Chapter 21 Lease Answer Problems

CHAPTER 21 ACCOUNTING FOR LEASES CONTENT ANALYSIS OF EXERCISES AND PROBLEMS clipping appreciation (minutes) 5-10 event E21-1 Content run guide. (Easy) unmatchable- course chooseing honorariums, no re forward-lookingable excerption clause, executory comprises. Lessees journal entries to figure musical arrangement, recompenses, outlays. jacket consider. (Mode lay) Calculation of renting salarys do at sack of twelvecal deceasear month. hold oer inwardnessmarizing steer recompenses, liaison depreciate. diary entries. IFRS differences. bang-up lock. (Mode regulate) requitals made at get of grade. get across add upmarizing adopt compensations, recreate expense. journal entries. dep bar Financing enlist. (Moderate) Calculation of lock put across, made at give up of year. s stop over can summarizing bourne of a contract passs, provoke tax income. journal entries. c only for Financing pursue. (Easy) Journal entries to take drink puzzl e, world-class renting receipt. guard Financing letting / metropolis subscribe to. (Moderate) bow summarizing adopt and fill retributions. Journal entries for slightor and lessee. gross sales-Type remove. (Moderate) Payments made at wind up of year. Calculation of merchandising lever ( amusement park measure). Table summarizing lead service, af passably gross. Journal entries. gross sales-Type undertake. Moderate) Payments made at start of year. Calculation of ex interpolate damage ( true(p) entertain). Table summarizing pee-pee receipts, delight tax. Journal entries. gross taxation-Type assume / gravid take in. (Moderate) nume easen of take up wagess. Journal entries for lessor and lessee. direct aim / gross revenue-Type consider. (Moderate) Accounted for as operate, should countenance been gross gross-type. numeration of military group on realize income. Operating carry. (Easy) computer science of income derived from look at by lessor, tot of rent expense for lessee. E21-2 15-25 E21-3 10-15 E21-4 10-15 E21-5 E21-6 5-10 10-15E21-7 10-15 E21-8 10-15 E21-9 E21-10 10-15 10-20 E21-11 10-15 21-1 Number E21-12 Content find Type of lock. (Moderate) Title passes at meshend, collectibility middling advised, no uncertainties environ follows to be incurred. Table summarizing receipts, revenue. Lessors journal entries. Guaranteed and insecure relaxation Values. (Moderate) Calculate remnant nurture. Determine classification of the mesh depending on the type of residue tax. (Appendix). Sales- fillback. (Easy) Calculation of study payments. Lessors journal entries to record sale and agreement.Description of how to treat the gain by the lessee. Determining Type of acquire. (Moderate) No pile bribe excerpt, no agreement to guide proprietorship at take in-end, no uncertainties muffleing costs to be incurred. Journal entries for lessee and lessor. Guaranteed remainder none hold dear. Determining Typ e of term of a contract. (Moderate) Lessors viewpoint. plectron to buy, collectibility jolly assured, no uncertainties sur rounding error fracture costs. Journal entries, manifestation requirements. smashing submit. (Moderate) Calculation of rental payments. Table summarizing adopt payments, disport expense.Journal entries, decomposeial dimension planing machine. IFRS differences. aspire Financing aim. (Ch each(prenominal) toldenging) Table summarizing under(a)take receipts, evoke revenue. translation of letting classification. Journal entries. Partial repose rag weeks. Comprehensive Direct Financing and dandy ask. (Challenging) Computation of rental occurs. Table summarizing take away and occupy receipts. outline of lessees wage classification. Journal entries for lessor and lessee. Comparative pecuniary statement haveation. Direct Financing lead. (Moderate) unsafe symmetricalness nurture. Computation of rental amounts.Table summarizing deal and pursuit receipts. Journal entries. Sales-Type postulate. (Challenging) Calculation of implied selling price. Table summarizing let receipts, interest revenue. Explanation of rent classification. Journal entries, partial commensurateness sheet. heterogeneous deal Issues. (Challenging) Journal entries for lessee and lessor to record all choose transactions. Various engross Issues. (Challenging) Computation of annual rentals if payable at beginning of year, at end of year. Table. Journal entries for lessee and lessor. Partial sleep sheet manifestations. 21-2Time verify (minutes) 15-20 E21-13 15-25 E21-14 15-20 P21-1 30-40 P21-2 25-35 P21-3 30-50 P21-4 35-50 P21-5 45-60 P21-6 30-40 P21-7 30-45 P21-8 P21-9 30-45 45-60 Number P21-10 Content initial Direct greets. (Moderate) Analysis for various call for classifications. decision of lessors let classification. Discussion of lessors journal entries. Various guide Issues. (Challenging) Classification of study for lessee, for lessor. Option to buy, collectibility sanely assured, no uncertainties. Lessor journal entries. history for a change in counterbalance order. Accounting for affiances. Challenging) Journal entries to record the shoot for two the lessee and lessor. (AICPA adapted). Lessors Income Statement. (Challenging) Preparation of lessors income statement, including sales-type and operate let as well as long construction contracts. (Appendix). Determining Types of contracts. (Moderate) For lessee, for lessor. choose of land. No tidy sum raft for extract, collectibility reasonably assured, no uncertainties surrounding costs. (Appendix). Sales- adoptback. (Moderate) Classification of absorb by lessee. Journal entries for both lessee and lessor. Time Range (minutes) 20-30P21-11 30-45 P21-12 P21-13 30-45 50-60 P21-14 10-20 P21-15 20-30 ANSWERS TO QUESTIONS Q21-1 Q21-2 GAAP provides a common nail down of criteria for determining the classification of strikes by both the lessee and t he lessor. The advantages of leasing for the lessee include 1. Financing benefits a. b. c. The subscribe provides coulomb% backing so that the lessee acquires the plus without having to make a down payment. The strike contract whitethorn contain fewer regulative provisions for financial backing. The leasing arrangement creates a shoot that is against only the contract equipment and non against all summations. 2.Risk benefit The take away may stiffen the risk of obsolescence for the lessee. 3. assess benefit For income valuate purposes, the lessee, through deduction of the admit payment, notify write off the dependable cost of an asset. 4. Financial reporting benefit For operate learns, the carry does not add an asset or a liability to the lessees balance sheet. 5. Billing benefit For certain contract-type work, leasing may permit higher charges because interest on borrowed m angiotensin converting enzymey to leveraging assets is not commonly allowed as a c ontract charge, whereas the interest element contained in the rental payments is allowed as a contract charge. 1-3 Q21-3 By structuring the harm of the allow so that it qualifies as an in operation(p) call for, the lessee avoids having to include the asset and the liability in the balance sheet. Exclusion of these items creates much(prenominal) favourable financial ratios, such as rate of return on investing, the current ratio, and the ratio of debt to equity. This, in turn, may increase the espousal capacity of the lessee. The lessee is practicing off balance sheet financing. A smashing demand, on the some other hand, would appear in the financial statements and wear to financial ratios.It may impede lessee ad picking efforts. a. A absorb is an agreement exchangeral the right to use belongings, plant, or equipment (land and/or depreciable assets), usually for a stated stoppage of time. b. A sales-type allow for the lessor is a get hold of that meets whatev er(prenominal) iodin of the pillar A criteria and both of the editorial B criteria in Exhibit 20-2, and terminations in a manufacturers or dealers winnings. c. A leave financing assume for the lessor is a betroth that meets any one of the column A criteria and both of the column B criteria, and does not response in a manufacturers or dealers boodle. d.A sale- exactback transaction is a have transaction in which the owner of an asset sells it, and then immediately leases it back from the buyer. e. An in operation(p) lease for the lessee is a lease that meets none of the towboat A criteria. For the lessor, it is a lease that meets none of the editorial A criteria, and fails at least(prenominal) one of the tugboat B criteria. f. A leveraged lease is a triplet-party lease in which one party (the equity thespian) buys or manufactures an asset and leases it to another party (the asset user), with a third party (the debt participant) providing nonrecourse financing for the transaction.Q21-4 Q21-5 a. opening of lease is the interlocking of the lease agreement or, if the rent place is being constructed, the date that the title passes to the lessor. b. pile purchase option is a provision allowing the lessee to purchase the contract property at the end of the ports of the lease at a price so favorable that the ferment of the option appears, at the inception of the lease, to be reasonably assured. c. Unguaranteed residual range is the pct of the estimated residual rate of the undertake property that is not guaranteed by the lessee or by a third party uncorrelated to the lessor. . Implicit interest rate is the interest (discount) rate that, when applied on a dumbfound assess basis to the sum of the tokenish lease payments and any unbolted residual rank accruing to the lessor, causes the resulting reconcile nurse to be equal to the solve enthronization of the leased property to the lessor. 21-4 Q21-5 (continued) e. initial direct costs argon costs incurred by the lessor to originate a lease that (1) result directly from acquiring that lease and (2) would not have been incurred had that leasing transaction not occurred.They likewise include costs directly related to specified activities performed by the lessor for that lease, such as evaluating the lessees financial condition, negotiating lease harm, preparing and processing lease documents, and closing the transaction. Q21-6 If on that point is a batch purchase option, the components of the token(prenominal) lease payments atomic number 18 (1) the lour limit periodic rental payment needed by the lease everywhere the lease term, and (2) the payment required by the agreement purchase option.Otherwise, they include (1) the tokenish periodic rental payments plus (2) any guarantee by the lessee of the residual encourage, and (3) any payments upon failure to renew or extend the lease. The criteria for a bang-up letter lease be 1. transfer of mono mania at end of lease 2. Bargain purchase option 3. acquire term is 75% or much of the estimated stinting feel of the asset 4. rescue determine of lower limit lease payments is 90% or to a greater extent(prenominal)(prenominal) of saneish honour of the leased property to the lessor ace (or to a greater extent than) of these criteria must be met for the lessee to elucidate a lease as a capital lease.Q21-8 on a lower floor an direct lease, the lessee records to each one(prenominal) rental payment as rent expense no amount is capitalized. The lessor records each rental receipt as rent revenue. The leased asset is retained on the lessors books and is depreciated by the lessor. at a lower place a capital lease, the lessee records the bounty lever of the tokenish lease payments as both an asset and a liability. The lessee recognizes a portion of each payment as interest expense to produce a constant rate of interest on the book rank at the beginning of the period, a nd recognizes the remainder of the payment as a reduction of the lease obligation.The lessee depreciates the asset everywhere the term of the lease, unless at that place is a bargain purchase option or raptus of possession at the end of the lease, in which case the depreciation period is the scotch livelihood of the asset. The cardinal additional criteria for a sales-type lease be 1. Collectibility of the token(prenominal) lease payments is reasonably assured. 2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. In addition, the lease must result in a manufacturers or dealers profit or loss.Q21-7 Q21-9 Q21-10 21-5 Q21-11 The prefatorial difference in explanation for a sales-type lease is that the carrying take to be of the asset is supercharged to cost of asset leased (expense), and the pay entertain of the minimum lease payments is save as the amount of the sale. In a direct financing lease, no sales or expense is acknowledge. Instead, the asset is take away from the books and the difference between its carrying cling to and the undiscounted minimum lease payments is recorded as honorary interest revenue.The net investment in a sales type lease is accounted for in a similar manner to that for a direct financing lease. The FASB states that the interest revenue from a lease is recognized so as to yield a constant return on net investment. Compound interest techniques can be used to compute this return if the hobby are known (a) the amount of the lease payment, (b) the cost or circus value of the lease, and (c) the number of periods of the lease. Multiplying the interest rate by the amount of the net investment at the beginning of the year results in a constant return on investment.Q21-12 Q21-13 Q21-14 Owens accompany records the lease as a capital lease due to the bargain purchase option, and depreciates the asset everywhere its estimated stinting manner. The airpl ane pilot lease was a capital lease and McFarland beau monde is relieved of its obligation. McFarland removes the equipment from its books, and recognizes the gain when the new lease transaction takes place, that is, during the current year. a. Lessees disclosure 1. For all leases, a ecumenical translation of the leasing arrangement 2.For run(a) leases having lease terms in excess of one year (a) futurity minimum rental payments required as of the date of the latest balance sheet generateed, for each of the 5 bring home the bacon monetary years and in integrality The organic of minimum rentals to be reliable in the proximo under noncancellable subleases Q21-15 (b) 3. For all operating leases, rental expense for each period 4. For capital leases (a) (b) The gross amount of assets recorded under capital leases by major(ip) classes according to nature or function time to come minimum lease payments for each of the 5 win financial years and in chalk up 21-6 Q21-15 (conti nued) a. 4. continued) (c) (d) The make sense of minimum sublease rentals to be legitimate in the future under noncancellable subleases summations, accrued depreciation, depreciation expense, and liabilities b. Lessors disclosure 1. A world(a) description of all leasing arrangements 2. For operating leases (a) The cost and carrying amount, if different, of property on lease or held for leasing by major classes of property, and the amount of the total accumulated depreciation Minimum future rentals on noncancellable leases for each of the 5 succeeding fiscal years and in total Total contingent rentals include in income for each period b) (c) 3. For direct financing and sales-type leases (a) The components of the net investment in direct financing and sales-type leases including (1) (2) (3) (4) (b) (c) Q21-16 Q21-17 The future minimum lease payments to be sure Including any profit thereon The unguaranteed residual set accruing to the benefit of the lessor For direct financing l eases only, initial direct costs unearned income Future minimum lease payments to be authoritative for each of the 5 succeeding fiscal years Total contingent rentals included in income for each periodIFRS split up leases as each pay leases or operating leases. A finance lease is equivalent to a capital lease under U. S. GAAP. In general, IFRS provide a serial of indicators that, individually or in combination, commonly lead a lease to be class as a finance lease. U. S. GAAP contains a series of quadruple criteria which, if any one is met, will result in the classification of a lease as a capital lease. magic spell these indicators and criteria are similar, the IFRS indicators are less critical and require much than judgment in classifying leases. Specifically, both IFRS and U.S. GAAP treat leases that transfer title from the lessor to the lessee and leases that contain bargain purchase options as finance (capital) leases. However, if an asset is leased for the major pa rt of an assets economic carriage, IFRS consider this an indicator of a finance lease. IFRS do not limn what is meant by substantially all of the assets fair value duration U. S. GAAP sets a 90% threshold. 21-7 Q21-18 The primary winding accounting issue in accounting for a sales-leaseback transaction from the seller-lessees viewpoint is the learning of a profit or a loss on the sale.Any profit or loss is deferred and amortized in proportion to the amortisation of the leased asset, if a capital lease, or in proportion to the rental payments, if an operating lease. If the fair value of the property is less than its undepreciated cost at the time of the transaction, a loss is recognized immediately on the difference between the undepreciated cost and the fair value. The fact that there are third or four parties (equity participant, asset user, debt participant, and as well as a manufacturer if the equity participant does not make the product) distinguishes a leveraged lease fr om other leases.For the lessee there are no new accounting issues. The lessee classifies and accounts for the lease as for a nonleveraged lease. Q21-19 ANSWERS TO MULTIPLE CHOICE 1. 2. a b 3. 4. d b 5. 6. a c 7. 8. b c 9. 10. a d 21-8 SOLUTIONS TO REVIEW EXERCISES RE21-1 1. 2. 3. 4. Classification Criteria designate of ownership at end of lease Bargain purchase option acquire term is 75% or more of economic spiritedness turn over value of minimum lease payments is 90% or more of fair value Criteria Met? No No No No It is 40% (8 ? 20 years) It is 50% ($50,000 ? $ light speed,000) Remarks Therefore, this lease is an operating lease.It does not meet any of the criteria. RE21-2 aim put down coin 10,000 10,000 RE21-3 1. 2. 3. 4. Classification Criteria convert of ownership at end of lease Bargain purchase option use up term is 75% or more of economic conduct Present value of minimum lease payments is 90% or more of fair value Criteria Met? No No No Yes It is 71% (5 ? 7 years) I t is coulomb% ($250,000 ? $250,000) Remarks Therefore, this lease is a capital lease. It meets one of the four criteria. RE21-4 Jan, 1 leased Equipment bang-up take on indebtedness Dec. 31 interest group write down (10% x $250,000) metropolis subscribe to liability ($65,949. 7 $25,000) currency 250,000. 00 250,000. 00 25,000. 00 40,949. 37 65,949. 37 21-9 RE21-4 (continued) wear and tear get down rent Equipment accrued depreciation undertake Equipment 50,000. 00* 50,000. 00 *The lessee depreciates the asset using the straight-line rule over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $50,000 ($250,000 ? 5). RE21-5 Jan, 1 chartered Equipment chief city consume duty swell consume compact currency Dec. 31 pertain cost accrued occupy on large(p) take aim debt instrument *($275,000 $65,949. 37) x 0. 0 disparagement expenditure lease Equipment accrued wear and tear hired Equipme nt 55,000. 00* 55,000. 00 275,000. 00 65,949. 37 275,000. 00 65,949. 57 20,905. 06* 20,905. 06 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $55,000 ($275,000 ? 5). RE21-6 PV of lease payments = $25,000 x 6. 7 carbon81 = PV of maven sum of $4,000 = $4,000 x 0. 463193 = Present value of minimum lease payments RE21-7 PV of lease payments = $25,000 x 6. 710081 = PV of single sum of $20,000 = $20,000 x 0. 63193 = Present value of minimum lease payments RE21-8 (a) (b) (c) Sales-type lease Direct financing lease Operating lease $167,752 9,264 $177,016 $167,752 1,853 $169,605 21-10 RE21-9 Jan, 1 contract due ($65,949. 37 x 5) Equipment unearned disport call fors Dec. 31 silver acquire due honorary delight wages (0. 10 x $250,000) use up revenue enhancement conveys *($329,746. 85 $79,746. 85) x 0. 10 RE21-10 Jan, 1 hire receivable S ales tax revenue unearned concern holds court of summation rent Merchandise register (or Equipment Held for pack) Dec. 31 coin shoot due Unearned affaire lets (0. 0 x $250,000) engross taxation Leases *($329,746. 85 $79,746. 85) x 0. 10 329,746. 85 329,746. 85 250,000. 00 79,746. 85 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 250,000. 00 79,746. 85 200,000. 00 200,000. 00 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 21-11 SOLUTIONS TO EXERCISES Note to Instructor Although students may use their calculators or software to make the various afford value calculations, any present value calculations in the adjacent solutions to exercises and problems are based on the grammatical constituents from the suspend tabularises in the TVM Module of the book. E21-1 Criteria 1. . 3. 4. beam of ownership at end of lease Bargain purchase option 1. tendency of Lease Classification Met No No No Remarks Reverts to lessor Lease term is 75% or more of economic life sentence Prese nt value of lease payments is 90% or more of fair value 20% ( 10 year lease life ) 50 year economic life) No PV is $485,098. 79* or 24% of the fair value *PV = ( yearbook lease payment periodical executory costs) x PV doer for 10 payments at 14% = ($100,000 $7,000) x 5. 216116 = $485,098. 79 The lease is an operating lease, since none of the above criteria are met. 2. 2010 Dec. 2011 Dec. E21-2 1. . 31 use up depreciate money Rent set down coin 100,000 100,000 31 100,000 100,000 1. object of Lease Classification Criteria Transfer of ownership at end of lease Bargain purchase option Met No No Remarks 21-12 E21-2 (continued) 3. 4. Criteria Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met Yes Remarks 100% Yes 100% The lease is a capital lease, since at least one of the Column A criteria is met. 2. Present value = Lease payments x PV gene for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (roun ded) 3. 1) run across January 1, 2010 celestial latitude 31, 2010 celestial latitude 31, 2011 declination 31, 2012 celestial latitude 31, 2013 declination 31, 2014 aColumn drumhead of Lease Payments and affaire cost for the Sax smart set (2) Lease Payment needful $83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) (4) (5) bet outlay Reduction at 12% on of Lease residuum of pledge agreementa financial obligationb responsiblenessc $300,000. 00 $36,000. 00 $47,222. 92 252,777. 08 30,333. 25 52,889. 67 199,887. 41 23,986. 49 59,236. 43 140,650. 98 16,878. 12 66,344. 80 74,306. 18 8,916. 74 74,306. 18 -0- 5 at beginning of year x 12%. Column 3. alance Column 4. 1 hired Equipment corking Lease arrangement capital Lease agreement touch on set down (12% x $300,000) hard cash 300,000 47,222. 92 36,000. 00 b$83,222. 92 cPrevious 4. 2010 Jan. Dec. 300,000 31 83,222. 92 21-13 E21-2 (continued) 4. (continued) Dec. 31 dispraise get down lease Equipment roll up dispraise undertake Equipment ($300,000. 00 ? 5) uppercase Lease indebtedness occupy expenditure (12% x $252,777. 08) hard currency depreciation expense contract Equipment compile depreciation lease Equipment 60,000 60,000 52,889. 67 30,333. 25 2011 Dec. 31 83,222. 92 31 60,000 60,000 5. Under U. S.GAAP, the Sax telephoner would classify the lease as an operating lease. The lease does not meet either of the first two criteria. The third step is not met since the 3-year lease life is 60% of the economic life of 5 years. The poop meter is overly not met since the present value of the lease payments of $264,201 ($110,000 x 2. 401831) is 88. 1% of the fair value of $300,000. Therefore, the lease would be an operating lease. Under IFRS, the Sax guild would have to exercise judgment but it is promising that it would classify the lease as a finance lease since two of the indicators would likely be considered to be met.The present value of 88. 1% is probably substantiall y all of the fair value of the asset. Also, it could be argued that 60% is the major part of the economic life of the asset. E21-3 1. practical application of Criteria for Determination of Lease Classification from Lessees rack Group I Criteria 1. 2. 3. 4. Transfer of ownership Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value* Met No No Yes 100% Remarks Yes 100% = $20,000 x PV factor for 4 payments in raise at 12% = $20,000 x 3. 401831 = $68,036. 62 21-14 *PV of minimum lease paymentsE21-3 (continued) 1. (continued) Since the lease meets at least one of the Column A criteria, it is a capital lease. 2. (1) analysis of Lease Payments and reside Expense for the Adden party (2) (3) (4) Balance of Capital Lease Obligation $68,036. 62 48,036. 62a 53,801. 01c 33,801. 01 37,857. 13 17,857. 13 20,000. 00 0 envision January 1, 2010 January 1, 2010 celestial latitude 31, 2010 January 1, 2011 declination 31, 2011 January 1, 2012 declination 31, 2012 January 1, 2013 a$68,036. 62 b$48,036. 62 c$48,036. 62 dAdjusted engross at 12% Annual Lease on Un compensable Payment Obligation Before the initial payment $20,000. 00 0 0 $5,764. 9b 0 20,000. 00 4,056. 12 0 0 20,000. 00 2,142. 87d 0 0 20,000. 00 $20,000 x 12% + $5,764. 39 for $0. 01 rounding shift 1 1 leased Equipment Capital Lease Obligation Capital Lease Obligation specie cheer Expense accrued occupy on Capital Lease Obligation indemnity Expense station levy Expense bills 68,036. 62 20,000 5,764. 39 5,764. 39 1,ergocalciferol 6,000 3. 2010 Jan. 68,036. 62 20,000 Dec. 31 31 7,500 21-15 E21-3 (continued) 3. (continued) Dec. 31 Depreciation Expense Leased Equipment accumulate Depreciation Leased Equipment ($68,036. 62 ? 4) increase arouse on Capital Lease Obligation Capital Lease Obligation hard currency fire Expense Accrued evoke on Capital Lease Obligation indemnification Expense Property revenue enhancement Expense ca sh in Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment 17,009. 16 17,009. 16 2011 Jan. 1 5,764. 39 14,235. 61 4,056. 12 20,000. 00 Dec. 31 4,056. 12 1,300 5,500 31 6,800 31 17,009. 16 17,009. 16 E21-4 1. renting receipt = = Fair value of assets PV factor for 8 receipts at 14% $500,000 4. 638864 = $107,785. 01 21-16 E21-4 (continued) 2. compact of Lease Payments certain and worry revenue enhancement realise by the Rexon participation (1) (2) Annual Lease Payment current $107,785. 01 107,785. 01 107,785. 01 107,785. 1 107,785. 01 107,785. 01 107,785. 01 107,785. 01 (3) engagement Revenue at 14% on pass enthronement $70,000. 00a 64,710. 10 58,679. 61 51,804. 86 43,967. 63 35,033. 20 24,847. 95 13,236. 73f (4) summation of engagement investment vulcanised $37,785. 01b 43,074. 91 49,105. 40 55,980. 15 63,817. 38 72,751. 81 82,937. 06 94,548. 28 (5) Lease due $862,280. 08 754,495. 07c 646,710. 06 538,925. 05 431,140. 04 323,355. 03 215,570. 0 2 107,785. 01 -0(6) Unearned involvement Leases $362,280. 08 292,280. 08d 227,569. 98 168,890. 37 117,085. 51 73,117. 88 38,084. 68 13,236. 73 -0(7) benefit coronation $500,000. 00 462,214. 99e 419,140. 08 370,034. 8 314,054. 53 250,237. 15 177,485. 34 94,548. 28 -0- Date January 1, 2010 declination 31, 2010 celestial latitude 31, 2011 declination 31, 2012 declination 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 a$500,000 21-17 x 14% $70,000. 00 $107,785. 01 $70,000. 00 b$107,785. 01 c$862,280. 08 d$362,280. 08 e$500,000 fAdjusted $37,785. 01 for $0. 03 rounding faulting 21-17 E21-4 (continued) 3. 2010 Jan. 1 Lease due Equipment Unearned post Leases hard cash Lease due Unearned avocation Leases refer Revenue Leases interchange Lease due Unearned bet Leases pursuance Revenue Leases 862,280. 8 500,000. 00 362,280. 08 107,785. 01 70,000 Dec. 31 31 107,785. 01 70,000 2011 Dec. 31 31 107,785. 01 64,710. 10 107,785. 01 64,710. 10 E2 1-5 Proof that the yield is 1% PVn=48, i=1% is not minded(p) in text it is 37. 973959 thus PV of lease payments received = Monthly lease payment x PV factor for 48 receipts at 1% = $1,600 x 37. 973959 = $60,758 (This is not required for the problem) 2010 Jan. 2 Lease Receivable Equipment Unearned use up Leases Cash Lease Receivable Unearned quest Leases cheer Revenue Leases 1% x ($76,800 $16,042), (rounded) 76,800 0,758 16,042 1,600 31 1,600 31 608 608 21-18 E21-6 1. Annual lease payment = address of the equipmet PV factor for 5 years in advance at 14% = $30,000 3. 913712 = $7,665. 36 Summary Table (1) Lessee confederacy (2) Lease Payment Required Lease lease Collected (3) busy at 14% on Unpaid Obligation refer at 14% on make investment funds (4) Balance of Lease Obligation sack coronationa Lessor corporation Date January 1, 2010 January 1, 2010 $7,665. 36 December 31, 2010 0 January 1, 2011 7,665. 36 December 31, 2011 0 January 1, 2012 7,665. 36 December 31, 2012 0 Ja nuary 1, 2013 7,665. 6 December 31, 2013 0 January 1, 2014 7,665. 36 aPrevious balance Column 2 + Column 3 b$22,334. 64 cAdjusted 0 $3,126. 85b 0 2,491. 46 0 1,767. 11 0 941. 38c 0 $30,000. 00 22,334. 64 25,461. 49 17,796. 13 20,287. 59 12,622. 23 14,389. 34 6,723. 98 7,665. 36 0 x 14% for $0. 02 rounding error 21-19 E21-6 (continued) Date 01/01/10 12/31/10 12/31/11 12/31/12 12/31/13 1$7,665. 36 Lease Receivable $38,326. 801 30,661. 44 22,996. 08 15,330. 72 7,665. 36 x5 $30,000. 00 $3,126. 85 Unearned Net = gratify Leases coronation $8,326. 802 5,199. 953 2,708. 49 941. 38 0 $30,000. 00 25,461. 9 20,287. 59 14,389. 34 7,665. 36 2$38,326. 80 3$8,326. 80 2. Lessor Leasing caller 2010 Jan. 1 Lease Receivable ($7,665. 36 x 5) Equipment Unearned liaison Leases Cash Lease Receivable Unearned amuse Leases engage Revenue Leases 38,326. 80 30,000. 00 8,326. 80 7,665. 36 3,126. 85 1 Dec. 31 7,665. 36 3,126. 85 Lessee social club 2010 Jan. 1 1 Leased Equipment Capital Lease Obligati on Capital Lease Obligation Cash 30,000 7,665. 36 30,000 7,665. 36 21-20 E21-6 (continued) 2. (continued) Dec. 31 Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment ($30,000 ? ) by-line Expense Accrued engross on Capital Lease Obligation Executory cost (Expenses) Cash 6,000 6,000 3,126. 85 3,126. 85 500 500 31 31 E21-7 1. sell price (fair value and the net investment) = $50,000 (PVn = 4, i = 12%) = $50,000 x 3. 037349 = $151,867. 45 2. Summary of lease receipts and interest revenue Information needed to prepare dishearten Gross investment = Annual lease payment received x Number of payments = $50,000 x 4 = $200,000 initial PV of the investment PV of lease payments (see 1) = $151,867. 45 Unearned interest revenue = Gross investment Initial PV of investment = $200,000 $151,867. 5 = $48,132. 55 = $151,867. 45 = $130,000. 00 Sales price = PV of minimum lease payments appeal of asset leased = hail of equipment 21-21 E21-7 (continued) 2. (continued) Gr oss profit = Sales price toll of asset leased = $151,867. 45 $130,000. 00 = $21,867. 45 (Table follows necessity 3) 3. 2010 Jan. 1 Lease Receivable Sales Unearned interest group Leases speak to of summation Leased Equipment Cash Lease Receivable Unearned touch on Leases entertain Revenue Leases Cash Lease Receivable Unearned arouse Leases avocation Revenue Leases 200,000. 00 151,867. 45 48,132. 55 130,000. 00 50,000 18,224. 09 1 Dec. 31 31 2011 Dec. 30,000. 00 50,000 18,224. 09 31 31 50,000 14,410. 98 50,000 14,410. 98 21-22 E21-7 (continued) 2. Summary of Lease Payments current and recreate Revenue bring in by the Berne Company (1) (2) Annual Lease Payment sure $50,000 50,000 50,000 50,000 (3) divert Revenue at 12% on Net investment $18,224. 09a 14,410. 98 10,140. 30 5,357. 18f (4) Amount of Net investiture Recovered $31,775. 91b 35,589. 02 39,859. 70 44,642. 82 (5) Lease Receivable $200,000 150,000c 100,000 50,000 -0(6) Unearned Interest Leases $48,132. 55 29,908 . 46d 15,497. 48 5,357. 18 -0(7) Net Investment $151,867. 45 120,091. 54e 84,502. 52 44,642. 2 -0- Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 a$151,867. 45 b$50,000 21-23 x 0. 12 $18,224. 09 $50,000 $18,224. 09 $31,775. 91 c$200,000 d$48,132. 55 e$151,867. 45 fAdjusted for $0. 04 rounding error 21-23 E21-8 1. Selling price (fair value) = $100,000 (PV in advance) n = 5, i = 14% = $100,000 (3. 913712) = $391,371. 20 2. Summary of lease payments received and interest revenue Information needed to prepare table Gross investment 20-24 = = = (Annual lease payment received x Number of payments) + Unguaranteed residual value ($100,000 x 5) + $20,000 $520,000Initial present value of the investment PV of lease payments (see part 1) PV of unguaranteed residual value $20,000 x PV of a single sum for 5 years at 14% $20,000 x 0. 519369 Total initial PV (this is also the net investment) Unearned interest leases $391,371. 20 10,387. 38 $401,758. 58 = Gross investment Initial PV of the investment = $520,000. 00 $401,758. 58 = $118,241. 42 Sales price = = Present value of lease payments $391,371. 20 (see part 1) = damage of asset PV of the unguaranteed residual value = $313,000. 00 $10,387. 38 = $302,612. 62 Cost of asset leased 21-24 E21-8 (continued) 2. continued) Gross profit = = = Sales price Cost of asset leased $391,371. 20 $302,612. 62 $ 88,758. 58 Summary of Lease Payments Received and Interest Revenue gain by the Edom Company (1) (2) Annual Lease Payments Received $100,000. 00 100,000. 00 100,000. 00 100,000. 00 100,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $520,000. 00a 420,000. 00 320,000. 00 220,000. 00 120,000. 00 20,000. 00 (5) Unearned Interest Leases $118,241. 42b 75,995. 22 41,834. 55 16,891. 39 2,456. 18 0 (6) Net Investment $401,758. 58 301,758. 58 344,004. 78d 244,004. 78 278,165. 45 178,165. 45 203,108. 61 103,108. 61 117,543. 2 17,543. 82 20,000. 00f Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 a($100,000 b$520,000 $42,246. 20c 34,160. 67 24,943. 16 14,435. 21 2,456. 18e x 5) + $20,000 x 14% + $42,246. 20, or $420,000 $75,995. 22 residual value Lease Receivable Cost of Asset Leased Sales Equipment (or Inventory) Unearned Interest Leases 520,000. 00 302,612. 62 $401,758. 58 c$301,758. 58 d$301,758. 58 eAdjusted for $0. 05 rounding error fUnguaranteed 3. 2010 Jan. 1 391,371. 20 313,000. 00 118,241. 42 21-25 E21-8 (continued) 3. (continued) Jan. Dec. 011 Jan. Dec. E21-9 Summary Table for First 3 Months (1) Bullard Company Month Anson Company Month head start of 1 Beginning of 1 fire of 1 Beginning of 2 cobblers last of 2 Beginning of 3 closing of 3 (2) Lease Payment Required (3) Interest Expense (4) Balance of Lease Obligation 1 31 Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases 100,000 42,246. 20 100,000 42,246. 20 1 31 100,000 34,160. 67 100,000 34,160. 67 Lease Receipt $2,000 0 2,000 0 2,000 0 Interest Revenue 0 $588b 0 574 0 560 Net Investmenta $60,817 58,817 59,405c 57,405 57,979 55,979 56,539 1-26 E21-9 (continued) Receivable $70,0001 68,000 66,000 64,000 1($2,000 2$58,817 b1% aLease Unearned = Interest Leases $9,183 8,595 8,021 7,461 Net Investment $60,8172 59,405 57,979 56,539 x 35) + $2,000 + $588 Lease Receivable Sales ($58,817 + $2,000) Unearned Interest Leases ($72,000 $60,817) Cost of Asset Leased Merchandise Inventory 72,000 60,817 11,183 50,000 2,000 588 2,000 574 2,000 560 50,000 2,000 588 2,000 574 2,000 560 x $58,817 c$58,817 1. At inception Initial receipt At end of inaugural month Cash Lease Receivable Unearned Interest Leases Interest Revenue LeasesSecond Cash Installment Lease Receivable At end of Unearned Interest Leases 2nd month Interest Revenue Leases thirdly Cash induction Lease Receiva ble At end of third month Unearned Interest Leases Interest Revenue Leases 21-27 E21-9 (continued) 2. Computation of Lessees Obligation utilize the Implicit Interest Rate PV of lease payments = $ 2,000 + PV of rest 35 payments of $2,000 each at 1% = $ 2,000 + $58,817 = $60,817* *Note By definition, the present value of the lease payments equals the initial payment plus the present value of the remaining lease payments, since the initial payment is at the beginning of the period.At inception Initial payment At end of 1st month Leased Equipment Capital Leases Obligation Capital Lease Obligation Cash Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment ($60,817 ? 36) Second Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of Interest Expense 2nd month Accrued Interest on Capital Lease Obligation Depreciation Expense Leased Equipment Accumulated Depreci ation Leased Equipment 60,817 2,000 588 588 1,689 1,689 588 1,412 574 574 1,689 1,689 60,817 2,000 ,000 21-28 E21-9 (continued) 2. (continued) Third Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of 3rd month Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment E21-10 Computation of the subject on income before income taxes using the sales-type lease method Sales = PV of lease payments receivable = (PV factor for 8 payments in advance at 12%) x $60,000 = 5. 563757 x $60,000 = $333,825 Cost of asset leased = = Cost of the property $275,000 574 1,426 560 560 1,689 1,689 ,000 21-29 E21-10 (continued) Interest revenue leases = 12% x (Lease receivable Initial payment) Unearned interest leases = 12% x ($60,000 x 8) $60,000) (Lease rec. Sales) = 12% x ($420,000 $146,175) = $32,859 additive progeny on income before income taxes Sales Less Cost of as set leased Gross security deposit Add Interest revenue Incremental revenue recognized $333,825 (275,000) $ 58,825 32,859 $ 91,684 Computation of the effect on income before income taxes using the operating lease method Rental revenue Depreciation expense = $60,000. 0 = = Cost Residual Value Economic life $275,000 $0 8 = $34,375 Incremental effect on income before income taxes Rental revenue $60,000 Less Depreciation expense (34,375) $25,625 military issue on income before income taxes Sales-type lease income Operating lease income Income before income taxes $91,684 (25,625) $66,059 understated 21-30 E21-11 1. Computation of Income Before Income Taxes Derived by Reuben Company for grade Ended December 31, 2010 Rental revenue Maintenance expense Depreciation expense Income before income taxes *10/12 x $180,000 $900,000 150,000* (20,000) (90,000) $ 40,000 ? 10 (It should be depreciated for a full year) 2. Rent expense = 10/12 x $180,000 = $150,000 E21-12 1. use of Criteria for De termination of Lease Classification from Lessors Viewpoint Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met Yes No Yes 80% ( Remarks Lease term is 75% or more of economic life 4 year lease life ) 5 year economic life 4. Present value of lease payments is 90% or more of fair value Column B Criteria 1. Collectibility assured 2.No uncertainties Yes Present value is $8,400, or 100% of the fair value Yes Yes Since the lease meets at least one of the Column A criteria and both of the Column B criteria, and there is no dealers profit (PV of lease payments Cost of car = $8,400 $8,400 = $0), the transaction should be classified as a direct financing lease. 21-31 E21-12 (continued) 2. Summary of lease payments received and interest revenue Computation of amount of lease receipts classly lease receipt = Cost of the car PV factor for 4 payments at 10% $8,400 3. 169865 = $2,649. 96 (Table follows Requirement 3) 3. 2010 Jan. 1 1 car Held for Lease C ash Lease Receivable Automobile Held for Lease Unearned Interest Leases Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases (from table) Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases (from table) 8,400. 00 10,599. 84 8,400. 00 8,400. 00 2,199. 84 2,649. 96 Dec. 31 31 2,649. 96 840. 00 840. 00 2,649. 96 659. 00 659. 00 2011 Dec. 31 31 2,649. 96 21-32 E21-12 (continued) 2.Summary of Lease Payments Received and Interest Revenue Earned by the Ravis Rent-A-Car Company (by Interest Method) (1) (2) Annual Lease Payments Received $2,649. 96 2,649. 96 2,649. 96 2,649. 96 (3) Interest Revenue at 10% on Net Investment $840. 00a 659. 00 459. 90 240. 94f (4) Amount of Net Investment Recovered $1,809. 96b 1,990. 96 2,190. 05 2,409. 02 (5) Lease Receivable $10,599. 84 7,949. 88c 5,299. 92 2,649. 96 -0(6) Unearned Interest Leases $2,199. 84 1,359. 84d 700. 84 240. 94 -0(7) Net Investment $8,400. 00 6,590. 04e 4,599. 08 2,409. 02Date January 1, 2010 Decemb er 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 a$8,400. 00 b$2,649. 96 21-33 x 10% $840. 00 $2,649. 96 $840. 00 $1,809. 96 c$10,599. 84 d$2,199. 84 e$8,400. 00 fAdjusted for $0. 04 rounding error 21-33 E21-13 1. Present value of lease payments = $10,000 x PV factor for 6 payments at 10% = $10,000 x 4. 355261 = $43,552 (rounded down for simplicity) = $50,000 fair value of the machine $43,552 = $6,448 = $6,448 x FV of 1 factor for 6 periods at 10% = $6,448 x 1. 771561 = $11,421 (rounded) Present value of residual valueResidual value at the end of the lease term 2. 20-34 Since the first third criteria are not met, the classification of the lease depends on the fourth criterion. A guaranteed residual value is not included in the minimum lease payments. Therefore, Baker Company would classify the lease as a capital lease because the fourth criterion is met as follows Present value of minimum lease payments = = $43,552 + $6,448 $50,000, or 100% of the fair value o f the machine 3. Since the first three criteria are not met, the classification of the lease depends on the fourth criterion.An unguaranteed residual value is included in the minimum lease payments. Therefore, Baker Company would classify the lease as an operating lease because the fourth criterion is not met as follows Present value of minimum lease payments = $43,552, or 87. 1% of the fair value of the machine E21-14 1. 2010 Jan. 1 Cash earthly concern Unearned cabbage on Sales-Leaseback Leased Land Capital Lease Obligation indemnification and Property Tax Expense Cash 31 Capital Lease Obligation Interest Expense Leases (14% x $2,500,000) Cash 21-34 2,500,000 2,000,000 500,000 2,500,000 12,000 1 During the year Dec. ,500,000 12,000 7,007 350,000 357,007 E21-14 (continued) 2. The $500,000 unearned profit is amortized by the straight-line method over the 25 year term of the lease. The yearly entry is 2010 Dec. 31 Unearned wampum on Sales Leaseback Realized Profit on Sales Lea seback 20,000 20,000 21-35 SOLUTIONS TO PROBLEMS P21-1 1. Application of Criteria for Determination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic lifePV of $268,685. 58* is 88% of fair value 4. Present value of lease payments is 90% or more of fair value *PV No = (Yearly lease payments Executory costs) x PV factor for 5 payments in advance at 12% = ($70,000 $3,450) x 4. 037349 = $66,550 x 4. 037349 = $268,685. 58 This lease is an operating lease for both the Alice Company (lessee) and the overlord Equipment Company (lessor). Reasons None of the Column A criteria are met. 2. Alice Company (lessee) 2010 Jan. 1 Rent Expense Cash 70,000 70,000 21-36 P21-1 (continued) 2. (continued) Superior Equipment Company (lessor) 2011 Jan.During the year Dec. 31 1 Cash Rental Revenue Property Tax Expense Maintenance Expense insurance Expense Cash 70,000 650 1,600 1,200 70,000 3,450 Depreciation Expense Equipment 49,500 Accumulated Depreciation Equipment ($500,000 $5,000) ? 10 Application of Criteria for Determination of Lease Classification 49,500 3. Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic life PV of $305,000* (rounded) 100% of fair value . Present value of lease payments is 90% or more of fair value *PV Yes = (Yearly lease payments Executory costs) x PV factor for 5 payments in advance at 12% + PV of guaranteed residual value = = = = ($70,000 $3,450) x 4. 037349 + ($64,000 x 0. 567427) ($66,550 x 4. 037349) + $36,315. 33 $268,685. 57 + $36,315. 33 $305,000 (rounded) This lease is a capital lease for both the Alice Company (lessee) and the Superior Equipment Company (lessor). Reasons The lessee would classify the lease as a capital lease because one of the Column A criteria is met. The lessor would classify the lease as a direct financing lease because (a) one of the Column A criteria is met, (b) both of the Column B criteria are met, and (c) there is no profit at the inception of the lease (fair value = present value of the minimum lease payments). 21-37 P21-1 (continued) 3. (continued) Alice Company (lessee) 2010 Jan. 1 1 Leased Equipment Capital Lease Obligation Executory be Expense Capital Lease Obligation Cash Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment ($305,000 $64,000) ? Interest Expense 12% x ($305,000 $66,550) Accrued Interest on Capital Lease Obligation Executory Costs Expense Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment Interest Expense 12% x ($305,000 $66,550 $37,936) Accrued Interest on Capital Obligation 305,000 3,450 66,550 305,000 70,000 Dec. 31 48,200 48,2 00 28,614 28,614 3,450 28,614 37,936 31 2011 Jan. 1 70,000 Dec. 31 48,200 48,200 24,061. 68 24,061. 68 31 21-38 P21-1 (continued) 3. continued) 2014 Dec. 31 Capital Lease Obligation Cash 64,000 64,000 Superior Equipment Company (lessor) 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($66,550 x 5 + $64,000) Equipment Leased to Others Unearned Interest Leases Cash Lease Receivable Property Tax Expense Maintenance Expense policy Expense Cash Unearned Interest Leases Interest Revenue Leases Cash Lease Receivable Property Tax Expense Maintenance Expense Insurance Expense Cash Unearned Interest Leases Interest Revenue Leases Cash Lease Receivable 305,000 305,000 396,750 05,000 91,750 66,550 1 During The Year Dec. 31 2011 Jan. During The Year Dec. 31 2014 Jan. 66,550 650 1,600 1,200 28,614 3,450 28,614 1 66,550 650 1,600 1,200 24,061. 68 66,550 3,450 24,061. 68 1 64,000 64,000 21-39 P21-2 1. Application of Criteria for Determination of Lease Classification Column A Criteria 1. 2. 3. 4. Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met No Yes Yes 100% Present value is $185,090. 68 or 100% of fair value Remarks YesThis is a sales-type lease for Ballieu Company, since one or more of the Column A criteria are met, both of the Column B criteria are met, and there is a dealers profit (PV of lease payments Cost of asset = $185,090. 68 $150,000 = $35,090. 68) 2. (1) Two-Year Table of Lease Payment Receipts and Interest Revenue acknowledgement (2) Annual Lease Payments Received $35,000. 00 35,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $280,000. 00a 245,000. 00 210,000. 00 (5) Unearned Interest Leases $94,909. 32b 73,896. 62 (6) Net Investment $185,090. 8 150,090. 68 171,103. 38d 136,103. 38 155,157. 85 Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 a$35,000 $21,012. 70c 19,054. 47 x8 $185,090. 68 x 14% + $21,012. 70 b$280,000 c$150,090. 68 d$150,090. 68 21-40 P21-2 (continued) 2. (continued) 2010 Jan. 1 Lease Receivable ($35,000 x 8) Sales Unearned Interest Leases ($280,000 $185,090. 68) Cost of Asset Leased Specialty Equipment (Inventory) Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases 280,000. 0 185,090. 68 94,909. 32 1 1 Dec. 2011 Jan. Dec. 3. 31 150,000. 00 35,000 21,012. 70 150,000. 00 35,000 21,012. 70 1 31 35,000 19,054. 47 35,000 19,054. 47 The lessor must disclose a. A general description of the leasing arrangements b. (1) The components of the net investment at the date of each balance sheet presented (a) The future lease payments to be received (b) The unearned interest revenue leases (2) Future lease payments to be received for each of the 5 succeeding fiscal years as of the date of the latest balance sheet presented P21-3 1.Present value = Lease payments x PV factor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 21-41 P21-3 (continued) 2. (1) Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 a$300,000 Summary Table of Lease Payments and Interest Expense for Timmer Company (2) Lease Payment Required $83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) Interest Expense at 12% on Obligation Balancea $36,000. 00a 30,333. 25 23,986. 49 16,878. 12 8,916. 74d (4) Reduction of Lease Obligation $47,222. 2b 52,889. 67 59,236. 43 66,344. 80 74,306. 18 (5) Balance of Lease Obligation $300,000. 00 252,777. 08c 199,887. 41 140,650. 98 74,306. 18 -0- x 12% $36,000. 00 $47,222. 92 b$83,222. 92 c$300,000. 00 3. 2010 Jan. Dec. 1 31 Leased Equipment Capital Lease Obligation Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense Cash Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment ( $300,000. 00 ? 5) Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense Cash 21-42 300,000 47,222. 2 36,000. 00 3,760 5,440 300,000 83,222. 92 31 9,200 31 60,000 60,000 52,889. 67 30,333. 25 3,100 5,330 2011 Dec. 31 83,222. 92 31 8,430 P21-3 (continued) 3. (continued) Dec. 31 Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment TIMMER confederation Balance canvas tent (Partial) December 31, 2010 Assets Property, Plant, and Equipment Leased property less accumulated amortisation $240,000. 00 (Note X) a$83,222. 92 60,000 60,000 4. Liabilities Current Capital lease obligation Noncurrent Capital lease obligation (Note X) $ 74,306. 17a,c $178,470. 1b,c x 0. 892857 $74,306. 17 b$252,777. 08 cThese amounts computed by the change in present value get down are $52,889. 67 and $199,887. 41, separately Under U. S. GAAP, the Timmer Company would classify the lease as an operating lease. The lease does not meet either of the first two criteria. The third criterion is not met since the 3-year lease life is 60% of the economic life of 5 years. The fourth criterion is also not met since the present value of the lease payments of $269,507 ($120,000 x 2. 245890) is 89. 8% of the fair value of $300,000.Therefore, the lease would be an operating lease. Under IFRS, the Timmer Company would have to exercise judgment but it is likely that it would classify the lease as a finance lease since two of the indicators would probably be considered to be met. The present value of 89. 8% is probably substantially all of the fair value of the asset. Also, it could be argued that 60% is the major part of the economic life of the asset. 5. 21-43 P21-4 1. Summary Table of Lease Payments Received and Interest Revenue Earned by the Calden Company (1) (2) Lease Payment Received $65,000. 0 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 (3) Interest Revenue at 15% on Net Investment $46,203. 16c 43,383. 63 4 0,141. 17 36,412. 35 32,124. 20 27,192. 83 21,521. 76 14,999. 87h (4) Reduction of Net Investment $18,796. 84d 21,616. 37 24,858. 83 28,587. 65 32,875. 80 37,807. 17 43,478. 24 50,000. 13 (5) Lease Receivable $570,000a 505,000e 440,000 375,000 310,000 245,000 180,000 115,000 50,000 (6) Unearned Interest Leases $261,978. 97 215,775. 81f 172,392. 18 132,251. 01 95,838. 66 63,714. 46 36,521. 63 14,999. 7 -0(7) Net Investment $308,021. 03b 289,224. 19g 267,607. 82 242,748. 99 214,161. 34 181,285. 54 143,478. 37 100,000. 13 50,000. 00i Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 a$570,000 21-44 is the undiscounted value of the lease payments plus the unguaranteed residual value is the present value of the lease payments plus the present value of the unguaranteed residual x 15% b$308,021. 03 value c$308,021. 03 d$65,000. 00 e$570,000 $46,203. 16 $46,203. 16 $18,796. 8 4 residual value $65,000 f$261,978. 97 g$308,021. 03 hAdjusted for $0. 15 rounding error iUnguaranteed 21-44 P21-4 (continued) 2. Criteria for direct financing lease Application of Criteria for Determination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is 75% or more of eonomic life 4. Present value of lease payments is 90% or more of fair value *PV of minimum lease payments Met No No Yes 89% ( 8 year lease life ) 9 year economic life Remarks 0-45 Yes PV is 94. 7% of the fair value of the leased asset* = $65,000 x PV factor for 8 payments at 15% = $65,000 x 4. 487322 = $291,675. 93 Column B Criteria 1. Collectibility assured 2. No uncertainties Met Yes Yes Remarks The lease is properly classified as a direct financing lease because at least one of the Column A criteria is met, both of the Column B criteria are met, and there is no dealers profit. 3. 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Rec eivable ($520,000 + $50,000) Equipment Leased to Others Unearned Interest Leases 308,021. 3 308,021. 03 570,000 308,021. 03 261,978. 97 21-45 P21-4 (continued) 3. (continued) Dec. 31 31 2011 Dec. Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases CALDER COMPANY Balance Sheet (Partial) Assets Current Assets Net investment in direct financing leases (Note X) Noncurrent Assets Net investment in direct financing leases (Note X) a$65,000 65,000 46,203. 16 5,000 46,203. 16 31 31 65,000 43,383. 63 65,000 43,383. 63 2012 Dec. 31 31 65,000 40,141. 17 65,000 40,141. 17 4. December 31, 2011 2010 $ 56,521. 73a,d $ 56,521. 73a,c $211,086. 09b,d $232,702. 46b,c x 0. 869565 $289,224. 19 $56,521. 73 12/31/11 $267,607. 82 $56,521. 73 b12/31/10 cThese amounts computed by the change in present value approach are $21,616. 37 and $267,607. 82 , respectively amounts computed by the change in present value approach are $24,858. 83 and $242,748. 99, respectively dThese 21-46 P21-5 1. a) Landlord Company computation of annual rental amount Annual rental amount = = Cost of equipment PV factor for 6 receipts in advance at 14% $300,000 4. 433081 = $67,673. 02 (b) Tenant Company computation of the present value of the lease rights To find the present value of the lease rights, Tenant Company would multiply the annual rental payment ($67,673. 02) by the PV factor for 6 periods paid in advance at i%. The percentage i would be the lower of 14% or Tenant Companys incremental borrowing rate. This incremental borrowing rate is the additional information needed.Summary Table of Lease Payments Received and Interest Revenue Recognition for the Landlord Company (1) (2) Annual Lease Payments Received $67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 2. Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 Jan. 1, 2015 a$67,673. 02 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $406,038. 12a 338,365. 10 270,692. 08 203,019. 06 135,346. 04 67,673. 02 0 (5) Unearned Interest Leases $106,038. 12b 73,512. 4 45,907. 18 23,911. 52 8,310. 69 0 (6) Net Investment $300,000. 00 232,326. 98 264,852. 76d 197,179. 74 224,784. 90 157,111. 88 179,107. 54 111,434. 52 127,035. 35 59,362. 33 67,673. 02 0 $32,525. 78c 27,605. 16 21,995. 66 15,600. 83 8,310. 69e x6 $300,000. 00 x 14% d$232,326. 98 eAdjusted + $32,525. 78 b$406,038. 12 c$232,326. 98 for $0. 04 rounding error This table would also be suitable for Tenant Company if Tenants incremental borrowing rate is ? 14%. 21-47 P21-5 (continued) 3. Journal entries Tenant Company (lessee) 2010 Jan. 1 1 During the year Dec. 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash Depreciation E xpense Leased Equipment Accumulated Depreciation Leased Equipment ($300,000 ? 6) Interest Expense Accrued Interest on Capital Lease Obligation Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash 31 Depreciation Expense Leased Equipment Accumulated Depreciation Leased Equipment Interest Expense Accrued Interest on Capital Lease Obligation 300,000 67,673. 2 700 800 300,000 67,673. 02 1,500 50,000 50,000 32,525. 78 32,525. 78 31 2011 Jan. 1 32,525. 78 35,147. 24 600 750 67,673. 02 During the year Dec. 1,350 50,000 50,000 27,605. 16 27,605. 16 31 21-48 P21-5 (continued) 3. (continued) Landlord Company (lessor) 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($67,673. 02 x 6) Equipment Leased to Others Unearned Interest Leases Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases Cash Lease Receivable Unearned Interest Leases Interest Revenue Leases 300,000. 0 406,038. 12 300,000. 00 300,00 0. 00 106,038. 12 67,673. 02 32,525. 78 1 Dec. 2011 Jan. Dec. 4. 31 67,673. 02 32,525. 78 1 31 67,673. 02 27,605. 16 67,673. 02 27,605. 16 Income statements and balance sheets Tenant Company revealing (Lessee) Comparative Balance Sheets (Partial) December 31 Assets 2011 2010 Liabilities 2011 2010 Leased equipment less accumulated amortization (Notes 1 and 2) $200,000. 00 $250,000. 00 Current Capital lease obligation $ 67,673. 02 Noncurrent Capital lease obligation 157,111. 88 (Notes 1 and 2) $ 67,673. 02 197,179. 74