Describe, in bullet form, the capital lease criteria per GAAP

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1.) Describe, in bullet form, the capital lease criteria per GAAP.

2.) Using the data below, what would be the appropriate GAAP entries for (1) the disposal of old
copier and (2) recording of new copier? For any data missing, make relevant assumptions.
• Company leases an existing copier (Old Copier)
• Copier is classified as a capital lease on its books
• Copier is 3yrs into its 5yr life
• Due to certain requirements of the company they will be upgrading to a new copier
• A deal has been struck that will allow the company to trade-in its existing copier for the
new one with some additional outlay
• The new copier is also a lease for a similar 5yr term.
Old Copier
Cash Price
Lease Price
PV of Lease payments
Implied interest rate
Residual Value at end of
Lease
Useful Life
Trade-in Credit on
Transaction
Lease Payment
Length of Lease
Buyout at end of Lease

New Copier

$28,000
$30,000
$33,835
1.45% p.a.
$2,000

$48,000
$50,000
$42,576
0.85% p.a
$15,000.00

5yrs
$16,500

6yrs

$519/month
$500/principal
$19/interest
5yrs
$1

$725/month
$695/principal
$30/interest
5yrs
$9,500

3.) The Company had purchased $58,000 of inventory from Zahn (a supplier) approximately 3yrs
ago. As of today the balance of the remaining inventory was $18,674. This inventory is most
likely obsolete and will not be used in the future.
Zahn has offered to take back the inventory for future credit. Zahn is willing to offer a buy one
get one free deal based on the weight of the product returned.
Below are the relevant details. What is the value of the inventory purchased under the buy one
get one free deal? What are the entries to record the obsolete & new inventory? For any data
missing, make relevant assumptions.
Inventory on hand including obsolete inventory
Weight of inventory returned for buy one get one free deal
Weight of inventory purchased under buy one get one free deal
Amount paid for inventory purchased on buy one get one free deal

– $76,852.00
– 280g
– 500g (250g is free;
250g is purchased)
– $19,681.00

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