Chapter 15 - Alternate Solutions

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
TheMcGrawHillCompanies,Inc.,2013
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
15-2
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).....................................
1,957
8,043
July1,2013
Interestexpense(2%x$89,823:fromschedule).........
1,796
8,204
October1,2013
1,632
8368
December31,2013
Interestpayable..............................................
1,465
Depreciationexpense($107,8663years)...............
Accumulateddepreciation...............................
January1,2014
Interestpayable(fromadjustingentry)........................
35,955
1,465
8,535
107,866
10,000
10,000
10,000
10,000
1,465
35,955
10,000
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

Effective
Interest
.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
15-4
Exercise153(concluded)
January1,2013
Leasereceivable(presentvalueofleasepayments)...
Inventoryofequipment(lessorscost)...............
107,866
Cash(leasepayment)..............................................
Leasereceivable.............................................
10,000
April1,2013
Leasereceivable(tobalance)............................
Interestrevenue(2%x[$107,86610,000]).........
July1,2013
Leasereceivable(tobalance).............................
Interestrevenue(2%x$89,826:fromschedule)....
October1,2013
December31,2013
Interestreceivable..............................................
January1,2014
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
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)...............
April1,2013
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
Theleasemeetsatleastone(actually3of4inthiscase)criteriaforclassificationas
acapitallease.
January1,2013
15-6
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.
157
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**
$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).................................................
15-8
500,000
32,629
14,021
18,609
500,000
32,629
32,629
Problem151(concluded)
StarLeasing(Lessor)
January1,2013
Leasereceivable(presentvalue)........................................
Inventoryofequipment(lessorscost)...........................
Cash(leasepayment)..........................................................
Leasereceivable.........................................................
April1,2013
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)..............................................
April1,2013
Interestrevenue(3%x[$500,00032,629]).......................
500,000
450,000
32,629
32,629
500,000
450,000
32,629
18,608
14,021
159
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%
Requirement2
Thelesseesincrementalborrowingrate(12%)ismorethanthelessorsimplicit
rate(10%).So,bothpartiescalculationsshouldbemadeusinga10%discountrate:
15-10
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%
1511
(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..................................................................
HHH(Lessor)
Leasereceivable(calculatedabove)....................................
Leasereceivable..........................................................
15-12
1,097,280
300,000
1,097,280
300,000
1,097,280
300,000
1,097,280
300,000
Requirement4
Since both use the same discount rate and since the residual value is lessee
guaranteed,thesameamortizationscheduleappliestoboththelesseeandlessor:

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 (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).................................................
Depreciationexpense([$1,097,28075,000]4years).........
HHH(Lessor)
Leasereceivable..........................................................
Interestrevenue(10%x[$1,097,280300,000]).................
79,728
220,272
255,570
300,000
300,000
255,570
220,272
79,728
1513
Problem152(concluded)
Requirement6
December31,2015
BlairCo.(Lessee)
Depreciationexpense([$1,097,28075,000]4years).........
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
15-14
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%]
221,920
57,636
1515

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Chapter 15 - Alternate Solutions

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Chapter15Leases

Present Value of Minimum Lease Payments:

Lease Amortization Schedule

Lease Amortization Schedule

Lessors Calculation of Lease Payments

Sinceatleastonecriterionismet,thisisa capitallease tothelessee. Blair

Lease Amortization Schedule

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