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Leases
EXERCISE
S
Rent expense...................
Exercise
40,000
Cash ............................
......................................... 40,000
15-1
40,000
40,000
40,000
40,000
40,000
40,000
Exercise 15-2
PresentValueofMinimumLeasePayments:
($10,000 x 10.78685*) = $107,866
lease
present
payments
value
* present value of an annuity due of $1: n=12, i=2%
[i = 2% (8% 4) because the lease
calls for quarterly payments]
LeaseAmortizationSchedule
Lease
Payments
1 10,000
2 10,000
3 10,000
4 10,000
5 10,000
6 10,000
7 10,000
8 10,000
9 10,000
1010,000
1110,000
1210,000
Effective
Interest
2% x Outstanding Balance
120,000
943
761
577
388
201*
12,134
Decrease
in Balance
10,000
8,043
8,204
8,368
8,535
8,706
8,880
9,057
9,239
9,423
9,612
9,799
Outstanding
Balance
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
107,866
Intermediate Accounting, 6e
107,866
107,866
10,000
10,000
April 1, 2011
Interest expense (2% x [$107,866 10,000])..............
Lease payable (difference).....................................
Cash (lease payment)..........................................
1,957
8,043
July 1, 2011
Interest expense (2% x $89,823: from schedule).........
Lease payable (difference).....................................
Cash (lease payment)..........................................
1,796
8,204
October 1, 2011
Interest expense (2% x $81,619: from schedule).........
Lease payable (difference).....................................
Cash (lease payment)..........................................
1,632
8368
1,465
10,000
10,000
10,000
1,465
35,955
35,955
January 1, 2012
Intermediate Accounting, 6e
Exercise 15-3
Lease
Payments
1 10,000
2 10,000
3 10,000
4 10,000
5 10,000
6 10,000
7 10,000
8 10,000
9 10,000
1010,000
1110,000
1210,000
1,465
8,535
10,000
LeaseAmortizationSchedule
Effective
Interest
2% x Outstanding Balance
120,000
943
761
577
388
201*
12,134
Decrease
in Balance
10,000
8,043
8,204
8,368
8,535
8,706
8,880
9,057
9,239
9,423
9,612
9,799
Outstanding
Balance
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
107,866
107,866
107,866
10,000
10,000
10,000
8,043
1,957
10,000
8,204
1,796
10,000
8,368
1,632
1,465
1,465
10,000
8,535
1,465
Exercise 15-4Requirement 1
The McGraw-Hill Companies, Inc., 2011
15-6
Intermediate Accounting, 6e
LessorsCalculationofLeasePayments
Amount to be recovered (fair value)
Lease payments at the beginning
of each of eight quarters:
$107,866
__________________
($107,866 10.7866**)
$10,000
Requirement 2
January 1, 2011
Lease receivable (fair value)..................................
Cost of goods sold (lessors cost)...........................
Sales revenue (fair value)..................................
Inventory of equipment (lessors cost)...............
Cash (lease payment)..............................................
Lease receivable .............................................
April 1, 2011
Cash (lease payment)..............................................
Lease receivable .............................................
Interest revenue (2% x [$107,866 10,000])........
Exercise 15-5
107,866
90,000
107,866
90,000
10,000
10,000
10,000
8,043
1,957
7.49236**)
$1,540,000
** present value of an annuity due of $1: n=13, i=11%
The lease meets at least one (actually 3 of 4 in this case) criteria for classification
as a capital lease.
January 1, 2011
Cash (given)......................................................................
Helicopter (carrying value).............................................
Deferred gain on sale-leaseback (difference)................
1,540,000
1,540,000
205,542
1,240,000
300,000
1,540,000
205,542
146,790
102,267
15,000
146,790
102,267
15,000
* The helicopter is depreciated over its remaining useful life rather than the lease term
because title transfers to the lessee.
Intermediate Accounting, 6e
PROBLEM
S
Requirement 1
Capital lease to lessee;
lessor.
Problem 15-1
CalculationofthePresentValueofMinimumLeasePayments
Present value of periodic lease payments
$32,629 x 15.32380**
$500,000
(rounded)
The 75% of useful life criterion is met also. Both additional lessor conditions are
met for a capital lease. There is no dealers profit because the fair value equals the
lessors cost.
Requirement 2
Pal Learning Systems (Lessee)
January 1, 2011
Leased equipment (calculated above).................................
Lease payable (calculated above)....................................
500,000
32,629
500,000
32,629
April 1, 2011
Interest expense (3% x [$500,000 32,629])...........................
Lease payable (difference).................................................
Cash (lease payment)......................................................
14,021
18,609
32,629
652,580
32,629
500,000
32,629
April 1, 2011
Cash (lease payment)..........................................................
Lease receivable .........................................................
Interest revenue (3% x [$500,000 32,629]).......................
32,629
18,608
14,021
Intermediate Accounting, 6e
Requirement 3
Star Leasing (Lessor)
January 1, 2011
Lease receivable (present value)........................................
Cost of goods sold (lessors cost)......................................
Sales revenue (fair value)..............................................
Inventory of equipment (lessors cost)...........................
500,000
450,000
32,629
500,000
450,000
32,629
April 1, 2011
Cash (lease payment)..........................................................
Lease receivable .........................................................
Interest revenue (3% x [$500,000 32,629]).......................
32,629
18,608
14,021
Problem 15-2Requirement 1
Lessors Calculation of Lease Payments
Amount to be recovered (fair value)
$1,097,280
(51,225)
($1,046,055 3.48685**)
$300,000
Requirement 2
The lessees incremental borrowing rate (12%) is more than the lessors implicit
rate (10%). So, both parties calculations should be made using a 10% discount rate:
Intermediate Accounting, 6e
NO
NO
NO
{4 yrs < 75% of 6 yrs}
YES
{$1,046,055b > 90% of $1,046,055}
$1,046,055
51,225
$1,097,280
Since at least one criterion is met, this is a capital lease to the lessee. Blair
records the present value of minimum lease payments as a leased asset and a lease
liability.
Requirement 3
December 31, 2011
1,097,280
1,097,280
300,000
300,000
1,097,280
Intermediate Accounting, 6e
1,097,280
300,000
300,000
Requirement 4
Problem 15-2 (continued)
Since both use the same discount rate and since the residual value is lesseeguaranteed, the same amortization schedule applies to both the lessee and lessor:
LeaseAmortizationSchedule
Dec. Payments
31
2011
2011300,000
2012300,000
2011300,000
2012300,000
2013 75,000
1,275,000
Effective
Interest
10% x Outstanding Balance
6,820*
177,720
Decrease
in Balance
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
Requirement 5
December 31, 2012
Intermediate Accounting, 6e
HHH (Lessor)
Cash (lease payment)..........................................................
Lease receivable..........................................................
Interest revenue (10% x [$1,097,280 - 300,000]).................
79,728
220,272
300,000
255,570
255,570
300,000
220,272
79,728
Requirement 6
HHH (Lessor)
Inventory of equipment (actual residual value)...................
Cash ($75,000 - 4,500).................................................................
Lease receivable (account balance)................................
Interest revenue (10% x 68,180: from schedule as rounded)
255,570
255,570
6,820
68,180
1,022,280
71,500
1,097,280
71,500
4,500
71,500
69,180
6,820
Intermediate Accounting, 6e