91Ó°ÊÓ

A lease is a valid agreement made between the lessor and the lessee. In a lease, the lessor is the owner, whereas the lessee only has the right to use the property or equipment. The term of the lease is fixed in the lease agreement.

Working Notes:

Calculation of Lease Liability

$$\begin{gathered} \mathrm{Lease}\mathrm{Liability}=\mathrm{Rental}\mathrm{payments}×\mathrm{Present}\mathrm{value}\mathrm{of}\mathrm{anorinary}\mathrm{annuity} \\ =\$110,666.81×6.14457 \\ =\$680,000 \end{gathered}$$

Calculation of Depreciation expense

$$\begin{gathered} \mathrm{Depreciation}\mathrm{Expense}=\frac{\mathrm{Fair}\mathrm{value}\mathrm{of}\mathrm{computer}-\mathrm{Book}\mathrm{value}\mathrm{of}\mathrm{computer}}{\mathrm{Noncanceable}\mathrm{lease}\mathrm{year}} \\ =\frac{\$680,000-\$600,0000}{10} \\ =\frac{\$80,000}{10} \\ =\$8,000 \end{gathered}$$

Calculation of accumulated depreciation

$$\begin{gathered} \mathrm{Accumulated}\mathrm{Depreciation}=\frac{\mathrm{Fair}\mathrm{value}\mathrm{of}\mathrm{computer}}{\mathrm{Useful}\mathrm{Life}} \\ =\frac{\$680,000}{10} \\ =\$68,000 \end{gathered}$$

Notes:

• Since the present value of the minimum lease payments equals the fair value of the computer, the lease should be classified as a capital lease. Furthermore, the lease period exceeds 75% of the asset's economic life and title transfers at the conclusion of the lease.
• Present value of an ordinary annuity for 10 periods at 9%
• The credit could also be to a revenue account

Note: The lease should be treated as a direct financing lease because the present value of the minimum lease payments equals the fair value of the computer, and

1. Payment collectability is reasonably assured,
2. No significant uncertainties surround the costs yet to be incurred by the lessor, and
3. The cost to the lessor equals the asset's fair value at the start of the lease.