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Cameron Construction signed a 24 month lease for a new compressor. There is no change in ownership and no bargain purchase option. The lease does not meet the 75% and 90% test as shown below. Therefore, this is an operating lease. No asset or liability is recorded, rental payments are expensed as incurred.
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Date Description PR Debit Credit
1-May Equipment Rental Expense 565 5,500
Cash 100 5,500
GENERAL JOURNAL
Compressor Lease DetailsLease Lease Fair Value Economic 75% of Econ Present 90% of
Payment Term of Equip Life Life Value Fair value706$ 2 years 24,000$ 10 years 7.5 years $15,000 21,600$
Compressor Lease DetailsLease Lease Fair Value Economic 75% of Econ Present 90% of
Payment Term of Equip Life Life Value Fair value706$ 2 years 24,000$ 10 years 7.5 years $15,000 21,600$
Boone Excavating signed a 48 month lease for a new backhoe. There is no change in ownership and no bargain purchase option. The lease meets the 90% test as shown below. Therefore, this is a capital lease. Therefore, the present value of the lease payments is recorded as the leased asset and the lease obligation on the balance sheet as the journal entry below illustrates.
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Date Description PR Debit Credit
1-Apr Leased Backhoe 565 65,000
Lease Obligation Payable 100 65,000
GENERAL JOURNAL
Backhoe Lease DetailsLease Lease Fair Value Economic 75% of Econ Present 90% of
Payment Term of Equip Life Life Value Fair value1,712$ 4 years 70,000$ 6 years 5 years $65,000 63,000$
Backhoe Lease DetailsLease Lease Fair Value Economic 75% of Econ Present 90% of
Payment Term of Equip Life Life Value Fair value1,712$ 4 years 70,000$ 6 years 5 years $65,000 63,000$
Present value is greater than 90% of fair value, therefore this is a capital lease
Bonds differ from direct commercial loans in that the source of funds for bonds can consist of a large number individual and institutional investors, each of which would own a portion of the total bond debt. With direct commercial loans, the source of loan funds are from a single financial institution.
Bonds differ from direct commercial loans in that the source of funds for bonds can consist of a large number individual and institutional investors, each of which would own a portion of the total bond debt. With direct commercial loans, the source of loan funds are from a single financial institution.
Bond IssuerThe borrower who receives bond funds and promises repaymentThe borrower who receives bond funds and promises repayment
The investor who provides bondfunds and awaits repaymentThe investor who provides bondfunds and awaits repayment
The written agreement specifyingterms of the bond issuanceThe written agreement specifyingterms of the bond issuance
Monitors the terms of the bond indenture for the bond holdersMonitors the terms of the bond indenture for the bond holders
Bond Underwriter Analyzes and accepts bond structurefor bond broker or investment bankAnalyzes and accepts bond structurefor bond broker or investment bank
Genway Corporation successfully issued $1,500,000 bonds sold at par on July 1, interest rate 8%.Interest payments are promised July 1 and January 1 each year for the 5 years the bonds are outstanding.
The journal entry for the issuance and the first interest payment is shown below.
Genway Corporation successfully issued $1,500,000 bonds sold at par on July 1, interest rate 8%.Interest payments are promised July 1 and January 1 each year for the 5 years the bonds are outstanding.
The journal entry for the issuance and the first interest payment is shown below.
Times Interest Earned RatioAdjusted accrual income = the sum of accrual net income + interest expense + income tax expense + non cash expenses such as depreciation, amortization and depletion.
Debt Coverage RatioAdjusted accrual income = the sum of accrual net income + interest expense + income tax expense + non cash expenses such as depreciation, amortization and depletion.
The higher the ratio, the more adequate earnings are to cover debt service
Example -Times interest earned and Debt coverage ratios
O16.5
Assets LiabilitiesCash 123,000 Accounts Payable 536,700Accounts receivable 345,000 Current Portion Long Term Debt 138,600Inventory 410,500 Long Term Debt 823,400Property, Plant, Equipment 1,200,500 Total liabilities 1,498,700
Equity Total assets 2,079,000 Owner, Capital 580,300
Sales 2,347,000
Cost of Goods Sold 1,760,250 Adjusted accrual income 376,150Wages expense 210,600 (NP +Inc tax exp + Int exp + depr)Depreciation expense 60,025 Times Interest earned 4.3Interest expense 86,580 Adjusted accrual income / Interest expenseMisc expense 38,400 Debt Coverage 1.7
Net Profit 191,145
Balance Sheet -Ruiz RecyclingAs of 12/31 2009
Adjusted accrual income/ ( Principal + Interest exp)