Week 4 - Lease Accounting

Week 4 - PROBLEM 1

"Kingdom Leasing Inc. agrees to lease jousting equipment to Knight Inc. on Jan 1, 2012. They agree on the following terms:

1) The normal selling price of the jousting equipment is $325000 and the cost of the asset to Kingdom Leasing Inc. was $250000.

2) Knight will pay all maintenance, insurance and taxes costs directly and annual payments of $60000 on Jan 1 each year.

3) The lease begins on Jan 1, 2012 and payments will be in equal annual installments.

4) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).

5) At the end of the lease, the jousting ring will revert to Kingdom Leasing Inc. and have an unguaranteed residual value of $30000. Their implicit interest rate is 10%.

6) Kingdom Leasing, Inc. Incurred costs of $6500 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable."

Normal Selling Price: $325,000

Cost Of Asset: $250,000

Lease Payment Per Year: $60,000

Unguaranteed Residual Value: $30,000

Interest Rate: 10%

Lease Term (Periods): 10

Estimated Economic Life: 10

a) Determine what type of lease this would be for the lessor and calculate the following: (show all work)

The lease term exceeds 75% of the asset's estimated economic life. In addition, Kingdom Leasing realized a profit. Also, the collection of payments is reasonably assured and there are no further costs to be incurred. As a result, this lease is a sales-type lease.

1) Lease Receivable

Annual Lease Payment $60,000

Present Value Of Annuity Due for 10 periods discounted at 10% 6.75903

Present Value Of 10 Lease Payments [60,000 x 6.75903) $405,542

Estimated Residual Value...