CPAnet Forum: F5 capital lease problem

Active Topics

Memberlist

Help

FAR STUDY GROUP
CPAnet Forum : FAR STUDY GROUP

Topic: F5 capital lease problem (

Topic Closed)

Author

Message

<< Prev Topic | Next Topic >>

yukagin
Contributor

Joined: 03 Jun 2010
Online Status: Offline
Posts: 84

Posted: 03 Apr 2011 at 05:21 \| IP Logged

Question CPA-00405
In the long-term liabilities section of its balance sheet at December 31,
Year 1, Mene Co. reported a capital
lease obligation of $75,000, net of current portion of $1,364. Payments
of $9,000 were made on both
January 2, Year 2, and January 2, Year 3. Mene's incremental borrowing
rate on the date of the lease
was 11% and the lessor's implicit rate, which was known to Mene, was
10%. In its December 31, Year 2,
balance sheet, what amount should Mene report as capital lease
obligation, net of current portion?
a. $66,000
b. $73,500
c. $73,636
d. $74,250

Explanation
Choice "b" is correct. The lesser of the lessee's incremental borrowing
rate or the lessor's implicit rate (if
known) should be used. The amortization of the lease is:
Cash Interest Principal Lease
Date Payment Expense Reduction Obligation
12/31/Year 1 $76,364
1/2/Year 2 $9,000 $7,636 $1,364 $75,000
12/31/Year 2 $75,000
1/2/Year 3 $9,000 $7,500 $1,500 $73,500
Date Short-term Long-term
12/31/Year 1 $1,364 $75,000
1/2/Year 2
12/31/Year 2 $1,500 $73,500
1/2/Year 3

I understand the answer is B, but why do they charge a portion of interest
(1500) if the payment isnt due until Jan 2, year 3? It almost seems as
though the obligation should be only 75000 and not 73500

tkphotomania
Contributor

Joined: 21 Mar 2008
Location: United States
Online Status: Offline
Posts: 51

Posted: 03 Apr 2011 at 11:52 \| IP Logged

The question is asking, "In its December 31, Year 2,
balance sheet, what amount should Mene report as capital lease
obligation, net of current portion."

__________________
FAR: Passed (Feb. 2011)
AUD: Passed (July 2010)
REG: Passed (July 2010)
BEC: Passed (Nov 2011)

New Hampshire

mmilito
Newbie
Newbie

Joined: 08 Mar 2011
Location: United States
Online Status: Offline
Posts: 18

Posted: 03 Apr 2011 at 13:15 \| IP Logged

Ok Follow me on this one

Year 1

Total lease payment 76,364
Lease Current 1,364
Non-current 75,000

Lease Liability    1,364
Interest Expense   7,634 (76,364 x .10)
             Cash 9,000

Now for the balance sheet for next year we have to know how much of the liability will "disappear"

So thus

Carrying value 75,000
Interest rate .10

Interest to be paid next year (not reported because it hasnt accured yet) 7,500

Total payment to be applied next year 9,000

Thus the total amount to be paid next year is 1,500

so thus the balance sheet would say

75,000 for lease liability (total)
1,500 for lease libility (current)
73,500 for lease liability (non-current)

Basically what we are doing in essence is saying

Total future payment - total interest scheduled to be incurred in the next year = current portion of lease liability

Lease liability (non-current) - Lease liability (current) = Current lease obligation (net of current portion)

....quod erat demonstrandum

Sorry, you can NOT post a reply.
This topic is closed.

Printable version

You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum