CAPBS Inc. enters into a lease agreement to acquire the use of a piece of machinery forfour years beginning on 1 January 2010. Th e lease requires four annual payments of€28,679 starting on 1 January 2010. Th e useful life of the machine is four years, and itssalvage value is zero. CAPBS accounts for the lease as a fi nance lease. Th e fair value ofthe machine is €100,000. Th e present value of the lease payments using the company’sdiscount rate of 10 percent is €100,000. (A reminder is relevant for present value calculations: Lease payments are made at the beginning of each period.) Th e company usesstraight-line depreciation.1 . Comment on the appropriateness of CAPBS treating the lease agreement as afi nance lease under IFRS and a capital lease under US GAAP.2 . What is the amount reported as a leased asset on the balance sheet on 1 January2010? What depreciation expense is reported in fi scal year 2010?3 . What is the amount of the machinery reported as a leased asset on the balance sheeton 31 December 2010?4 . What is the amount of the lease liability reported on the balance sheet on 1 January2010? What interest expense is reported in fi scal year 2010?5 . What is the amount of the lease liability reported on the balance sheet on 31 December 2010? What interest expense is reported in fi scal year 2011?6 . If CAPBS had determined that the above lease was an operating lease, whatamount of expenses would be reported on the income statements in fi scal 2010and 2011? How does this expense compare to the expenses reported under acapital lease?
CAPBS Inc. enters into a lease agreement to acquire the use of a piece of machinery for
four years beginning on 1 January 2010. Th e lease requires four annual payments of
€28,679 starting on 1 January 2010. Th e useful life of the machine is four years, and its
salvage value is zero. CAPBS accounts for the lease as a fi nance lease. Th e fair value of
the machine is €100,000. Th e present value of the lease payments using the company’s
discount rate of 10 percent is €100,000. (A reminder is relevant for present value calculations: Lease payments are made at the beginning of each period.) Th e company uses
straight-line
1 . Comment on the appropriateness of CAPBS treating the lease agreement as a
fi nance lease under IFRS and a capital lease under US GAAP.
2 . What is the amount reported as a leased asset on the
2010? What depreciation expense is reported in fi scal year 2010?
3 . What is the amount of the machinery reported as a leased asset on the balance sheet
on 31 December 2010?
4 . What is the amount of the lease liability reported on the balance sheet on 1 January
2010? What interest expense is reported in fi scal year 2010?
5 . What is the amount of the lease liability reported on the balance sheet on 31 December 2010? What interest expense is reported in fi scal year 2011?
6 . If CAPBS had determined that the above lease was an operating lease, what
amount of expenses would be reported on the income statements in fi scal 2010
and 2011? How does this expense compare to the expenses reported under a
capital lease?
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