FA6e - Ch10 - SolutionsManual - Revised 062619

CHAPTER 10
Reporting and Analyzing

Leases, Pensions, Income Taxes, and
Commitments and Contingencies
Learning Objectives – coverage by question

Mini- Cases
Exercises Problems
Exercises and Projects
LO1 – Define off-balance-sheet

financing and explain its effects on 22 27 46
financial analysis.
LO2 – Account for leases using the

finance lease method and the
13 – 17 24, 26, 27 36 – 37 46
operating lease method. Compare
and analyze the two methods.
LO3 – Explain and interpret the

18 -21 25, 30, 31 39, 40 45
reporting for pension plans.
LO4 – Analyze and interpret pension

19 – 21 25, 30, 31 39, 40 45
footnote disclosures.
LO5 – Describe and interpret

23 32 – 35 41 – 44 47, 48
accounting for income taxes.
LO6 – Describe disclosures regarding

future commitments and
contingencies. Analyze financial
28, 29 38
statements after converting off-
balance sheet items to be considered
on the balance sheet.
©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 10 10-1
QUESTIONS
Q10-1. Under the old lease accounting standard for an operating lease, the lessee did
not record either the leased asset or the lease liability on the balance sheet,
and normally charged each lease payment to rent expense. Under the new
lease accounting standard, the lessee in an operating lease contract records a
right-of-use asset on the balance sheet as well as a lease liability on the
balance sheet. The expense is a straight-line lease expense (total cost of the
lease divided by the number of lease payments). Under the old standard, the
other type of lease was a capital lease and under the new standard the other
type is a finance lease. The lessee accounted for a capital lease by recording
the leased property as an asset and establishing a liability for the lease
obligation. The leased asset was subsequently depreciated, and interest
expense accrued on the lease liability. Under the new standard, the other type
of a lease is a finance-type lease. The lessee records a lease asset and a lease
liability on the balance sheet -- the lease asset is amortized and amortization
expense is recorded, and in addition, interest expense is recorded, and the
lease liability is reduced as payments are made.
Q10-2. As adoption occurs, the year of adoption (and years after adoption)_ will be
presented using the new standard, while prior years will likely be presented
using the old standard. Thus, financial statement users will need to compute
ratios for analysis after adjusting the year(s) prior to adoption to have “as-if”
capitalized operating leases. For the years presented before the new leasing
standard is adopted, the leasing footnote is reasonably complete to allow for
capitalization of operating leases for analysis purposes.
Q10-3. In general, yes. Over the term of the lease the straight-line lease expense for
an operating lease will be equal to the sum of the interest and amortization on a
finance lease. Only the timing of the expense recognition changes.
Q10-4. Under defined contribution plans, companies and employees make
contributions to the plans which, together with earnings on the amounts
invested, provide the sole source of funding for payments to retirees. Under
defined benefit plans, the obligations are defined with payment to be made in
the future from general corporate funds. These plans may or may not be fully
funded. Since the company’s obligation is extinguished upon contribution for a
defined contribution plan, the accounting is relatively simple: record an expense
when paid or accrued. Defined benefit plans present a number of complications
in that the liability is very difficult to estimate and involves a number of critical
assumptions. In addition, companies lobbied for (and the FASB agreed to)
various mechanisms to smooth the impact of pension costs on reported
earnings. These smoothing mechanisms further complicate the accounting for
defined benefit plans vis-à-vis defined contribution plans.

10-2 Financial Accounting, 6th Edition
Q10-5. Although the accounting can get complicated, a net pension asset will be
reported if the fair market value of the plan assets exceeds the plan obligation.
Otherwise, a net liability will be reported on the balance sheet to represent the
underfunding of the pension obligation.
Q10-6. Service cost, interest cost and the expected return on plan investments (a
reduction of the pension cost) are the basic components of pension expense.
Companies might also report amortization of deferred gains and losses.
Q10-7. The use of expected returns and the deferral of unexpected gains and losses
act to smooth corporate earnings by removing the effects of swings in the
market values of investments and variation in pension liabilities resulting from
changes in actuarial assumptions or plan amendments.
Q10-8. For a finance or operating lease, the initial value of the lease liability is
determined by calculating the present value of the remaining lease payments.
The remaining lease payments include those payments that are not subject to
options or contingencies, including any guaranteed residual value. The initial
right-of-use asset value for both types is the lease liability computed as just
described, adjusted for some items occurring at or before the lease
commencement date (e.g., add lease prepayments, subtract lease incentives,
and add initial direct costs).
Q10-9. Retirement benefits are normally expensed in the period in which they are
earned by the employee, not when they are paid. Some benefits are calculated
for periods of employment prior to the inception of a pension plan or prior to a
plan amendment. The cost of these benefits (called prior service costs) is
expensed by amortizing the cost over the average expected future period of
employee service.
Q10-10. Income tax expense is a financial accounting expense measured using accrual
accounting. Thus, the expense includes the cash taxes paid but also includes
accruals for future tax payments and future tax benefits that result from
transactions in the current period.
Q10-11. A tax payment would be recorded as a deferred tax asset or liability under two
situations. First, if the company is required to make a tax payment based on a
temporary difference that makes taxable income reported on the tax return
higher than the income reported for financial accounting. In this case, the tax on
the temporary difference would not be recorded as tax expense. Recall that tax
expense is the expense related to the accounting income. For example,
consider a company that receives a cash payment in advance of delivering a
service. For financial accounting this is recorded as unearned revenue and not
recognized as revenue until earned and thus is not in accounting earnings.
However, generally for tax purposes such a payment would be included in
taxable income. Thus, a cash tax payment would be required to be made on
this amount. For financial accounting, this would increase current tax expense
continued

but a deferred tax asset and corresponding deferred tax benefit (negative tax
expense) would need to be recorded yielding a zero effect on total income tax
for the year. The second situation arises when a deferred tax liability reverses.
In this situation, tax expense has been recognized in excess of tax payments in
prior years. When the tax return “catches up with” the income statement, the
tax deferral reverses and the deferred tax liability is reduced (debited).
Consider the example of depreciation discussed in the text. In the later years of
the asset’s life, taxable income will be higher than book income. The cash tax
payments related to that temporary difference will be recorded as current tax
expense. In addition, the deferred tax liability will also be reversed along with a
reduction to deferred tax expense, thus, again, the net effect on the total tax
expense will be zero.
Q10-12. An unrecognized tax benefit is recorded as a liability on a firm’s balance sheet

(and on the income statement increases to the unrecognized tax benefit
account are recorded as additional tax expense). The unrecognized tax benefit
(UTB) is essentially a contingent liability. It represents management’s estimate
of the amount that is more likely than not going to be owed to tax authorities in
the future (e.g., upon audit) for tax positions taken to date.

MINI EXERCISES
M10-13. (35 minutes)

LO 2
a. i.
1/3 Right-of-use asset – operating lease (+A).................... 57,198
Operating lease liability (+L).................................... 57,198
$57,198 = $12,000 x 4.76654
12/31 Operating lease liability (L)............................................ 12,000

Cash (-A).................................................................. 12,000
12/31 Operating lease expense (+E)...................................... 12,000

Right-of-use asset – operating lease (-A)................ 7,996
ii.
1/3 Right-of-use lease asset – finance lease (+A).............. 57,198
Finance lease liability (+L)....................................... 57,198
$57,198 = $12,000 x 4.76654
12/31 Amortization expense – finance lease (+E, -SE).......... 9,533

Accumulated amortization – finance lease (+XA).... 9,533
$9,533 = $57,198 / 6
(note that the company could choose to credit the right-of-use
asset for the finance lease directly)
12/31 Finance lease liability (-L).............................................. 7,996

Interest expense (+E, -SE)............................................ 4,004
Cash (-A).................................................................. 12,000
$4,004 = $57,198 x 0.07; $7,996 = $12,000 - $4,004

b. Operating Lease (i):
+ Cash (A) - - Operating Lease Liability – (L) +

12,000 12/31 57,198 1/3
12/31 12,000 4,004 12/31
+ Right-of-use Asset (A)—Operating Lease -

1/3 57,198 7,996 12/31
+ Lease Expense – Operating Lease (E) -

12/31 12,000
Finance Lease (ii):
+ Cash (A) - - Finance Lease Liability (L) +

12,000 12/31 57,198 1/3
12/31 7,996
+ Right-of-use Asset (A) – Finance Lease - + Interest Expense (E) -

1/3 57,198 12/31 4,004
- Accumulated Amortization – Finance + + Amortization Expense – Finance

Lease (XA) -Lease (E)
9,533 12/31 12/31 9,533
c. Operating Lease (i):
Balance Sheet Income Statement

Cash Noncash Contra Contrib. Earned Net
Transaction Asset + Assets - Assets = Liabilities + Capital + Capital Revenues - Expenses = Income
Operating +57,198 - = +57,198 - =
lease Right-of- use Operating
commences. asset – Lease
Operating Liability
lease
Lease -12,000 - = -12,000 - =
payment. Cash Operating
Lease
Liability
Record lease - -7,996 - = 4,004 -12,000 - +12,000 = -12,000
expense and Right-of-use Operating Retained Lease
changes to asset – Lease Earnings Expense
asset and Operating Liability
liability. lease
continued

c. continued
Finance Lease (ii):

Finance lease +57,198 - = +57,198 - =
commences Right-of- Finance
use asset – Lease
Finance Liability
lease
Amortization of - +9,533 = -9,533 - +9,533 = -9,533
leased asset. Accum. Retained Amort.
Amortization. Earnings Expense
Made annual -12,000 - = -7,996 -4,004 - +4,004 = -4,004
lease payment. Cash Finance Retained Interest
Lease Earnings Expense
Liability
d. The amount of interest plus amortization expense in the finance-type lease is greater
early in the asset’s life than the straight-line lease expense amount under the
operating lease. This is driven by the amortization portion meaning that the net right-
of-use asset value on the balance sheet for an operating lease will be higher than for
the finance-type lease early in the asset’s life.

LO 2
a. 7/1 Right-of-use asset – finance lease (+A) 123,100

Finance lease liability (+L).................................. 123,100
$123,100 = $4,500 x 27.35548
b. 9/30 Amortization expense (+E, -SE) 3,078

Accumulated amortization (+XA, -A).................. 3,078
$3,078 = $123,100 / (10 x 4)
(note the company could directly reduce the right-of-use asset value)
9/30 Finance lease liability (-L)........................................ 2,038

Interest expense (+E, -SE)...................................... 2,462
Cash (-A)............................................................ 4,500
$2,462 = $123,100 x (0.08/4); $2,038 = $4,500 - $2,462
12/31 Amortization expense (+E, -SE).............................. 3,078

Accumulated amortization (+XA, -A).................. 3,078
12/31 Finance lease liability (-L)........................................ 2,079

Interest expense (+E, -SE)...................................... 2,421
Cash (-A)............................................................ 4,500
$2,421 = ($123,100 - $2,038) x (0.08/4); $2,079 = $4,500 - $2,421

c.
+ Cash (A) - - Finance Lease Liability (L) +
4,500 9/30 123,10 7/1
0
4,500 12/31 9/30 2,038
12/31 2,079
+ Right-of-use Asset – Finance Lease (A) - + Interest Expense (E) -

7/1 123,100 9/30 2,462
12/31 2,421
- Accumulated Amort. – Finance lease (XA) + + Amortization Expense (E) -

3,078 9/30 9/30 3,078
3,078 12/31 12/31 3,078
d.

7/1/20 +123,100 - = +123,100 - =
Finance lease
Right-of-use Finance
commences.
asset –
Lease
finance lease
Liability
9/30/20 - +3,078 = -3,078 - +3,078 = -3,078
Amortization
Accum. Retained Amort.
on leased
Amort. Earnings Expense
asset.
9/30/20 -4,500 - = -2,038 -2,462 - +2,462 = -2,462

Made quarterly
Cash Finance Retained Interest
lease
Earnings Expense
payment. Lease
Liability
12/31/20 - +3,078 = -3,078 - +3,078 = -3,078
Amortization
Accum. Retained Amort.
on leased
Amort. Earnings Expense
asset.
12/31/20 -4,500 - = -2,079 -2,421 - +2,421 = -2,421

Made quarterly
Cash Finance Retained Interest
lease
Earnings Expense
payment. Lease
Liability

M10-15 (10 minutes)
LO 2
a. Right-of-use asset – finance lease (+A)............................. 74,520

Finance lease liability (+L)....................................... 74,520
b. Right-of-use asset – operating lease.................................. 5,853

Operating lease liability (-L)................................................ 1,000

Cash (-A).................................................................. 1,000

LO 2
Determine the PV of the lease payments  $130,000 X 4.10020 ((or use excel or a
financial calculator) = $533,026.
Note: Table amounts may not compute precisely and all totals may not foot, due to
rounding.
a. Operating Lease Liability Amortization Schedule

Date Lease Interest Reduction of
Payment on Liability Lease Liability Lease Liability
January 1, 2020 $ 533,026
December 31, 2020 $ 130,000 $ 37,312 $ 92,688 440,337
December 31, 2021 130,000 $ 30,824 $ 99,176 341,161
December 31, 2022 130,000 $ 23,881 $ 106,119 235,042
December 31, 2023 130,000 $ 16,453 $ 113,547 121,495
December 31, 2024 130,000 $ 8,505 $ 121,495 0
$ 650,000 $ 116,974 $ 533,026
b. Right-of-Use Asset Amortization Schedule

Date Straight-line Interest Amortization of Right-of-Use
Expense on Liability Right-of-Use Asset Asset
January 1, 2020 $ 533,026
December 31, 2020 $ 130,000 $ 37,312 $ 92,688 440,338
December 31, 2021 130,000 30,824 99,176 341,161
December 31, 2022 130,000 23,881 106,119 235,043
December 31, 2023 130,000 16,453 113,547 121,496
December 31, 2024 130,000 8,505 121,495 0
$ 650,000 $ 116,974 $ 533,026

c. Journal Entries
January 1, 2020
Right-of-use asset – operating lease (A)............................ 533,026
Operating lease liability (L)...................................... 533,026
December 31, 2020

Operating lease Liability..................................................... 130,000
Cash......................................................................... 130,000
December 31, 2020

Operating lease expense.................................................... 130,000
Operating lease liability............................................ 37,312
Right-of-use asset – operating lease....................... 92,688
December 31, 2021

Operating lease liability....................................................... 130,000
Cash......................................................................... 130,000
December 31, 2021

Operating lease expense.................................................... 130,000

LO 2
Determine the PV of the payments – annuity due  $130,000 X 4.3872 (or use excel or
a financial calculator) =$570,377.
a. Operating Lease Liability Amortization Schedule

Date Lease Interest Reduction of
Payment on Liability Lease Liability Lease Liability
January 1, 2020 $ 570,337
January 1, 2020 $ 130,000 $ - $ 130,000 440,337
January 1, 2021 130,000 30,824 99,176 341,161
January 1, 2022 130,000 23,881 106,119 235,042
January 1, 2023 130,000 16,453 113,547 121,495
January 1, 2024 130,000 8,505 121,495 0
$ 650,000 $ 79,663 $ 570,337

b. Right-of-Use Asset Amortization Schedule
January 1, 2020 $ 570,337
Year 2020 $ 130,000 $ 30,824 $ 99,176 471,161
Year 2021 130,000 23,881 106,119 365,042
Year 2022 130,000 16,453 113,547 251,495
Year 2023 130,000 8,505 121,495 130,000
Year 2024 130,000 - 130,000 0
$ 650,000 $ 79,663 $ 570,337
c. Journal entries
January 1, 2020
Right-of-use asset............................................................... 570,337
Operating lease liability............................................. 570,337
January 1, 2020
Operating lease liability........................................................ 130,000
Cash......................................................................... 130,000
December 31, 2020

Operating lease expense..................................................... 130,000
Right-of-use-asset – operating lease........................ 99,176
January 1, 2021
Operating lease liability........................................................ 130,000
Cash......................................................................... 130,000
December 31, 2021

Operating lease expense..................................................... 130,000
Right-of-use asset – operating lease........................ 106,119
M10-18 (10 minutes)

LO 3
a. Pension expense (+E, -SE)....................................................... 16,000

Cash (-A)............................................................................. 16,000
$16,000 = $400,000 x 0.04
b. Bartov would report a net liability of $450,000 ($625,000 - $175,000) in its 2019
balance sheet. Because Bartov is effectively self-insured, it must report the estimated
death benefit obligation net of any assets set aside to meet that obligation.

LO 3, 4
a. Exxon Mobil is reporting $2,769 million in pension expense for 2017.
b. Expected returns are an offset to service and interest costs and serve to reduce
reported pension expense.
c. “Expected” refers to the use of long-term average returns for the investment portfolio.
Expected returns are used in the computation of pension expense, rather than actual
returns, in order to smooth reported income.

LO 3, 4
a. Yum! Brands is reporting $17 million of pension expense for 2017.
b. Expected returns are an offset to service and interest costs and serve to reduce
reported pension expense.
c. “Expected” refers to the use of long-term average returns for the investment portfolio.
Expected returns are used in the computation of pension expense, rather than actual
returns, in order to smooth reported income.

LO 3, 4
a. A&F maintains a defined contribution plan for the benefit of its employees.
b. Contributions are expensed when made. The entry to record expenses for 2014 was
($ millions):
Pension expense (+E, -SE)...................................................... 14.4

Cash (-A)............................................................................. 14.4
c. Only the unpaid contribution, if any, appears on the A&F balance sheet.

LO 1
a. The use of contract manufacturers removes the manufacturing assets and related
liabilities from Nike’s balance sheet.
Because sales are unaffected, PPE turnover is increased by the removal of assets.
The effect on net operating profit after taxes (NOPAT) is uncertain; depreciation is
removed (interest on the liabilities incurred to purchase the manufacturing assets is
also removed, but this is a nonoperating expense and, therefore, does not affect
NOPAT), but Nike will pay a higher price for its manufactured goods in order to
provide the manufacturer with a return on its investment. If the contract manufacturer
is more efficient than Nike, however, the price increase is mitigated. Profitability will
increase if the turnover effect more than offsets the negative effect on NOPAT and
profit margin, which is likely.
b. Executory contracts are not recognized under GAAP. As a result, the use of contract
manufacturers achieves off-balance-sheet financing. This is one motivating factor for
their use.

LO 5
a, b, and c.
Book Temporary Tax Deferred

Year Value Tax Basis (after depreciation deduction) Difference Rate Tax Liability
2021 $300,000 $173,000 $127,000 25% $31,750
2022 $200,000 $173,000 - ($100,000 - $31,000) = $104,000 $96,000 25% $24,000
2023 $100,000 $104,000 - ($100,000 - $31,000) = $35,000 $65,000 25% $16,250
d. Deferred tax assets and liabilities are all recorded as non-current assets and liabilities.

EXERCISES
E10-24. (45 minutes)

LO 2
a. Present value of operating leases = $4,897, 005 , computed using the PV function in
Excel: =PV(0.04,5,1100000,0) or using the PV of annuity table in Appendix A:
4.45182 X $1,100,000 (or using a financial calculator or the formula for PV of an
annuity) [Note there will be small rounding differences between the methods.] This
amount is both the value of the asset and the liability (because there are no
payments already made or other complicating terms of this lease).
b. Lease liability amortization schedule

Interest on Reduction of Lease
Date Lease Payment Liability Liability Lease Liability
01-Jan-20 $4,897,005
31-Dec-20 $ 1,100,000 $ 195,880 $ 904,120 $ 3,992,885
31-Dec-21 1,100,000 159,715 940,285 3,052,601
31-Dec-22 1,100,000 122,104 977,896 2,074,705
31-Dec-23 1,100,000 82,988 1,017,012 1,057,693
31-Dec-24 1,100,000 42,308 1,057,693 0
Total $ 5,500,000 $ 602,996 $ 4,897,005
Right-of-use Asset Amortization Schedule – operating lease

01-Jan-20 $4,897,005
31-Dec-20 $ 1,100,000 $ 195,880 $ 904,120 $ 3,992,885
31-Dec-21 1,100,000 159,715 940,285 3,052,601
31-Dec-22 1,100,000 122,104 977,896 2,074,705
31-Dec-23 1,100,000 82,988 1,017,012 1,057,693
31-Dec-24 1,100,000 42,308 1,057,693 0
$ 5,500,000 $ 602,996 $ 4,897,005
*Note: there are some small differences due to rounding in the tables above.

c. Entries if a finance lease:
January 1, 2020
Right-of-use asset – finance lease............................ 4,897,005
Finance lease liability..................................... 4,897,005
December 31, 2020

Amortization expense................................................ 979,401
Accumulated amortization – finance lease.... 979,401
$4,897,005 / 5
(note that company could choose to reduce the asset value directly)
Finance lease liability................................................ 904,120

Interest expense........................................................ 195,880
Cash............................................................... 1,100,00
December 31, 2021

Amortization expense................................................ 979,401
Accumulated amortization – finance lease.... 979,401
$4,897,005 / 5
(Note that company could choose to reduce the asset value directly)
Finance lease liability................................................ 940,285

Interest expense........................................................ 159,715
Cash............................................................... 1,100,00
Balance Sheet Equation:
January 1, 2020
Cash Noncash Contrib. Earned Net
Transaction Asset + Assets = Liabilities + Capital + Capital Revenues - Expenses = Income
Lease +4,897,005 = +4,897,005 - =
equipment
Right-of-use Lease
using finance-
asset liability
type lease
December 31, 2020

Record –979,401 = –979,401 - +979,401 = –979,401
amortization
Accum. Amort.
of asset
Amort. – expense
finance lease

Record –1,100,000 = –904,120 –195,880 - +195,880 = –195,880
interest and
Interest
cash payment
expense

d. Entries if an operating lease
January 1, 2020
Right-of-use asset – operating lease.................................. 4,897,005
Operating lease liability............................................ 4,897,005
December 31, 2020

Operating lease liability....................................................... 1,100,000
Cash......................................................................... 1,100,000
Lease expense.................................................................... 1,100,000

Operating lease liability....................................................... 195,880
(note company could choose to maintain an accumulated amortization account)
December 31, 2021

Operating lease liability....................................................... 1,100,000
Cash......................................................................... 1,100,000
Lease expense.................................................................... 1,100,000

Balance Sheet Equation
January 1, 2020
Lease +4,897,005 = +4,897,005 - =
equipment
Right-of-use Lease
operating-type
asset liability
lease
December 31, 2020

Record –1,100,000 = –1,100,000
payment

Record lease –904,120 = +195,880 –1,100,000 - +1,100,000 = –1,100,000
expense,
Right-of-use Lease Lease
reduction in
asset – liability expense
asset value &
operating
adjust liability
lease
for interest
continued

d. continued
Alternative Entry for Dec. 31, 2020
Because this lease has no prepayments and no incentives and payments are at the
end of the year, the entries could be recorded as follows (they are equivalent):
Operating lease liability................................................. 904,120

Lease expense.............................................................. 1,100,000
Cash................................................................... 1,100,000
Right-of-use asset – operating lease................. 904,120
e. Operating lease treatment and finance lease treatment both require the recording
of a lease liability at the present value of the remaining lease payments. Both types
of leases require the recording a right-of-use asset for the total cost of the lease.
Thus, both types of leases are now ‘on-balance sheet’. However, the income
statement treatment differs between the two types of leases and the asset
amortization differs. Finance leases record amortization expense for the straight-line
amortization of the right-of-use lease asset. Finance leases also record interest
expense on the lease liability. In contrast, operating lease treatment involves one
straight-line lease expense amount each period. There is no separate amortization
expense and no separate interest expense. As a result, whereas a finance lease
records interest expense in non-operating expenses, an operating lease will record
one lease expense in operating expenses. Overall, expenses are greater in the early
part of the asset’s life for finance leases relative to operating leases. As a result, the
asset value on the balance sheet will remain higher over the term of the lease for
operating leases relative to finance leases as can be seen in the table below:
Right-of-Use Asset Balance

Finance Lease Operating Lease
January 1, 2020 4,897,005 4,897,005
December 31, 2020 3,917,604 3,992,885
December 31, 2021 2,938,203 3,052,600
December 31, 2022 1,958,802 2,074,704
December 31, 2023 979,401 1,057,692
December 31, 2024 0 0
Amounts may differ slightly due to rounding.

LO 3, 4
a. Target maintains only a defined contribution plan for the benefit of its employees.
b. Contributions are expensed when made.
c. Only the unpaid contribution, if any, appears on Target’s balance sheet.
d. First, employees who do not meet the unspecified eligibility requirements will not be
covered. Second, matching contributions can be reduced or eliminated in bad times.
Third, employees covered by defined contribution plans must choose how those
funds are invested and, consequently, they bear all of the risks of price volatility.

LO 2
a. JetBlue will record $1.2 billion more in assets, thus total assets would be $1.2 billion
+ $10.426 billion for a total of $11.626 billion. JetBlue will also have $1.2 billion
more in liabilities, thus total liabilities would be $1.2 billion + $5.815 billion for a total
of $7.015 billion (again, assuming nothing else changed for JetBlue).
 Total debt-to-equity based on recorded numbers is 1.26 or 126% computed

as $5.815 B/ $4.611 B.
 Using the numbers after operating lease assets and liabilities are added to
the balance sheet, the debt-to-equity ratio would be 1.52 or 152% computed
as $7.015/$4.611B.
The increase is quite significant – nearly a 21%increase of the debt-to-equity ratio!
b. Delta already adopted the lease standard. Thus, to make a correct comparison
between Delta and JetBlue – one that adopted the standard and one that did not –
the analyst will need to adjust JetBlue’s financial statements to be comparable to
Delta’s. One step, and likely the most important as JetBlue states, is the step in part
a above, putting the assets and liabilities on the balance sheet. Some companies do
not provide such clear disclosures of what the amounts will be. In that case, the
analyst needs to find the present value of the future minimum lease payments as
disclosed in the notes to estimate the liability (and asset) to add to the balance
sheet. Any difference would likely affect equity.

LO 1, 2
a. According to Verizon’s lease footnote, it has both capital and operating leases. As of
the end of 2018, the company states that only the capital leases are reported on-
balance sheet: a liability in the amount of $905 million ($316 million in current liabilities
and $589 million as long-term liabilities). However, this is not the total obligation to its
lessors. Verizon also has a significant amount of leases that it has classified as
operating, which before the recent changes to the accounting for leases were “off-
balance sheet”. Looking at the 2018 data, we can see that in fact, the minimum lease
payments under operating leases are more than 26 times that for capital leases!
b. Verizon states in their disclosures that do not know for certain what the amounts will
be, but that their estimates are that the new standard will require the addition of
somewhere in the range of $21.0 billion and $23.0 billion in additional assets and
liabilities.
c. Debt-to-equity as reported = $210,119 M/$54,710 M = 3.84 or 384%.
Debt-to-equity after adjusting for estimating operating leases

= $232,119/$54,710
= 4.24 or 424%
d. Return-on-assets will likely decline because assets will be much larger but the income
statement effect will not be very large. Rent was already being expensed and FASB
settled on straight-line-expensing for the operating leases under the new standard.
Thus, essentially the same income will be compared to a larger asset base and ROA
will likely decline (based on reported numbers).

LO 6
a. The payments promised to sponsored athletes are economically similar to a liability in

many ways. The payments do not rise to the level of a recognizable liability for GAAP
because the athlete is yet to wear the product and be sponsored (and Under Armour
has not taken control of an asset at the point when the sponsorship contract begins).
Yet, an analyst may want to consider these payments as economically equivalent to
liabilities for at least some analysis purposes. Arguably, there is an “asset” related to
these expenditures – but advertising is expensed as incurred for financial accounting
so an asset would not be considered for analysis purposes most likely.
b. The estimated amount would be the present value of the future payments.
 First we need to specify the future payments (in thousands)

o 2019 $126,221
o 2020 $106,782
o 2021 $101,543
o 2022 $98,353
o 2023 $91,337
o Then for 2024 and after, we can estimate by dividing the total by the payment in
2023
 $210,634/$91,337 = 2.3 years.
 Round to 2 years for simplicity and find the payment for the next two years:
$210,634/2 = $105,317
o 2024 $105,317
o 2025 $105,317
 Using Excel’s NPV function to estimate the amount, using the 3% interest rate
stated in the problem:
[NPV(0.03, 126221,106782,101543,98353,91337,105317,105317) }
= $656,130 thousand.
c. Under Armour does not record a liability for the lawsuit. The accrual of an
expense and recording of a liability would occur if the loss was estimable and
probable, and if the amount is material. The company says the amount is likely
not material and that the company has insurance that will cover the costs.

LO 6
a. The present value of the future payments at 2.5% using Excel’s NPV function and
assuming the “thereafter” amount on the table is all paid in 2024 is: NPV(0.025,
2447,3202,1749,1596,268,66) = $8,799 million.
b. An analyst might consider this to be essentially equivalent to a liability. The company
has promised future payments. We do not have additional information to estimate
any associated assets, however.
c. Apple has recorded a liability with respect to the Qualcomm royalty payments (and
an associated accrued expense). Apple does not disclose the amount of the liability
it has recorded, just that it has accrued its “best estimate” of the amount it will have
to pay for the resolution of the dispute.

LO 3, 4
a. Service cost is the increase in the pension obligation resulting from employees working
another year for the company. Interest cost is the accrual of interest on the
(discounted) pension obligation.
b. Payments to retirees are made from the pension investment account. There is a
corresponding reduction in the pension obligation.
c. The funded status is the pension obligation less the fair value of the plan assets. In this
case $1,007 million (pension obligation) – $864 million (plan assets) = $(143) million
funded status (when pension obligations are greater than the plan assets it is an
underfunded amount).
d. A $143 million net pension liability is reported in the balance sheet.

LO 3, 4
a. Service cost is the increase in the pension obligation resulting from employees
working another year for the company. Interest cost is the accrual of interest on the
b. Payments to retirees are made from the pension investment account. There is a
corresponding reduction in the pension obligation.
c. The funded status is the pension benefit obligation less the fair value of the plan
assets. In this case $21,531 million – $19,175 million = $(2,356) million funded
status (underfunded amount).
d. A $2,356 million net pension liability is reported on the balance sheet.

LO 5
a. In 2019, the temporary difference is $8,000. $8,000 x 25% = $2,000.

In 2020, the temporary difference reverses and no liability would be reported as of the
end of the year.
b. 2019
Income tax expense (+E, -SE)................................................. 57,000
Income taxes payable* (+L)................................................ 55,000
Deferred income tax liability (+L)........................................ 2,000
*($236,000 - $16,000) x 25% = $55,000
2020
Deferred income tax liability (-L).............................................. 2,000
*($245,000 - $0) x 25% = $61,250
c. 2019
Deferred income tax liability** (+L)..................................... 2,800
*($236,000 – $16,000) x 25% = $55,000 **($8,000 x 35% = $2,800)
2020
Deferred income tax liability (-L).............................................. 2,800
*($245,000 - $0) x 35% = $85,750

10-33. (15 minutes)
LO 5
a. $12,000 x 25% = $3,000. (None would be depreciable for book purposes
b. The entire amount will be a non-current liability.
c. $8,000 x 25% = $2,000.

LO 5
a.
To record = +1,745 -2,392 - +2,392 = -2,392
income tax Taxes Retained Income
expense Payable Earnings Tax
Expense
+647
Deferred
Tax
Liability
b. Income tax expense (+E, -SE)............................................ 2,392

Income taxes payable (+L)............................................ 1,745
Deferred income tax liability (+L)................................... 647
(Note that if you assume the taxes due are paid in cash in the reporting period, the account Income taxes
payable used above would be replaced with Cash—Cash would be reduced. Either is correct.)
c. An expense of $2,392 million is recorded in the income statement, thereby reducing

both net income and retained earnings. Liabilities are increased by $2,392 million,
$1,745 million in income taxes payable (assuming the amount due this year has not
been paid yet) and the increase of of $647million in deferred income tax liability.
d. 2016: 18.67% ($863/$4,623)
2017: 13.22% ($646/$4,886)
2018: 55.31% ($2,392/$4,325)
Nike’s tax rate is much higher in the year ended May 31, 2018 because the TCJA
was passed during this fiscal year for Nike. Examining their disclosures, they state
that they accrued an additional tax expense of $1.8 billion because of the one-time
Transition Tax (aka mandatory deemed repatriation tax) on unremitted foreign
earnings prior to the TCJA. In addition, they had an additional expense of $158
million because all their deferred tax assets and liabilities had to be re-measured at
the new tax rate.

LO 5
a.
a. To record = +2,139 -1,144 - +1,144 = -1,144
income tax Taxes Retained Income
expense. Payable Earnings Tax
Expense
-995
Deferred
Tax
Liability
b. Deferred tax liability (-L)............................................................ 995

Income tax expense (+E )......................................................... 1,144
Income tax payable (+L )..................................................... 2,139
payable used above would be replaced with Cash—Cash would be reduced. Either is correct. Also, in
this problem if you increased a Deferred Income Tax Asset for $995 million rather than decrease the
Deferred Tax Liability that is acceptable as well because the disclosures are not presented that show
whether the company has a net deferred tax asset or liability. )
c. An expense of $1,144 million is recorded in the income statement, thereby reducing

both net income and retained earnings. This total tax expense is composed of two
parts – current tax expense and deferred tax expense. The current portion ($2,139
million) approximates income taxes on the tax return for the current year (ignoring
some more complicated factors like unrecognized tax benefits, a detailed discussion
of which is beyond the scope of this text). Boeing also records an decrease in
deferred tax liabilities (or an increase in deferred tax assets) of $995 million and a
deferred tax benefit of $955.

PROBLEMS
P10-36. (25 minutes)
LO 2
a. $5,262 million ($2,380 + $2,882).
b. $5,995 million ($719 +$5,276)
c. Net book value of $346 ($992 - $646) for the asset. The liability is $347 ($123 + $224)
d. Operating leases were previously ‘off-balance’ sheet. Thus, companies often

structured their lease contracts to obtain this ‘off-balance’ sheet outcome. These
numbers tell us that operating lease liabilities are roughly 17 times the liability for
finance-type leases. How United and other companies adjust their use of operating
leases following the implementation of the new standard remains to be seen.
e. Reported ROA = 0.0475 or 4.75% ( $2,129/$44,792)
Reported Debt-to-equity = 3.48 or 348% ($34,797/$9,995)
Adjusted ROA = 0.0425 or 4.25% ($2,129/($44,792 + $5,262))
Adjusted Debt-to-Equity = 4.40 or 440% (($34,797 + $5,995)/($9,995 + (-$733*)))

*($2,380 + $2,882 -$719 - $5,276 = -$733)

LO 2
a. $9,151 million
b. $545 million
d. $9,556 million. The amount is the present value of the remaining lease payments.
e. Amortization expense for finance leases is $78 million. Amortization expense for
operating leases is zero. There is no separate amortization expense recorded for
operating leases, only a straight-line ‘lease expense’ that expenses to the total cost
of the leased asset over the lease term.

f. Interest expense for the finance lease is $48 million. Interest expense on the
operating leases is zero. There is no separate interest expense recorded for
operating leases, only a straight-line ‘lease expense’ that expenses the total cost of
the leased asset over the lease term.
g. Right-of-use asset – operating lease....................................... $10 B

Operating lease liability............................................ $10 B

LO 6
a. The use of contract manufacturers removes the manufacturing assets and related
liabilities from Cisco’s balance sheet.
Because sales are unaffected, PPE turnover is increased by the removal of assets.
The effect on net operating profit after taxes (NOPAT) is uncertain; depreciation is
removed (interest on the liabilities incurred to purchase the manufacturing assets is
also removed, but this is a nonoperating expense and, therefore, does not affect
NOPAT), but Cisco will likely pay a higher price for its manufactured goods in order
to provide the manufacturer with a return on its investment. If the contract
manufacturer is more efficient than Cisco, however, the price increase is mitigated.
Profitability will increase if the turnover effect more than offsets the negative effect
on NOPAT and profit margin, which is likely.
b. The estimate of the present value given the assumptions in the problem is
$6,163 million.
c. Cisco states that it has accrued $159 million – meaning it has reported that amount
as a (current) liability on its balance sheet.

LO 3, 4
a. Hoopes Corporation recognized $543 million as pension expense in 2019.
b. The expected return is computed as the beginning fair market value of the pension
plan assets multiplied by the long-term expected return on these investments. For
2019, this is computed as $13,295  8% = $1063.6, slightly more than the reported
amount of $1,062 million. The plan assets reported an actual return of $2,425 million.
U.S. GAAP permits the use of the expected long-term rate of return in order to
smooth earnings. If actual returns were to be used, corporate profits would fluctuate
greatly with swings in investment returns. The logic behind using the long-term rate
is that investment returns are expected to fluctuate around this average and its use
more accurately captures the average cost of the pension plan. (It is similar to the
logic of reporting held-to-maturity bond investments at historical cost rather than
current market value.)
c. The pension liability is increased by the service and interest costs and decreased by
any payments made to plan participants. The actuarial loss (gain) relates to the effects
on the pension obligation of changes in assumptions used to compute it, such as the
discount rate or the rate of expected wage inflation. The pension plan assets are
increased (decreased) by investment gains (losses), are increased by company
contributions and are decreased by benefits paid to plan participants.
d. The “funded status” is the excess (deficiency) of the pension obligation over plan
assets. If plan assets exceed pension obligation, the funded status is positive or
overfunded. If pension obligations exceed the fair value of plan assets, the funded
status is negative or underfunded. The funded status of the Hoopes Corporation
pension plan is $(1,531) million at the end of 2019. Pension obligations are $17,372
million and plan assets are $15,841 million. Hoopes should report its net funded status
as a net pension liability of $1,531 million on its balance sheet.
e. Because the pension obligation is the present value of expected pension payments, a
decrease in the discount rate increases the present value reported on the balance
sheet. The effect on the income statement is more difficult to predict (when the same
discount rate is used to compute interest expense and the PBO). The interest cost
component of pension expense is the product of the beginning of the year pension
obligation and the discount rate. In 2019, the effect of a decrease in the discount rate is
to apply a lower discount rate to a higher pension obligation. These two effects are
offsetting, but usually result in lower interest cost.
f. The estimated wage inflation rate is used to project future benefit payments.
Decreasing the estimated inflation rate decreases the pension obligation because a
lower amount of payments to plan participants is projected. Decreasing the expected
wage inflation rate reduces service cost and decreases the pension obligation reported
on the balance sheet and, consequently, the interest component of pension expense.
It is an income-increasing action.

LO 3, 4
a. Service cost is the increase in the pension obligation resulting from employees working
another year for the company. Interest cost is the accrual of interest on the
b. The “actual” return on plan assets is $4,274 million in 2017.
c. Actuarial losses (gains) generally arise as a result of decreases (increases) in the

discount rate used to compute the pension obligation (PBO). Because the PBO is the
present value of expected future payouts to retirees, a decrease in the discount rate
results in an increase in the PBO. This decrease is recorded as an actuarial loss.
d. Payments to retirees are made from the plan assets account. There is a corresponding
reduction in the pension obligation.
e. Johnson and Johnson contributed $664 million to its pension plans in 2017.
f. Johnson and Johnson paid $1,050 million in benefits to its retirees in 2017.
g. The funded status is the pension obligation less the fair value of the plan assets. In this
case $33,221 million – $28,404 million = $(4,817) million underfunded amount.
h. A $4,817 million net pension liability is reported on the balance sheet.

LO 5
a. Tax expense – 2018: $1,727 million; 2017: $971 million; 2016: $700 million.
Current tax expense – 2018: $247 mil.; 2017: $871 mil.; 2016: $417 mil.
Deferred tax expense – 2018: $1,480 mil.; 2017: $100 mil.; 2016: $283 mil.
b. 2018: $1,727 / $4,070.7 = 42.43%

2017: $971 / $3,153.8 = 30.79%
2016: $700 / $2,224.0 = 31.47%
c. Deferred tax liabilities are created when a company reports greater revenues and/or
lower expenses in the income statement than are reported on the tax return. The
most common cause is the use of accelerated depreciation for taxes and straight-
line depreciation for financial reporting. When these deferred taxes reverse (late in
the asset’s life) the deferred tax liability is reduced.

LO 5
a. Temporary differences
2019: $32,000 - $24,000 = $8,000;
2020: ($32,000 + $37,000) – ($24,000 + $26,000) = $19,000.
b. Deferred tax liability

2019: $8,000 x 25% = $2,000; 2020: $19,000 x 25% = $4,750
c. $12,000 + ($4,750 – $2,000) = $14,750
d. Income tax expense (+E, -SE).................................................. 14,750

Income taxes payable (+L).................................................. 12,000
Deferred tax liability (+L)...................................................... 2,750
+ Income Tax Expense (E) - - Income Taxes Payable (L) + - Deferred Tax Liability (L) +
(d) 14,750 12,000 (d) 2,750 (d)
payable used above would be replaced with Cash—Cash would be reduced. Either is correct.)

LO 5
a. Temporary differences
2019: $140,000 - $130,000 = $10,000;
2020: ($140,000 + $122,000) – ($130,000 + $128,000) = $4,000.
b. Deferred tax liability
2019: $10,000 x 25% = $2,500; 2020: $4,000 x 25% = $1,000
c. $45,150 + ($1,000 – $2,500) = $43,650

Deferred tax liability (-L)............................................................ 1,500
Income taxes payable (+L).................................................. 45,150
+ Income Tax Expense (E) - - Income Taxes Payable (L) + - Deferred Tax Liability (L) +
(d) 43,650 45,150 (d) (d) 1,500
payable used above would be replaced with Cash (Cash would be reduced). Either is correct.)

LO 5
a. Macy’s reported an income tax benefit of $571 million.
b. Macy’s reported a benefit because its deferred income tax liabilities are greater than its
deferred income tax assets. When the value of the liabilities is reduced to the new
lower rate, this reduces deferred tax expense (creates a benefit). Recall that when the
liability was originally recorded it was recorded as follows (in general form):
Deferred tax expense (+E) …………………. XX

Deferred tax liability (+L) ……………. XX
Now upon the TCJA enactment, the net liability is devalued to a new lower rate; the
entry is as follows (in general form):
Deferred tax liability (+L) ………………….. YY

Deferred tax expense (-E)…………….. YY

CASES and PROJECTS
C10-45. (30 minutes)

LO 3, 4
a. DowDuPont reported net pension expense of $58 million for 2018.
b. The expected rate of return is computed as the beginning fair value of the pension plan
assets multiplied by the long-term expected return on these investments. For 2018,
expected return was $2,846 on assets of $43,685 million. This implies an expected
rate of return of 6.51% ($2,846 / $43,685).
c. The pension liability is increased by the service and interest costs and decreased by
any payments made to plan participants. The actuarial loss (gain) relates to the effects
of changes in assumptions used to compute the pension obligation, such as the
discount rate or the rate of expected wage inflation. The pension plan assets are
increased (decreased) by investment gains (losses), are increased by company
contributions, and are decreased by benefits paid to plan participants.
d. The “funded status” is the excess (deficiency) of the pension obligation over plan
assets. If plan assets exceed pension obligation, the funded status is positive. If
pension obligations exceed the fair value of plan assets, the funded status is negative.
The funded status of DowDuPont’s pension plan is $(11,552) million at the end of
2018. Thus, the pension is underfunded and the balance sheet should show a net
pension liability of $11,552 million.
e. Since the pension obligation is the present value of expected pension payments, an
increase in the discount rate decreases the present value reported on the balance
sheet (and a decrease in the discount rate increases the present value reported on the
balance sheet). The effect on the income statement is more difficult to predict. The
interest cost component of pension expense is the product of the beginning-of-the-year
pension obligation and the discount rate. The effect of an increase (decrease) in the
discount rate is to apply a higher (lower) interest rate to a smaller (larger) pension
obligation. Interest expense on the pension liability will usually increase (decrease) in
this circumstance. However, the actuarial “gain” or “loss” resulting from the change in
the liability amount may offset the differential interest cost
f. An increase in expected return unambiguously increases profitability as pension cost is

reduced. This result occurs because the long-term expected rate of return is used to
compute the expected return that is subtracted in the computation of pension expense.

g. Inflation rates differ from country to country. For 2018, those rates are generally higher
outside the U.S. where Dow operates. Inflation is expected to increase in the U.S. and
could exceed the rates in other countries implying relatively higher compensation
levels. Discount rates vary across countries as well, due in part to differences in
inflation.

LO 1, 2
a. $1,965 million
b. $872 million (net of amortization)
c. $2,170 million. The amount is the present value of the remaining lease payments.
d. $65 million
e. $42 million
f. Lease expense of $251 million.
g. Amortization expense (+E)........................................................ 65

Accumulated Amortization – finance lease (+XA)........... 65
Finance Lease liability (-L )....................................................... 83

Interest expense (+E)................................................................ 42
Cash (A)......................................................................... 125
h. The lease expense for operating leases is all recorded in SG&A, which is included in
operating income. For finance leases, the amortization expense may be included in
Cost of Goods sold (thus reducing gross profit) or in SG&A, or partially in both (as it
looks like the expense for Target is). For finance leases, interest expense is reported
as non-operating on income statement. Thus, finance leases have 1) a greater annual
expense amount early in the asset’s life, 2) lower net book values early in the asset’s
life, and 3) expenses allocated to various parts of the income statement in each
reporting period (whereas operating lease expense is in one place, SG&A).
i. Target has reported debt-to-equity of 2.65 or 265% ($29,993/$11,297). Without

operating leases being “on balance sheet” Target would have had a reported debt-to-
equity of 2.51 or 251% (($29,993 - $2,170)/($11,297 + (- $205*))). Debt-to-equity is
higher when the operating leases are capitalized because there are significant liabilities
added to the balance sheet. More specifically these are debt-financed assets
essentially, thus adding substantial amounts to assets but also often very similar
amounts to liabilities. Thus, the debt-to-equity ratio rises when operating leases are
recorded on the balance sheet.
*($1,965 - $166 - $2,004 = -$205)

LO 5
a. $192,894 thousand
b. 2018: $192,894 / $452,439 = 42.63%.
2017: $166,524 / $471,911 = 35.29%.

2016: $177,839/488,007 = 36.44%
Current US: $97,202 / $379,000 = 25.65%

Deferred US: $62,893 / $379,000 = 16.59%;
Total US rate: $160,095/$379,000 = 42.24%.
c. $23,245 - $56,783 + $129,513 = $95,975 thousand

Deferred tax liability (+L)................................................ 63,381
Income taxes payable (+L)............................................. 129,513
e. $932,283 – ($17,361/0.21) = $849,612 thousand.
f. Prepaid catalog expenses are capitalized and amortized for financial reporting purposes.
However, for tax reporting purposes, the costs are expensed when paid. Consequently,
the tax deduction is recognized before the expense is recognized in the income
statement. The prepaid catalog expense of $58,693 thousand represents a temporary
difference between financial and tax reporting. The resulting deferred tax liability shown
of $5,386 thousand offsets the current deferred tax assets in the balance sheet.
g. $13,200 thousand. This amount increased income tax expense in the year ended
January 2018 (likely by the full amount because the company says they did not have
any U.S. tax accrued prior to the TCJA.)
h. A valuation allowance is a contra-asset account related to deferred tax assets.

Management establishes a valuation allowance if it thinks the deferred tax assets will
not be realized in the future. That is, management does not think the company will
generate enough future taxable income to be able to offset the future deductions
represented by the deferred tax assets. Recognizing a valuation allowance lowers the
amount of deferred tax assets recognized and reduces income (increases tax
expense).
i. Williams Sonoma recorded $28.3 million in additional tax expense related to the
devaluation of its net deferred tax assets from the U.S. statutory tax rate of 33.9% to
the new, lower rate of 21%. Deferred tax assets and liabilities are to be valued at the
enacted rate expected to be in effect with the deferred tax item reverses. In a big
picture sense, an asset the company has is now worth less.

LO 5
a. Domestic:
2018: ($2,153 + $907) / $15,800 = 19.4%
2017: ($12,608 + $220 ) / $10,700 = 119.9 %
2016: ($3,826 - $70 ) / $12,000 = 31.3%
Foreign:
2018: ($1,251 - $134) / $19,100 = 5.85%
2017: ($1,746 - $43) / $16,500 = 10.32%
2016: ($966 - $50) / $12,100 = 7.57%
Total:
2018: $4,177 / ($34,900) = 12.0%
2017: $14,531 / ($27,200) = 53.4%
2016: $4,672 / ($24,100) = 19.4%
b. Alphabet states that they have $10.2 billion due for the one-time transition tax. This
amount increased tax expense on the income statement, and reduced net income. The
amount was not paid in cash (they have eight years to pay the tax) and thus, the
company would have recorded a liability for this amount.


FA6e - Ch10 - SolutionsManual - Revised 062619

Uploaded by

Copyright:

Available Formats

FA6e - Ch10 - SolutionsManual - Revised 062619

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FA6e - Ch10 - SolutionsManual - Revised 062619

Uploaded by

Copyright:

Available Formats

CHAPTER 10

Reporting and Analyzing

Learning Objectives – coverage by question

LO1 – Define off-balance-sheet

LO2 – Account for leases using the

LO3 – Explain and interpret the

LO4 – Analyze and interpret pension

LO5 – Describe and interpret

LO6 – Describe disclosures regarding

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

Q10-12. An unrecognized tax benefit is recorded as a liability on a firm’s balance sheet

©Cambridge Business Publishers, 2020

M10-13. (35 minutes)

12/31 Operating lease liability (L)............................................ 12,000

12/31 Operating lease expense (+E)...................................... 12,000

12/31 Amortization expense – finance lease (+E, -SE).......... 9,533

12/31 Finance lease liability (-L).............................................. 7,996

©Cambridge Business Publishers, 2020

+ Cash (A) - - Operating Lease Liability – (L) +

+ Right-of-use Asset (A)—Operating Lease -

+ Lease Expense – Operating Lease (E) -

Finance Lease (ii):

+ Cash (A) - - Finance Lease Liability (L) +

+ Right-of-use Asset (A) – Finance Lease - + Interest Expense (E) -

- Accumulated Amortization – Finance + + Amortization Expense – Finance

c. Operating Lease (i):

Balance Sheet Income Statement

©Cambridge Business Publishers, 2020

Finance Lease (ii):

Balance Sheet Income Statement

M10-14. (20 minutes)

a. 7/1 Right-of-use asset – finance lease (+A) 123,100

b. 9/30 Amortization expense (+E, -SE) 3,078

9/30 Finance lease liability (-L)........................................ 2,038

12/31 Amortization expense (+E, -SE).............................. 3,078

12/31 Finance lease liability (-L)........................................ 2,079

©Cambridge Business Publishers, 2020

+ Right-of-use Asset – Finance Lease (A) - + Interest Expense (E) -

- Accumulated Amort. – Finance lease (XA) + + Amortization Expense (E) -

Balance Sheet Income Statement

9/30/20 -4,500 - = -2,038 -2,462 - +2,462 = -2,462

12/31/20 -4,500 - = -2,079 -2,421 - +2,421 = -2,421

©Cambridge Business Publishers, 2020

a. Right-of-use asset – finance lease (+A)............................. 74,520

b. Right-of-use asset – operating lease.................................. 5,853

Operating lease liability (-L)................................................ 1,000

M10-16. (25 minutes)

a. Operating Lease Liability Amortization Schedule

b. Right-of-Use Asset Amortization Schedule

©Cambridge Business Publishers, 2020

December 31, 2020

December 31, 2020

December 31, 2021

December 31, 2021

M10-17. (20 minutes)

a. Operating Lease Liability Amortization Schedule

©Cambridge Business Publishers, 2020