[Anonymous]

If anyone is using Becker, I’m talking about Chapter 5 Homework, the lease homework part of the chapter (Accounting for Leases)

This is question 33/50 about Main the pharmaceutical company.

I have no clue where the numbers Becker comes up with in the solution to explain the answer come from.

The answer is choice D. 71550

But, I don’t understand where they got the numbers from including the Total Lease Payments amounts and the Lease expense amounts

Where do they get the numbers they use in the solution based upon the information were given in the question?

If anyone can help clear this up I’d be very appreciative.

Thanks

[momto5]

First you have to figure out the total amount of lease payments over the entire term of the lease. You would pay the following:

17,500 x 9 months = 157,500

19,000 x 12 months = 228,000

20,500 x 12 months = 246,000

23,000 x 12 months = 276,000

24,500 x 12 months = 294,000

Therefore, the total lease payments come to $1,201,500. This has to be recognized equally over the life of the lease, so you take that number and divide by the total life of 60 months to come up with what the monthly payment should be (20,025).

Then the first two fiscal years they would end up paying less (157,500) than their actual expense (20,025 x 12 months = 240,300), so that would leave a deferred expense of 95,100 (82,800 + 12,300) on the books. The 3rd fiscal year and first 6 months of their 4th fiscal year they pay more than their actual expense, which uses up some of their deferred expense (23,550).

So if you take their initial overpayments and subtract their subsequent underpayments, by the end of December of year 4 the balance in their deferred expense account would still be $71,550. Does that help or do you still have questions?

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[Anonymous]

That helps a whole lot Momto5!

I now understand where the numbers are coming from. By the way I see that you passed all 4 parts now. Congratulations, very happy for you. I hope to be in your shoes someday in the near future.

[Author]

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