Exercise 15-11
Situation 1
(a) $600,000 ÷ 5.88923** = $101,881
fair lease
value payments
** present value of an ordinary annuity of $1: n=10, i=11%
(b) $101,881 x 5.88923** = $600,000*
lease leased asset/
payments lease liability
* rounded
** present value of an ordinary annuity of $1: n=10, i=11%
Situation 2
(a) $980,000 ÷ 9.12855** = $107,355
fair lease
value payments
** present value of an ordinary annuity of $1: n=20, i=9%
(b) $107,355 x 9.12855** = $980,000‡
lease leased asset/
payments lease liability
** present value of an ordinary annuity of $1: n=20, i=9%
‡ rounded for convenience
Situation 3
(a) $185,000 ÷ 3.03735** = $60,908
fair lease
value payments
** present value of an ordinary annuity of $1: n=4, i=12%
(b) $60,908 x 3.10245** = $188,964
lease leased asset/
payments lease liability
** present value of an ordinary annuity of $1: n=4, i=11%
But since this amount exceeds the asset’s fair value, the lessee must capitalize the $185,000 fair value instead.
Exercise 15-12
Situation 1
Amount to be recovered (fair value) $50,000
___________________¯
Lease payments at the beginning ¯
of each of the next 4 years: ($50,000 ÷ 3.48685**) $ 14,340
** present value of an annuity due of $1: n=4, i=10%
Situation 2
Amount to be recovered (fair value) $350,000
Less: Present value of the residual value ($50,000 x .48166*) (24,083)
Amount to be recovered through periodic lease payments $325,917
_______________________¯
Lease payments at the beginning ¯
of each of the next 7 years: ($325,917 ÷ 5.23054**) $ 62,310
* present value of $1: n=7, i=11%
** present value of an annuity due of $1: n=7, i=11%
Exercise 15-12 (concluded)
Situation 3
Amount to be recovered (fair value) $75,000
Less: Present value of the residual value ($7,000 x .64993*) (4,550)
Amount to be recovered through periodic lease payments $70,450
______________________¯
Lease payments at the beginning ¯
of each of the next 5 years: ($70,450 ÷ 4.23972**) $ 16,617
* present value of $1: n=5, i=9%
** present value of an annuity due of $1: n=5, i=9%
Situation 4
Amount to be recovered (fair value) $465,000
Less: Present value of the residual value ($45,000 x .40388*) (18,175)
Amount to be recovered through periodic lease payments $446,825
______________________¯
Lease payments at the beginning ¯
of each of the next 8 years: ($446,825 ÷ 5.56376**) $ 80,310
* present value of $1: n=8, i=12%
** present value of an annuity due of $1: n=8, i=12%
Exercise 15-13
Situation
1 2 3 4
A. The lessor’s:
1. Minimum lease payments1 $700,000 $750,000 $800,000 $840,000
2. Gross investment in the lease2 700,000 750,000 850,000 900,000
3. Net investment in the lease3 548,592 547,137 610,168 596,764
B. The lessee’s:
4. Minimum lease payments4 700,000 750,000 800,000 840,000
5. Leased asset5 548,592 547,137 586,842 572,531
6. Lease liability6 548,592 547,137 586,842 572,531
1 ($100,000 x number of payments) + residual value guaranteed by lessee and/or by third party; for situation 4: ($100,000 x 8) + ($40,000).
2 Minimum lease payments plus unguaranteed residual value; for situation 4: ($840,000 + $60,000).
3 Present value of gross investment (discounted at lessor’s rate); for situation 4: ($100,000 x 5.56376) + ($100,000 x .40388).
4 ($100,000 x number of payments) + residual value guaranteed by lessee; for situation 4: ($100,000 x 8) + $40,000.
5 Present value of minimum lease payments (discounted at lower of lessor’s rate and lessee’s incremental borrowing rate); should not exceed fair value; for situation 4: ($100,000 x 5.56376) + ($40,000 x .40388).
6 Present value of minimum lease payments (discounted at lower of lessor’s rate and lessee’s incremental borrowing rate); should not exceed fair value; for situation 4: ($100,000 x 5.56376) + ($40,000 x .40388).
Exercise 15-14
Situation 1
Amount to be recovered (fair value) $60,000
Less: Present value of the BPO price ($10,000 x .56743*) (5,674)
Amount to be recovered through periodic lease payments $54,326
_____________________¯
Lease payments at the beginning ¯
of each of the next 5 years: ($54,326 ÷ 4.03735**) $13,456
* present value of $1: n=5, i=12%
** present value of an annuity due of $1: n=5, i=12%
Situation 2
Amount to be recovered (fair value) $420,000
Less: Present value of the BPO price ($50,000 x .59345*) (29,673)
Amount to be recovered through periodic lease payments $390,327
_____________________¯
Lease payments at the beginning ¯
of each of the next 5 years: ($390,327 ÷ 4.10245**) $95,145
* present value of $1: n=5, i=11%
** present value of an annuity due of $1: n=5, i=11%
Note: Since a BPO is expected to be exercised, the lease term ends for accounting purposes when the option becomes exercisable.
Exercise 15-14 (concluded)
Situation 3
Amount to be recovered (fair value) $185,000
Less: Present value of the BPO price ($22,000 x .77218*) (16,988)
Amount to be recovered through periodic lease payments $168,012
_____________________¯
Lease payments at the beginning ¯
of each of the next 3 years: ($168,012 ÷ 2.75911**) $60,894
* present value of $1: n=3, i=9%
** present value of an annuity due of $1: n=3, i=9%
Note: Since a BPO is expected to be exercised, the lease term ends for accounting purposes when the option becomes exercisable.
Exercise 15-15
Requirement 1
Note:
Because exercise of the option appears at the inception of the lease to be reasonably assured, payment of the option price ($45,000) is expected to occur when the option becomes exercisable (at the end of the third year).
Present value of annual lease payments ($36,000 x 2.69005**) $ 96,842
Plus: Present value of the BPO price ($45,000 x .71178*) 32,030
Present value of minimum lease payments $128,872
* present value of $1: n=3, i=12%
** present value of an annuity due of $1: n=3, i=12%
Requirement 2
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
12% x Outstanding Balance
128,872
1/1/09 36,000 36,000 92,872
12/31/09 36,000 .12 (92,872) = 11,145 24,855 68,017
12/31/10 36,000 .12 (68,017) = 8,162 27,838 40,179
12/31/11 45,000 .12 (40,179) = 4,821 40,179 0
153,000 24,128 128,872
Exercise 15-15 (concluded)
Requirement 3
January 1, 2009
Leased equipment (calculated above) 128,872
Lease payable (calculated above) 128,872
Lease payable 36,000
Cash (annual payment) 36,000
December 31, 2009
Depreciation expense ($128,872 ÷ 6 years*) 21,479
Accumulated depreciation 21,479
Interest expense (12% x [$128,872 – 36,000]) 11,145
Lease payable (difference : from schedule) 24,855
Cash (annual payment) 36,000
December 31, 2010
Depreciation expense ($128,872 ÷ 6 years*) 21,479
Accumulated depreciation 21,479
Interest expense (12% x $68,017 : from schedule) 8,162
Lease payable (difference : from schedule) 27,838
Cash (annual payment) 36,000
December 31, 2011
Depreciation expense ($128,872 ÷ 6 years*) 21,479
Accumulated depreciation 21,479
Interest expense (12% x $40,179: from schedule) 4,821
Lease payable (difference: from schedule) 40,179
Cash (BPO price) 45,000
* Because title passes with the expected exercise of the BPO, depreciation is for the entire six-year useful life of the asset. The depreciation entry will be recorded for three years after the completion of the lease term.
Exercise 15-16
Requirement 1
Amount to be recovered (fair value) $30,900
Less: Present value of the BPO price ($12,000 x .75131*) (9,016)
Amount to be recovered through periodic lease payments $21,884
_____________________¯
Lease payments at the beginning ¯
each of three years: ($21,884 ÷ 2.73554**) $8,000
* present value of $1: n=3, i=10%
** present value of an annuity due of $1: n=3, i=10%
Requirement 2
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
30,9000
1/1/09 8,000 8,000 22,9000
12/31/09 8,000 .10 (22,900) = 2,290 5,710 17,1900
12/31/10 8,000 .10 (17,190) = 1,719 6,281 10,9099
12/31/11 12,000 .10 (10,909) = 1,091 10,909 00
36,000 5,100 30,900
Exercise 15-16 (concluded)
Requirement 3 (4th edition method)
January 1, 2009
Lease receivable (8000x3+12000)………………… 36,000
Inventory of equipment (lessor’s cost) 30,900
Unearned Interest revenue……………………......... 5,100
Cash (lease payment) 8,000
Lease receivable 8,000
December 31, 2009
Cash (lease payment) 8,000
Lease receivable 8,000
Unearned interest revenue [(36,000-8,000) -5,100)]x10%. 2,290 Interest Revenue …………………………….. 2,290
December 31, 2010
Cash (lease payment) 8,000
Lease receivable 8,000
Unearned interest revenue [(36,000-8,000-8,000)-(5,100-2290)]x10% 1,719
Interest revenue ……………………………… 1,719
December 30, 2011
Unearned interest revenue [(36,000-8,000-8,000-8000)-(5,100-2290-1719)]x10% 1,091 Interest Revenue …………………………….. 1,091
Cash (BPO price) 12,000
Lease receivable (account balance) 12,000
Requirement 3 (5th edition method)
January 1, 2009
Lease receivable (PV of lease payments + PV of BPO) 30,900
Inventory of equipment (lessor’s cost) 30,900
Cash (lease payment) 8,000
Lease receivable 8,000
December 31, 2009
Cash (lease payment) 8,000
Lease receivable (difference) 5,710
Interest revenue (10% x [$30,900 - 8,000]) 2,290
December 31, 2010
Cash (lease payment) 8,000
Lease receivable 6,281
Interest revenue (10% x $17,190 : from schedule) 1,719
December 30, 2011
Cash (BPO price) 12,000
Lease receivable (account balance) 10,909
Interest revenue (10% x $10,909 : from schedule) 1,091
Problem 15-8
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Less: Present value of the guaranteed
residual value ($25,000 x .68301*) (17,075)
Amount to be recovered through periodic lease payments $348,685
_____________________¯
Lease payments at the beginning ¯
of each of four years: ($348,685 ÷ 3.48685**) $100,000
* present value of $1: n=4, i=10%
** present value of an annuity due of $1: n=4, i=10%
Requirement 2
The lessee’s incremental borrowing rate (12%) is more than the lessor’s implicit rate (10%). So, both parties’ calculations should be made using a 10% discount rate:
Problem 15-8 (continued)
Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
2 Does the agreement contain a
bargain purchase option? NO
3 Is the lease term equal to 75%
or more of the expected NO
economic life of the asset? {4 yrs < 75% of 6 yrs}
4 Is the present value of the
minimum lease payments equal
to or greater than 90% of the YES
fair value of the asset? {$365,760b > 90% of $365,760}
b See calculation below.
Present Value of Minimum Lease Payments
Present value of periodic lease payments
($100,000 x 3.48685**) $348,685
Plus: Present value of the lessee-guaranteed
residual value ($25,000 x .68301*) 17,075
Present value of minimum lease payments $365,760
* present value of $1: n=4, i=10%
** present value of an annuity due of $1: n=4, i=10%
Problem 15-8 (continued)
(a) By Western Soya Co. (the lessee)
Since at least one criterion is met, this is a capital lease to the lessee. Western Soya records the present value of minimum lease payments as a leased asset and a lease liability.
(b) By Rhone-Metro (the lessor)
Since the fair value equals the lessor’s carrying value, there is no dealer’s profit, making this a direct financing lease.
Requirement 3
December 31, 2009
Western Soya Co. (Lessee)
Leased equipment (calculated above) 365,760
Lease payable (calculated above) 365,760
Lease payable 100,000
Cash (lease payment) 100,000
Rhone-Metro (Lessor)-4th edition method
Lease receivable (calculated above) 425,000
Inventory of equipment (lessor’s cost) 365,760
Unearned interest revenue………………………….. 59,240
Cash (lease payment) 100,000
Lease receivable 100,000
Rhone-Metro (Lessor)-5th edition method
Lease receivable (calculated above) 365,760
Inventory of equipment (lessor’s cost) 365,760
Cash (lease payment) 100,000
Lease receivable 100,000
Problem 15-8 (continued)
Requirement 4
Since both use the same discount rate and since the residual value is lessee-guaranteed, the same amortization schedule applies to both the lessee and lessor:
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2009 365,760
2009 100,000 100,000 265,760
2010 100,000 .10 (265,760) = 26,576 73,424 192,336
2011 100,000 .10 (192,336) = 19,234 80,766 111,570
2012 100,000 .10 (111,570) = 11,157 88,843 22,727
2013 25,000 .10 (22,727) = 2,273 22,727 0
425,000 59,240 365,760
Requirement 5
December 31, 2010
Western Soya Co. (Lessee)
Interest expense (10% x [$365,760 – 100,000]) 26,576
Lease payable (difference) 73,424
Cash (lease payment) 100,000
Depreciation expense ([$365,760 – 25,000] ÷ 4 years) 85,190
Accumulated depreciation 85,190
Rhone-Metro (Lessor)-4th edition method
Cash (lease payment) 100,000
Lease receivable (difference) 100,000
Unearned Interest ………………………….. 26,576
Interest revenue (10% x [$365,760 – 100,000]) 26,576
Rhone-Metro (Lessor)-5th edition method
Cash (lease payment) 100,000
Lease receivable (difference) 73,424
Interest revenue (10% x [$365,760 – 100,000]) 26,576
Requirement 6
December 31, 2013
Western Soya Club (Lessee)
Depreciation expense ([$365,760 – 25,000] ÷ 4 years) 85,190
Accumulated depreciation 85,190
Interest expense (10% x 22,727: from schedule) 2,273
Lease payable (difference : from schedule) 22,727
Accumulated depreciation ($365,760 – 25,000) 340,760
Loss on residual value guarantee ($25,000 – 1,500) 23,500
Leased equipment (account balance) 365,760
Cash ($25,000 – 1,500) 23,500
Rhone-Metro (Lessor)-4th edition method
Inventory of equipment (actual residual value) 1,500
Cash ($25,000 – 1,500) 23,500
Lease receivable (account balance) 25,000
Unearned Interest………………………………… 2,273
Interest revenue (10% x 22,727: from schedule) 2,273
Rhone-Metro (Lessor)-5th edition method
Inventory of equipment (actual residual value) 1,500
Cash ($25,000 – 1,500) 23,500
Lease receivable (account balance) 22,727
Interest revenue (10% x 22,727: from schedule) 2,273
Problem 15-9
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Less: Present value of the unguaranteed
residual value ($25,000 x .68301*) (17,075)
Amount to be recovered through periodic lease payments $348,685
_____________________¯
Lease payments at the beginning ¯
of each of four years: ($348,685 ÷ 3.48685**) $100,000
Plus: Executory costs 4,000
Lease payments including executory costs $104,000
* present value of $1: n=4, i=10%
** present value of an annuity due of $1: n=4, i=10%
Problem 15-9 (continued)
Requirement 2
The lessee’s incremental borrowing rate (12%) is more than the lessor’s implicit rate (10%). So, both parties’ calculations should be made using a 10% discount rate:
Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
2 Does the agreement contain a
bargain purchase option? NO
3 Is the lease term equal to 75%
or more of the expected NO
economic life of the asset? {4 yrs < 75% of 6 yrs}
4 Is the present value of the
minimum lease payments equal
to or greater than 90% of the YES
fair value of the asset? {$348,685a > 90% of $365,760}
a See calculation below.