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Old Exam Problem 1 With Solution
Old Exam Problem 1 With Solution
Old Exam Problem 1 With Solution
On August 1, 1993, Idaho Think Tank (lessee) and Colfax Computer Industries
(lessor) sign a lease with the following terms:
b. Prepare all necessary journal entries for Idaho Think Tank at 8/1/93 and 12/31/93 (end of fiscal year).
d. Prepare all necessary journal entries for Colfax Computer Industries (CCI) at 8/1/93 and 12/31/93 (end of
fiscal year).
Acct. 414 Spring 2006
a) There is no Title Transfer and no BPO. The lease term is 71% of economic life. The only way this can be a
capital lease is if the PV of MLP is greater than 90% * 168,834 = 151,951. The lessee uses a 12% interest
rate and ignores the unguaranteed residual value. Therefore, the PVMLP = 157,457 and the lease is a
capital lease for the lessee.
c) This is a sales type lease because there is a profit (FMV is not equal to cost), because the PV of the MLP >
90% of FMV and because there are no cost or collection uncertainties.
d) 8/1/93 Salary expense (commission) 1,626
Cash 1,626
Net investment in lease 168,834
COGS (reduced by PV of RV) 123,791
Inventory 130,000
Sales 162,625
Cash 39,000
Net investment in lease 39,000
Optional entry to put commission in cost of sales
COGS (initial direct cost-commission) 1,626
Salary expense (commission) 1,626
12/31/93 Net investment in lease 5,410
Interest revenue 5,410
Based on amortization table:
Date Payment Interest 10% Principal Balance
168,834
8/1/93 39,000 0 39,000 129,834
8/1/94 39,000 12,983 26,017 103,817
8/1/95 39,000 10,382 28,618 75,199
8/1/96 39,000 7,520 31,480 43,719
8/1/97 39,000 4,372 34,628 9,091
8/1/98 10,000 909 9,091 0
Acct. 414 Spring 2006