Chapter15Leases

EXERCISES

(a)GothicCorporation(Lessee)

Exercise151
June30,2013
Rentexpense...................................
Cash............................................

40,000

December31,2013
Rentexpense...................................
Cash............................................

40,000

40,000

40,000

(b)HardWhere(Lessor)
June30,2013
Cash................................................
Rentrevenue...............................

40,000

December31,2013
Cash................................................
Rentrevenue...............................

40,000

40,000

40,000

Depreciationexpense($350,0005years) 70,000
Accumulateddepreciation...........
70,000

AlternateExerciseandProblemSolutions

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151

Present Value of Minimum Lease Payments:

Exercise152

($10,000x10.78685*) = $107,866

lease
present
payments
value
*presentvalueofanannuitydueof$1:n=12,i=2%
[i=2%(8%4)becausethelease
callsforquarterlypayments]

Lease Amortization Schedule

Lease
Payments

1
2
3
4
5
6
7
8
9
10
11
12

10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000

Effective
Interest
2%xOutstandingBalance

.02
.02
.02
.02
.02
.02
.02
.02
.02
.02
.02

(97,886)
(89,823)
(81,619)
(73,251)
(64,716)
(56,010)
(47,130)
(38,073)
(28,834)
(19,411)
(9,799)

120,000

=
=
=
=
=
=
=
=
=
=
=

Decrease
inBalance

Outstanding
Balance

1,957
1,796
1,632
1,465
1,294
1,120
943
761
577
388

201*

10,000
8,043
8,204
8,368
8,535
8,706
8,880
9,057
9,239
9,423
9,612
9,799

107,866
97,886
89,823
81,619
73,251
64,716
56,010
47,130
38,073
28,834
19,411
9,799
0

12,134

107,866

*adjustedforroundingofothernumbersintheschedule

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Intermediate Accounting, 7e

Exercise152(concluded)

January1,2013

Leasedequipment(calculatedabove).....................
Leasepayable(calculatedabove)........................

107,866

Leasepayable.....................................................
Cash(leasepayment)..........................................

10,000

April1,2013
Interestexpense(2%x[$107,86610,000])..............
Leasepayable(difference).....................................
Cash(leasepayment)..........................................

1,957
8,043

July1,2013
Interestexpense(2%x$89,823:fromschedule).........
Leasepayable(difference).....................................
Cash(leasepayment)..........................................

1,796
8,204

October1,2013
Interestexpense(2%x$81,619:fromschedule).........
Leasepayable(difference).....................................
Cash(leasepayment)..........................................

1,632
8368

December31,2013
Interestexpense(2%x$73,251:fromschedule).........
Interestpayable..............................................

1,465

Depreciationexpense($107,8663years)...............
Accumulateddepreciation...............................
January1,2014
Interestpayable(fromadjustingentry)........................
Leasepayable(difference).....................................
Cash(leasepayment)..........................................
AlternateExerciseandProblemSolutions

35,955

1,465
8,535

107,866
10,000

10,000

10,000

10,000

1,465
35,955

10,000

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153

Exercise153
Lease
Payments

1
2
3
4
5
6
7
8
9
10
11
12

10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000

Lease Amortization Schedule

Effective
Interest
2%xOutstandingBalance

.02
.02
.02
.02
.02
.02
.02
.02
.02
.02
.02

(97,886)
(89,823)
(81,619)
(73,251)
(64,716)
(56,010)
(47,130)
(38,073)
(28,834)
(19,411)
(9,799)

120,000

=
=
=
=
=
=
=
=
=
=
=

Decrease
inBalance

Outstanding
Balance

1,957
1,796
1,632
1,465
1,294
1,120
943
761
577
388

201*

10,000
8,043
8,204
8,368
8,535
8,706
8,880
9,057
9,239
9,423
9,612
9,799

107,866
97,886
89,823
81,619
73,251
64,716
56,010
47,130
38,073
28,834
19,411
9,799
0

12,134

107,866

*adjustedforroundingofothernumbersintheschedule

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Intermediate Accounting, 7e

Exercise153(concluded)

January1,2013

Leasereceivable(presentvalueofleasepayments)...
Inventoryofequipment(lessorscost)...............

107,866

Cash(leasepayment)..............................................
Leasereceivable.............................................

10,000

April1,2013
Cash(leasepayment)..............................................
Leasereceivable(tobalance)............................
Interestrevenue(2%x[$107,86610,000]).........
July1,2013
Cash(leasepayment)..............................................
Leasereceivable(tobalance).............................
Interestrevenue(2%x$89,826:fromschedule)....
October1,2013
Cash(leasepayment)..............................................
Leasereceivable(tobalance).............................
Interestrevenue(2%x$81,619:fromschedule)....
December31,2013
Interestreceivable..............................................
Interestrevenue(2%x$73,251:fromschedule)....
January1,2014
Cash(leasepayment)..............................................
Leasereceivable(tobalance).............................
Interestreceivable(fromadjustingentry)............

10,000

10,000

10,000

1,465

10,000

107,866
10,000

8,043
1,957

8,204
1,796

8,368
1,632

1,465

8,535
1,465

Exercise154Requirement1

AlternateExerciseandProblemSolutions

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155

Lessors Calculation of Lease Payments

Amounttoberecovered(fairvalue)
$107,866
__________________
Leasepaymentsatthebeginning
ofeachofeightquarters:($107,86610.7866**)
$10,000
**presentvalueofanannuitydueof$1:n=12,i=2%

Requirement2
January1,2013
Leasereceivable(fairvalue)..................................
Costofgoodssold(lessorscost)...........................
Salesrevenue(fairvalue)..................................
Inventoryofequipment(lessorscost)...............
Cash(leasepayment)..............................................
Leasereceivable.............................................
April1,2013
Cash(leasepayment)..............................................
Leasereceivable.............................................
Interestrevenue(2%x[$107,86610,000])........

107,866
90,000

10,000

10,000

107,866
90,000
10,000

8,043
1,957

Exercise155
Presentvalueofperiodicleasepayments*

($205,542x7.49236**)

$1,540,000

**presentvalueofanannuitydueof$1:n=13,i=11%

Theleasemeetsatleastone(actually3of4inthiscase)criteriaforclassificationas
acapitallease.
January1,2013
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Intermediate Accounting, 7e

Cash(given)......................................................................
Helicopter(carryingvalue).............................................
Deferredgainonsaleleaseback(difference)................

1,540,000

Leasedhelicopter(presentvalueofleasepayments)................
Leasepayable(presentvalueofleasepayments)...............

1,540,000

Leasepayable.................................................................
Cash............................................................................

205,542

December31,2013
Interestexpense(11%x[$1,540,000205,542]).....................
Interestpayable..........................................................

1,240,000
300,000
1,540,000

146,790

Depreciationexpense($1,540,00015years*)..................
Accumulateddepreciation...........................................

102,267

Deferredgainonsaleleaseback($300,00020years).......
Depreciationexpense.................................................

15,000

205,542

146,790
102,267
15,000

*Thehelicopterisdepreciatedoveritsremainingusefulliferatherthantheleaseterm
becausetitletransferstothelessee.

AlternateExerciseandProblemSolutions

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PROBLEMSRequirement1
Problem151
Capitalleasetolessee;

Directfinancingleasetolessor.

Sincethepresentvalueofminimumleasepayments(sameforboththelessorand
thelessee)isequalto(>90%)thefairvalueoftheasset,the90%recoverycriterion
ismet.
Calculation of the Present Value of Minimum Lease Payments
Presentvalueofperiodicleasepayments
$32,629x15.32380**
**presentvalueofanannuitydueof$1:n=20,i=3%

$500,000

(rounded)

The75%ofusefullifecriterionismetalso.Bothadditionallessorconditionsare
metforacapitallease.Thereisnodealersprofitbecausethefairvalueequalsthe
lessorscost.
Requirement2
PalLearningSystems(Lessee)
January1,2013
Leasedequipment(calculatedabove).................................
Leasepayable(calculatedabove)....................................
Leasepayable.................................................................
Cash(leasepayment)......................................................
April1,2013
Interestexpense(3%x[$500,00032,629])............................
Leasepayable(difference).................................................
Cash(leasepayment)......................................................
TheMcGrawHillCompanies,Inc.,2013
15-8

500,000
32,629

14,021
18,609

500,000
32,629

32,629

Intermediate Accounting, 7e

Problem151(concluded)

StarLeasing(Lessor)

January1,2013
Leasereceivable(presentvalue)........................................
Inventoryofequipment(lessorscost)...........................
Cash(leasepayment)..........................................................
Leasereceivable.........................................................
April1,2013
Cash(leasepayment)..........................................................
Leasereceivable.........................................................
Interestrevenue(3%x[$500,00032,629]).......................

652,580
32,629

32,629

500,000
32,629

18,608
14,021

Requirement3
StarLeasing(Lessor)
January1,2013
Leasereceivable(presentvalue)........................................
Costofgoodssold(lessorscost).......................................
Salesrevenue(fairvalue)..............................................
Inventoryofequipment(lessorscost)...........................
Cash(leasepayment)..........................................................
Leasereceivable.........................................................
April1,2013
Cash(leasepayment)..........................................................
Leasereceivable.........................................................
Interestrevenue(3%x[$500,00032,629]).......................

AlternateExerciseandProblemSolutions

500,000
450,000

32,629

32,629

500,000
450,000
32,629

18,608
14,021

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Problem152Requirement1
LessorsCalculationofLeasePayments
Amounttoberecovered(fairvalue)

$1,097,280

Less:Presentvalueoftheguaranteed
residualvalue($75,000x.68301*)

(51,225)

Amounttoberecoveredthroughperiodicleasepayments
$1,046,055
_____________________
Leasepaymentsatthebeginning
ofeachoffouryears:($1,046,0553.48685**)
$300,000
*presentvalueof$1:n=4,i=10%
**presentvalueofanannuitydueof$1:n=4,i=10%

Requirement2
Thelesseesincrementalborrowingrate(12%)ismorethanthelessorsimplicit
rate(10%).So,bothpartiescalculationsshouldbemadeusinga10%discountrate:

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Intermediate Accounting, 7e

Problem152(continued)

ApplicationofClassificationCriteria

Doestheagreementspecifythat
ownershipoftheassettransfers
tothelessee?

Doestheagreementcontaina

Istheleasetermequalto75%

bargainpurchaseoption?

ormoreoftheexpected
economiclifeoftheasset?

NO

NO

NO

{4yrs<75%of6yrs}

Isthepresentvalueofthe
minimumleasepaymentsequal
toorgreaterthan90%ofthe
fairvalueoftheasset?

YES
{$1,046,055b>90%of$1,046,055}

bSeecalculationbelow.

PresentValueofMinimumLeasePayments
Presentvalueofperiodicleasepayments

($300,000x3.48685**)
Plus:Presentvalueofthelesseeguaranteed
residualvalue($75,000x.68301*)
Presentvalueofminimumleasepayments

$1,046,055
51,225
$1,097,280

*presentvalueof$1:n=4,i=10%
**presentvalueofanannuitydueof$1:n=4,i=10%

AlternateExerciseandProblemSolutions

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Problem152(continued)

(a)ByBlairCo.(thelessee)

Sinceatleastonecriterionismet,thisisa capitallease tothelessee. Blair

recordsthepresentvalueofminimumleasepaymentsasaleasedassetandalease
liability.
(b)ByHHH(thelessor)
Sincethefairvalueequalsthelessorscarryingvalue,thereisnodealersprofit,
makingthisadirectfinancinglease.

Requirement3
December31,2013
BlairCo.(Lessee)
Leasedequipment(calculatedabove).................................
Leasepayable(calculatedabove)....................................
Leasepayable..................................................................
Cash(leasepayment)......................................................
HHH(Lessor)
Leasereceivable(calculatedabove)....................................
Inventoryofequipment(lessorscost)...........................
Cash(leasepayment)..........................................................
Leasereceivable..........................................................

TheMcGrawHillCompanies,Inc.,2013
15-12

1,097,280
300,000

1,097,280
300,000

1,097,280
300,000

1,097,280
300,000

Intermediate Accounting, 7e

Problem152(continued)

Requirement4

Since both use the same discount rate and since the residual value is lessee
guaranteed,thesameamortizationscheduleappliestoboththelesseeandlessor:

Lease Amortization Schedule

Dec. Payments
31

2013
2013
2014
2015
2016
2016

300,000
300,000
300,000
300,000
75,000
1,275,000

Effective
Interest
10%xOutstandingBalance

.10 (797,280)
.10 (577,008)
.10 (334,709)
.10 (68,180)

=
=
=
=

79,728
57,701
33,471
6,820*
177,720

Decrease
inBalance

300,000
220,272
242,299
266,529
68,180
1,097,280

Outstanding
Balance

1,097,280
797,280
577,008
334,709
68,180
0

Requirement5
December31,2014
BlairCo.(Lessee)
Interestexpense(10%x[$1,097,280300,000]).....................
Leasepayable(difference).................................................
Cash(leasepayment)......................................................
Depreciationexpense([$1,097,28075,000]4years).........
Accumulateddepreciation...........................................
HHH(Lessor)
Cash(leasepayment)..........................................................
Leasereceivable..........................................................
Interestrevenue(10%x[$1,097,280300,000]).................
AlternateExerciseandProblemSolutions

79,728
220,272
255,570

300,000

300,000
255,570

220,272
79,728

TheMcGrawHillCompanies,Inc.,2013
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Problem152(concluded)

Requirement6

December31,2015
BlairCo.(Lessee)
Depreciationexpense([$1,097,28075,000]4years).........
Accumulateddepreciation...........................................
Interestexpense(10%x68,180:fromscheduleasrounded)....
Leasepayable(difference:fromschedule)..........................
Accumulateddepreciation($1,097,28075,000)................
Lossonresidualvalueguarantee($75,0004,500).............
Leasedequipment(accountbalance)..............................
Cash($75,0004,500)............................................................
HHH(Lessor)
Inventoryofequipment(actualresidualvalue)....................
Cash($75,0004,500).................................................................
Leasereceivable(accountbalance)................................
Interestrevenue(10%x68,180:fromscheduleasrounded)

Addendum

255,570
6,820
68,180
1,022,280
71,500

4,500
71,500

255,570

1,097,280
71,500

69,180
6,820

Requirement1

Problem153
Lessee

TheMcGrawHillCompanies,Inc.,2013
15-14

Intermediate Accounting, 7e

January1,2013
Rightofuseequipment
Leaseliability($279,556 x 3.5771)
Leaseliability
Cash (leasepayment)
December31,2013
Interestexpense([$1,000,000 279,556] x 8%]
Leaseliability(difference)
Cash(leasepayment)
Amortizationexpense($1,000,0004years)
Rightofuseequipment

1,000,000
1,000,000
279,556

279,556

57,636
221,920
279,556
250,000

250,000

Requirement2
Lessor
January 1
Lease receivable ($279,556 x 3.5771)
Equipment inventory (carrying amount)
Profit (to balance)*

1,000,000
800,000
200,000

Acompanymightchoosetoseparatethisprofitintoitstwocomponents:Salesrevenue
($1,000,000)andcostofgoodssold($800,000),whichisthegrossmethoddemonstratedfor
salestypeleasesinthemainchapter.

Cash (leasepayment)
Lease receivable

279,556
279,556

December 31
Cash (leasepayment)
279,556
Lease receivable (difference)
Interest revenue ([$1,000,000 279,556] x 8%]

AlternateExerciseandProblemSolutions

221,920
57,636

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