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 5,30012/31/22 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 1,000 943BRIEF 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... 33,056BRIEF 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 012/31/22 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.