRADED. This is a GROUP assignment but you may do it alone if you prefer. Group size is TWO students. In other words, you may work with ONE other person and put both names on the excel sheet and include both names in the file name of your submission.

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