Lessee’s Application of Classification Criteria

1 Does the agreement specify that ownership of the asset transfers to the lessee? NO 2 Does the agreement contain a bargain purchase option? YES 3 Is the lease term equal to 75% or more of the expected YES economic life of the asset? {4 yrs>75% of 5 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the NO fair value of the asset? {$35,456¹<90% of $43,000 = $38,700} ¹$10,000 x 3.54595^*= $35,456

^* present value of an ordinary annuity of $1: n=4, i=5%

Exercise 15-6 (continued)

Situation 3

Since at least one (#4 in this case) classification criterion is met, this is a capital lease.

Lessee’s Application of Classification Criteria

1 Does the agreement specify that ownership of the asset transfers to the lessee? NO 2 Does the agreement contain a bargain purchase option? NO 3 Is the lease term equal to 75% or more of the expected NO economic life of the asset? {4 yrs<75% of 6 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the YES fair value of the asset? {$37,233¹>90% of $41,000 = $36,900} ¹$10,000 x 3.72325^*= $37,233

^* present value of an annuity due of $1: n=4, i=5%

Exercise 15-6 (concluded)

Situation 4

Since at least one (#4 in this case) classification criterion is met, this is a capital lease.

Lessee’s Application of Classification Criteria

1 Does the agreement specify that ownership of the asset transfers to the lessee? NO 2 Does the agreement contain a bargain purchase option? NO 3 Is the lease term equal to 75% or more of the expected NO economic life of the asset? {4 yrs<75% of 6 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the YES fair value of the asset? {$35,460¹>90% of $39,000 = $35,100} ¹$10,000 x 3.54595^*= $35,460

^* present value of an ordinary annuity of $1: n=4, i=5%

Exercise 15-7

Requirement 1 January 1, 2011

Leased assets 4,000,000 Lease payable 4,000,000

Requirement 2

$4,000,000 ÷ 3.16987^** = $1,261,881

present lease value payment

^** present value of an ordinary annuity of $1: n=4, i=10%

Lease Amortization Schedule

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

4,000,000

2011 1,261,881 .10 (4,000,000) = 400,000 861,881 3,138,119

2012 1,261,881 .10 (3,138,119) = 313,812 948,069 2,190,050

2013 1,261,881 .10 (2,190,050) = 219,005 1,042,876 1,147,174

2014 1,261,881 .10 (1,147,174) = 114,707* 1,147,174 0

5,047,524 1,047,524 4,000,000

* adjusted for rounding of other numbers in the schedule

Requirement 3 December 31, 2011

Interest expense(10% x outstanding balance) 400,000 Lease payable (difference) 861,881 Cash(payment determined above) 1,261,881

Requirement 4 December 31, 2013

Interest expense(10% x outstanding balance) 219,005 Lease payable (difference) 1,042,876 Cash(payment determined above) 1,261,881

Exercise 15-8