BRIEF EXERCISE 21.1
The lease payments in the lease arrangement will include both the annual
fixed payments of $800,000 each year, plus the €11,000,000 bargain purchase
option at the end of the lease term (as it is reasonably certain to be
exercised). The lease payments for the lease agreement total (€800,000 x 6) +
€11,000,000 = €15,800,000.
BRIEF EXERCISE 21.2
The lease payments for years 1 and 2 will be $1,700 ($2,000 annual rental
minus $300 lease incentive). In year 3, Fieger will receive no lease incentive,
and will have a full lease payment of $2,000. In total over the first 3 years, the
lease payments will be $5,400 ($1,700 + $1,700 + $2,000).
BRIEF EXERCISE 21.3
Variable payments in a lease are not considered in determining the initial
value of the lease liability and right-of-use asset. Because the lease payments
are based on 4% of net sales, these payments are considered variable, as they
are not based on an index or rate, the future level of which in not known at
lease commencement. It does not matter that it is highly certain that Sanders
will achieve a minimum of £1,000,000 in net sales each year. Thus, these
variable lease payments are not included in the initial valuation of the lease
liability and right-of-use asset. Since they are the only payments being made
in the lease agreement, Sanders would record the right-of-use asset at zero
and record lease expense when payments are made.BRIEF EXERCISE 21.4
12/31/21
Right-of-Use Asset ($41,933 3.57710")
Lease Liability
150,000**
150,000
Lease Liability. 41,933
Cash.
BRIEF EXERCISE 21.4 (Continued)
41,933
“Present value of an annuity-due of 1 for 4 periods at 8%.
“Rounded by $1.
42/34/22
Interest Expense [($150,000 ~ $41,933) * 0.08]
Lease Liability...
Cash
8,645
33,288
37,500
Depreciation Expense...
Right-of-Use Asse!
($150,000 + 4)...
BRIEF EXERCISE 21.5
12/31122
Interest Expense [(€300,000 - €48,337) x 0.08].
Lease Liability ..
Cash...
20,133
28,204
Depreciation Expense .. 37,500
Right-of-Use Asset
(€300,000 + 8)...
BRIEF EXERCISE 21.6
Right-of-Use Asset 33,975"
Lease Liability
*PV of rentals (£5,300 x 6.20637")
PV bargain purchase option (£2,000 0.54027)
*Present value of an annuity-due of 1 for 8 periods at 8%.
“Present value of 1 for 8 periods at 8%.
Lease Liability 5,300
Cash
41,933
37,500
48,337
37,500
33,975
£32,894
5,30012/31/22
Interest Expense [(£33,975 - £5,300) » .08] 2,294
Lease Liability 2,294
Depreciation Expens 3,398
Right-of-Use Asset
($33,975 + 10*) 3,398
“The right-of-use asset is amortized over the economic life of the asset
instead of the lease term because of the bargain purchase option included in
the lease contract, given that the lessee plans to take ownership of the asset.
BRIEF EXERCISE 21.8
Fair value of leased asset $47,000
Less: Present value of lessor’s expected residual value*
($30,000 x 0.79209"*) 23,763
Amount to be recovered through lease payments $23,237
Amount of equal annual lease payments ($23,237 + 3.46511) $6,706
*The expectation of the residual value of the lessee would not matter in this
case. The lessor uses its own expectation of the residual value in determining
the annual lease payments. The lessor probably would not even be aware of
the lessee’s expectations.
Present value of 1 for 4 periods at 6%.
***Present value of an ordinary annuity for 4 periods at 6%.BRIEF EXERCISE 21.10
Cash 30,044
Lease Receivable 20,447
Interest Revenue [( 9,597
BRIEF EXERCISE 21.11
Lease Receivable (€40,800 x 4.31213*) 175,935
Cost of Goods Sold 120,000
Sales Revenue 175,935
Inventory 120,000
Cash 40,800
Lease Receivable 40,800
*Present value of an annuity-due of 1 for 5 periods at 8%.
BRIEF EXERCISE 21.12
Cash 40,800
Deposit Lia 40,800
“When collectibility of lease payments is not probable, the lessor does not
derecognize the asset or recognize selling profit on the lease. Instead,
Geiberger would recognize any cash receipts as a deposit liability.
BRIEF EXERCISE 21.13
Lease Receivable.
Interest Revenue
57
57
1,000
1,000
Note to Instructor: The above two entries can be combined into one entry at
the end of the year, as shown below:
Inventory ....
Interest Revenue
Lease Receivable
1,000
943BRIEF EXERCISE 21.14
1/4122
Right-of-Use Asset (2.83339* « £35,000) 99,169
Lease Liability 99,169
Lease Liability. 35,000
Cash... 35,000
*Present value of an annuity-due of 1 for 3 periods at 6%.
Schedule A
KINGSTON PLC
Lease Amortization Schedule
Annuity-Due Basis
Reduction
Interest (6%) of Lease
Date Annual Payment _on Liability Liability __Lease Liability.
41122 £99,169
1/1122 £35,000 £ 0 £35,000 64,169
1/1123 35,000 3,850 31,150 33,019
11124 35,000 1,981 33,019 0
12/31/22
Interest Expense ..... 3,850
Lease Liability 3,850
Depreciation Expense (£99,169 + 3). 33,056
Right-of-Use Asset... 33,056BRIEF EXERCISE 21.15
4un22
Cash... 35,000
Unearned Lease Revenue 35,000
12/31/22
Unearned Lease Revenue 35,000
Lease Revenue.......... 35,000
Depreciation Expense... - 25,000
Accumulated Depreciation-Leased Equipment
(£200,000 = 8)... a 25,000
BRIEF EXERCISE 21.16
1ni22
Right-of-Use Asset (2.78326* x $12,000) 33,399
Lease Liability 33,399
*Present value of an annuity-due of 4 for 3 periods at 8%.
Lease Liability... 12,000
Cash 12,000
Schedule A
RODGERS CORPORATION
Lease Amortization Schedule
Annuity-Due Basis
Reduction
Annual Interest (8%) on _of Lease
Date Payment Liability Liability Lease Liability
111122 $33,399
qW1i22 $12,000 $ 0 $12,000 21,399
1/1123 12,000 1,712 10,288 11,111
11124 12,000 889 14,144 012/31/22
Interest Expense 4,712
Lease Liability .. 1,742
Depreciation Expense ($33,399 + 3) 11,133
Right-of-Use Asset. 414.133
BRIEF EXERCISE 21.17
Cash 12,000
Unearned Lease Revenue 12,000
12/31/22
Unearned Lease Revenue 12,000
Lease Revenue. 12,000
Depreciation Expense ..... 6,000
Accumulated Depreciation—
Leased Equipment [$60,000 ~ 10}. 6,000
The lessor classifies the lease as an operating lease because none of the
finance lease tests are met.
BRIEF EXERCISE 21.18
£17,000 x 2.83339* = £48,168
*Present value of an annuity-due of 1 for 3 periods at 6%.
Because the residual value is unguaranteed, Escape plc does not include it in
its computation of the annual lease payments. If the residual value was
guaranteed, the lessee may or may not be required to include the residual in the
calculation of the lease payments, depending on whether the expected residual
value was higher, equal to, or lower than the guaranteed residual value.BRIEF EXERCISE 21.19
(a) The value of the lease liability would remain the same if the only fact
changed from BE21.18 was the guarantee of the expected residual value.
Residual values should only be included in the lease liability when the
expected residual value is less than the guaranteed residual value (i.e.
when the lessee expects to make an additional payment at the end of the
lease term to the lessor).
(b) Following from the above reasoning, if the expected residual value drops
to £5,000 and Escape guarantees a residual of £9,000, Escape will need
to account for the difference between the expected and guaranteed
residual value in calculating the initial lease liability as follows:
PV of lease payments (£17,000 x 2.83339") £48,168
PV of residual value [(£9,000 — £5,000) x 0.83962"*] 3,358
Lease liability £54,526
“Present value of an annuity-due of 1 for 3 periods at 6%.
“Present value of 1 for 3 periods at 6%.
BRIEF EXERCISE 21.20
42/31/2024
Right-of-Use Asset 215,544"
Lease Liability 215,544
*PV of rentals (€40,000 x 5.21236") €208,494
PV of guaranteed residual value
(€20,000 - €10,000***) x 0.70496" 7,050
Lease liability €215,544
Lease Liability 40,000
Cash 40,000
*Present value of an annuity-due of 1 for 6 periods at 6%.
“Present value of 1 for 6 periods at 6%.
“The lessee need only include in the initial lease liability the amount of the
residual value that it expects to pay at the end of the lease term. Thus, in this
case, only the residual value in excess of the expected residual value (up to
the guaranteed residual) should be discounted to present value and included
in the computation of the lease liability.BRIEF EXERCISE 21.21
12/31/24
Lease Receivable... @ = st “ 222,593"
Cost of Goods Sold....... sancasssons oo i 180,000
Sales Revenue. 222,593
Inventory. 180,000
+*([€40,000 « 5.21236] + [€20,000 = 0.70496])
BRIEF EXERCISE 21.21 (Continued)
40,000
40,000
12/31/22
Cash. 40,000
Lease Receivable. 5 29,044
Interest Revenue [(€222,593 — €40,000) x 0.06]... 10,956
Cash... 40,000
Lease Receivable 40,000
12/3122
Cash... 40,000
Lease Receivable 29,044
Interest Revenue [(€222,593 — €40,000) 0.06] 10,956
BRIEF EXERCISE 21.22
Lea
In calculating the lease liability, Forrest must determine which of the executory
costs are considered a component of the lease (to be considered in the
measurement of the lease liability).
+ The real estate taxes in this case are variable payments and therefore are
not considered in the measurement of the lease liability and related right-
of-use asset.
+ The fixed $500 insurance payments are included in the measurement of
the lease liability because the insurance costs are a fixed part of the rental
payments. The lease liability is computed as follows:
PV of rental payments (4.31213* » $4,638) $20,000
PV of insurance payments (4.31213 x $500) 2.1456
Initial lease liability 22.156
“Present value of an annuity-due of 1 for 5 periods at 8%.ight-of-Use Asset
The right-of-use asset is initially measured the same as the lease liability,
though it is also adjusted for any initial direct costs, prepaid rent, and lease
incentives associated with the lease. The legal fees resulting from the
execution of the lease are considered initial direct costs, and must be
included in the calculation of the right-of-use asset:
Lease liability $22,156
Legal fees 4,000
Right-of-use asset $23,156
The journal entry to record the initial lease liability and right-of-use asset is
as follows:
Right-of-Use Asset 23,156"
Cash (Legal Fees) 4,000
Lease Liability 22,156
BRIEF EXERCISE 21.23
PV of lease payments $83,498
Cash incentive received from Badger (lessor) (5,000)
Lease document preparation costs 500
Measurement of right-of-use asset at 1/1/22 $78,998
Employee salaries are specifically excluded as initial direct costs and would
not be included in the calculation of the right-of-use asset.
Note to Instructor: The lease liability will not include any adjustments for the
cash incentive received, or any initial direct costs, and as such, will only
reflect the present value of future lease payments.BRIEF EXERCISE 21.24
PV of lease payments €44,651
Cash incentive received from Highlander (lessor) (2,000)
Commissions for selling agents ‘900
Legal fees resulting from the execution of the lease 3,000
Measurement of right-of-use asset at 1/1/22 £46,554
Internal engineering costs are specifically excluded as initial direct costs and
are not included in the calculation of the right-of-use asset.
Note to Instructor: The lease liability will not include any adjustments for the
cash incentive received, or any initial direct costs, and as such, will only
reflect the present value of future lease payments.
BRIEF EXERCISE 21.25
Lease Expense scsan:scutsissiccctesnisesensessccimeet 15,000
Cash... 15,000
“Because the lease term is only 1 year, the lessee treats the lease as a short-
term lease, does not capitalize the asset on its books, and records lease
payments as expenses when paid.