Lease Problems:

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Lease problems: Homework 1 – due Tu March 6, 2012 Problem 2 On January 1, Year 1, Burton Company leases equipment from Nelson Company for an annual lease rental of $10,000. The lease term is five years and the lessor’s interest rate implicit in the lease is 8%. The lessee’s incremental borrowing rate is 8.25%. The useful life o the equipment is five years, and its estimated residual value equals its removal cost. Annuity tables indicate that the present value of an annual lease rental of $1 (at 8% rate) is $3.993 (three dollars and 99.3 cents). The fair value of leased equipment equals the present value of the rentals. Assume the lease is capitalized. • Prepare accounting entries required by Burton for Year 1. • Compute and illustrate the effect on the income statement for the year ended Dec 31, Year 1, and for the balance sheet as of Dec. 31, Year 1. • Construct a table showing payments of interest and principal made every year for the five year lease term • Construct a table showing expenses charged tot eh income statement for the five year lease term if the equipment is leased. Show a column for amortization, interest and total expenses. • Discuss the income and cash flow implications from this capital lease. Problem 2 On January 1, Borman Company, a lessee, entered into three non-cancellable leases for new equipment identified as J, K and L. None of the three leases transfers ownership of the equipment to Borman at the end of the lease term. For each of the three leases, the present value at the beginning of the lease term of the minimum lease payments excluding that portion of the payments representing executor costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, is 75% of the excess of the fair value of the equipment to the lessor at the inception of the lease over any related investment

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