Winter's Toyland has a debt-equity ratio of .57. The pretax cost of debt is 8.2 percent and the required return on assets is 14.
2 answers:
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Solution:
a. It is a capital lease to Jensen, because the leasing period is more than 75% of the economic existence of the rented asset. The leasing duration is 78% (7-9) of the economic life of the commodity. That is a capital lease to Glaus, since the collectibility of the lease fees is fairly stable, there are no significant surprises regarding the expenses remaining to be borne by the lessor, so there is a lea. If the market valuation ($700,000) of the property equals the expense of the lessor ($525,000), the contract is a sale-type deal.
b. Calculation of annual rental payment:
= $121,130
**Present value of $1 at 10% for 7 periods.
**Present value of an annuity due at 10% for 7 periods
c. Computation of present value of minimum lease payments:
PV of annual payments: $121,130 X 5.23054 =
PV of guaranteed residual value:
$50,000 X 0.48166 = 24,083
**Present value of an annuity due at 11% for 7 periods.
**Present value of $1 at 11% for 7 periods
d. 1/1/14 Leased Equipment................................681,741
Lease Liability...............................681,741
Lease Liability.......................................121,130
Cash...............................................121,130
12/31/14 Depreciation Expense.......................... 83,106
Accumulated Depreciation—Capital Leases
($681,741 – $100,000) ÷ 7 ..........83,106
Interest Expense................................... 61,667
Interest Payable ($681,741 – $121,130) X .11......61,667
1/1/15 Lease Liability....................................... 59,463
Interest Payable.................................... 61,667
Cash...............................................121,130
12/31/15 Depreciation Expense.......................... 83,106
Accumulated Depreciation - Capital Leases..........................83,106
Interest Expense................................... 55,126
e) 1/1/14 Lease Receivable..................................700,000
Cost of Goods Sold..............................525,000
Sales Revenue...............................700,000
Inventory........................................525,000
Cash.......................................................121,130
Lease Receivable..........................121,130
12/31/14 Interest Receivable............................... 57,887
Interest Revenue [($700,000 – $121,130) X .10]....57,887
1/1/15 Cash.......................................................121,130
Lease Receivable..........................63,243
Interest Receivable.......................57,8871
2/31/15 Interest Receivable............................... 51,563
Interest Revenue
($700,000 – $121,130 - $63,243) X .10...............................51,5635