Assume the following direct financing-type capital lease: Present value (PV) of lease payments at 12 percent is $25,000. The leased asset is depreciated straight line over 6 years. The lease payment is $6,000. The first payment of $6,000 is to be paid at the end of the year. On a before tax basis, compute the EBT difference of lessee reported under direct financing-type capital lease compared with that reported under an operating lease for the first year will be??and how about lessor’s ?? ----------------lessee EBT difference--------------- Capital Lease //Operating Lease Interest expense $3,000 //Rental expense $6,000 Depreciation expense $4,167//******************** Total expense: $7,167 //Total expense: $6,000 Capital lease total expense ¡V Operating lease total expense = $1,167 expense is $1,167 higher for the capital lease, before-tax income is $1,167 lower ----------------lessor EBT difference--------------- Capital Lease //Operating Lease received payment $6,000 //received payment $6,000 Interest income $3,000 // Depreciation expense$4,167 principle payback $3,000 //******************** EBT: $6,000 ****** //EBT: $1,833 Capital lease EBT is $4,167 higher. ------------------------------------------------------------- is above calcualtion correct, especially in capital lesse income recognition. tks!
capital lease: interest expense = 25,000*12% = 3,000 depreciation = 25,000/6 = 4,167 total expense: 7,167 operating lease: rent = 6,000 therefore, lease related expense is higher under capital lease -> pretax income is lower by the difference 1,167
annexguy Wrote: ------------------------------------------------------- > Assume the following direct financing-type capital > lease: > Present value (PV) of lease payments at 12 > percent is $25,000. > The leased asset is depreciated straight line > over 6 years. > The lease payment is $6,000. > The first payment of $6,000 is to be paid at the > end of the year. > On a before tax basis, compute the EBT difference > of lessee reported under direct financing-type > capital lease compared with that reported under an > operating lease for the first year will be??and > how about lessor’s ?? > > ----------------lessee EBT > difference--------------- > > Capital Lease //Operating Lease > Interest expense $3,000 //Rental expense $6,000 > Depreciation expense > $4,167//******************** > Total expense: $7,167 //Total > expense: $6,000 > > Capital lease total expense ¡V Operating lease > total expense = $1,167 > expense is $1,167 higher for the capital lease, > before-tax income is $1,167 lower > ----------------lessor EBT > difference--------------- > Capital Lease //Operating Lease > received payment $6,000 //received payment > $6,000 > Interest income $3,000 // Depreciation > expense$4,167 > principle payback $3,000 //******************** > EBT: $6,000 ****** //EBT: > $1,833 > > Capital lease EBT is $4,167 higher. > -------------------------------------------------- > ----------- > is above calcualtion correct, especially in > capital lesse income recognition. tks! Agree on leasee part. As to leasor recording, the profit resource of direct financing type lease is interest income, so IMO, EBT is 3000. Operating lease recording for leaseor is correct.