ACCT 302 Case Assignment Paper: The Deal for a Dozer

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Course
Instructor
Date
Deal for a Dozer
1] How should Sable classify the lease in its accounting records?
Before recording the transaction there is a need to determine whether it is a capital or financial/ operating lease. If the criteria are not met the lease is considered an operating lease. Under this option the lessor merely transfers the right to own the property to the lessee, but the property reverts back to the lessor at the end of the lease term. This implies the lessee expenses and operating expenses. “A lease that meets any one of the criteria in paragraph 842-10-
25-2 is a sales-type lease because the lessor, in effect, transfers control of the underlying asset to the lessee (FASB 373a).Under the capital lease, the lessee benefits from having more ownership rights, and the lease payments then acts as both an asset and liability.
The criteria for determining, whether a lease is financial includes fulfilling any of the four criteria:
The lease life exceeds 75% of the life of the asset; or
The ownership of the asset is transferred to the lessee after the end of the lease ; or
There is an option for the lessee to purchase at a bargain price at the end of the lease term; or
The present value of the minimum lease payments exceeds 90% of the fair value market of the asset.
The capital lease may be the sales type option, direct leasing or leveraged, and this is a capital lease that should be classified as a sales-type lease.
2] Provide the journal entries that Sable should record to:
FACTS
$135,000 $125,000 Term of lease1010Lease payment16,00016,000Rate5.45%6.93 %Guaranteed res. Value 24,000  24,000 Life of asset1515PV$120,891 $112,742 
Present Value (PV) =PVIFA* lease payment
PV 5.45% = 7.5557 *16,000= 120, 891.2
PV, 6.96%= 7.0464*16,000= 112, 742.4
Calculation of the lease interest payment= 6.93 %* $ 125,000= $8,662.50
Initially record the lease.
Net investment in lease$125,000 Cost of sales$87,742  Sales $112,742  Carrying value of asset$100,000 b. Account for the first lease payment made to Sable at the end of year 1.
Cash$16,000 Lease investment$7,337  Interest income$8,663 
3] Prepare the amortization schedule for the entire 10 years.
Relevant calculations
GrossNetUnearnedInvestmentsInvestmentsincomeLease payments$160,000  $112,742$47,258 Unguaranteed residual$24,000 $12,258 $11,742 Total$184,000 $125,000 $59,000 
Amortization Schedule
YearPaymentInterestGrossEndingNet EndingIncomeInvestmentUnearned InvestmentPeriodIncomeBeginningBalance$184,000 $59,000 $125,000 1$16,000 $8,662.50 $168,000 $50,337.50 $117,662.50 2$16,000 $8,154.01 $152,000 $42,183.49 $109,816.51 3$16,000 $7,610.28 $136,000 $34,573.20 $101,426.80 4$16,000 $7,028.88 $120,000 $27,544.33 $92,455.67 5$16,000 $6,407.18 $104,000 $21,137.15 $82,862.85 6$16,000 $5,742.40 $88,000 $15,394.75 $72,605.25 7$16,000 $5,031.54 $72,000 $10,363.21 $61,636.79 8$16,000 $4,271.43 $56,000 $6,091.78 $49,908.22 9$16,000 $3,458.64 $40,000 $2,633.14 $37,366.86 10$16,000 ...