Lease Amortization Schedule

Effective Decrease Outstanding Payments Interest in Balance Balance 10% x Outstanding Balance

645,526

1/1/11 110,000 110,000 535,526

12/31/11 110,000 .10 (535,526) = 53,553 56,447 479,079

12/31/12 110,000 .10 (479,079) = 47,908 62,092 416,987

12/31/13 110,000 .10 (416,987) = 41,699 68,301 348,686

12/31/14 110,000 .10 (348,686) = 34,869 75,131 273,555

12/31/15 110,000 .10 (273,555) = 27,356 82,644 190,911

12/31/16 110,000 .10 (190,911) = 19,089* 90,911 100,000

12/31/17 110,000 .10 (100,000) = 10,000 100,000 0

880,000 234,474 645,526

* adjusted for rounding of other numbers in the schedule

Requirement 4

December 31, 2011

Red Baron Flying Club (Lessee) Interest expense(10% x [$645,526 – 110,000]) 53,553 Lease payable (difference) 56,447 Cash(lease payment) 110,000 Depreciation expense ($645,526 ÷ 8 years) 80,691 Accumulated depreciation 80,691 Bidwell Leasing (Lessor) Cash(lease payment) 110,000 Lease receivable (difference) 56,447 Interest revenue(10% x [$645,526 – 110,000]) 53,553

Problem 15-19 (concluded)

Requirement 5

December 31, 2017

Red Baron Flying Club (Lessee) Interest expense(10% x $100,000: from schedule) 10,000 Lease payable (difference) 100,000 Cash(lease payment) 110,000 Depreciation expense ($645,526 ÷ 8 years) 80,691 Accumulated depreciation 80,691 Bidwell Leasing (Lessor) Cash(lease payment) 110,000 Lease receivable (difference) 100,000 Interest revenue(10% x $100,000: from schedule) 10,000

Problem 15-20

Requirement 1

Present value of periodic lease payments ($88,492 x 5.65022^**) $500,000*

^* rounded

^** present value of an ordinary annuity of $1: n=10, i=12%

January 1, 2011

Cash 500,000 Accumulated depreciation (cost – carrying amount) 600,000 Buildings (original cost) 1,000,000 Deferred gain on sale-leaseback (difference) 100,000 Leased building(present value of lease payments) 500,000 Lease payable (present value of lease payments) 500,000

Note: Because the title transfers to the lessee, this is a capital lease.

December 31, 2011

Interest expense(12% x $500,000) 60,000 Lease payable (difference) 28,492 Cash(lease payment) 88,492 Depreciation expense ($500,000 ÷ 12 years*) 41,667 Accumulated depreciation 41,667 Deferred gain on sale-leaseback ($100,000 ÷ 12 years*) 8,333 Depreciation expense 8,333

* The building is depreciated over its remaining useful life rather than the lease term because title transfers to the lessee. The remaining useful life can be calculated as:

total life x ^{carrying amount}/_cost = 30 years x ^$400,000/_$1,000,000 = 12 years

Problem 15-20 (continued)

Requirement 2

Balance Sheet

Assets: Leased asset $500,000 less: accumulated depreciation (41,667) less: deferred gain ($100,000 – 8,333) (91,667)

$366,666

Liabilities: Current:

Lease payable ($88,492 – {12% x [$500,000 – 28,492]}) $31,911

Noncurrent:

Lease payable ($500,000 – 28,492 – 31,911) $439,597