ILLUSTRATION2O-1 ( A-t?

E)
CRITERIAFOR
LESSEE'SCLASSIFICATION
CAPITALLEASES

THE
IFTHELEASEMEETSONE OR MOREOF THEFOLLOWINGTHREECRITERIA,
AS A
AND ACCOUNTFOR THEARRANGEMENT
MUSTCLASSIFY
LESSEE
LEASE:
CAPITAL
TOTHELESSEEOR
TRANSFERS
OFTHEPROPERTY
1. THELEASE
OWNERSHIP
A
BARGAIN
PURCHASE
OPT]ON.
THELEASE
CONTAINS
TO75%OR MOREOFTHEESTIMATED
TERMISEQUAL
2.THELEASE
LIFE
PROPERTY.
ECONOM]C
OFTHELEASED

(EXCLUDING
VALUEOF THEMINIMUMLEASEPAYMENTS
3. THEPRESENT
VALUEOF
FAIR
90%OF THE
EQUALS
OR EXCEEDS
COSTS)
EXECUTORY
PROPERTY.
THELEASED

ILLUSTRATION
20.2 ( ArPE)
LESSEE-CAPITALLEASE
LESSOR_DIRECT
FINANCING
LEASE
EXAMPLE
On January1,2005, Velde Company(lessee)enteredinto a 4-year,noncancellablecontract
to lease a computer from Fxceptional Computer Company (lessor). Annual rentals of
$17,208 are to be paid each January 1. Velde will assumeresponsibility for all normal
ownership costs, and at the end of the lease period the computer will be returned to
Exceptional Computer Company. The cost of the computer to Exceptional Computer
Company was $60,000 and it had an estimateduseful life of four years and no residual
value. Velde has an incrementalborrowing rate of 12% but has knowledgethat Exceptional
ComputerCompanyused a rateof l0% in settingannualrentals. Collection of the rentalsis
reasonably predictable and there are no important uncertainties regarding future
unreimbursable
coststo be incurredby the lessor.

Capitalization Criteria
Lessee

Criteria#l
Criteria#2
Critefia#3

Lessor

No
Yes
Yes

GroupI:
Criteria#1
Criteria#2
Criteia #3
GroupII:
Criteria#1
Crrteria#2

No
Yes
Yes
Yes
Yes

Direct financing leasebecausecost of

computer: fair value.

VELDE COMPANY
: $60.000
x 3.48685
$17,208
(TableA-5)

EXCEPTIONALCOMPUTERCOMPANY
Annualrental
F . V . $ 6 0 . 0 0 0- $ 1 7 , 2 0 8
3.48685 x 4

$68332

fLLUSTRATION
20-2(continued)
VELDECOMPANY

EXCEPTIONAL COMPUTER CO.

January1. 2005

LeasedComputer
ObligationsUnder
CapitalLeases

Obligations
Under
CapitalLeases
Cash

60,000
60,000

LeasePayments
Receivable
UnearnedInterest
Income
Computer

LeasePayments
Receivable

17,208

*,,

60,000

17,208

Cash

17,208

68,832

17,208

December3l 2005
Amortization Expense
15,000
AccumulatedAmortization
InterestExpense
InterestPayable

15,000

4,279
4,279

UnearnedInterestIncome
InterestIncome

4,279

4,279

Januarvl. 2006
InterestPayable
ObligationsUnder
CapitalLeases
Cash

4,279

17,208

Cash
LeasePayments
Receivable

12,929

17,208

17,208
December31 2006

Amortization Expense

15,000
Accumulated
Amortization
15,000
InterestExpense
InterestPavable

2,986
2,996

Unearned
InterestIncome
InterestIncome

2,986
2,996

ILLUSTRATION
20-2(continued)
VELDECOMPANY

EXCEPTIONAL COMPUTER COMPANY

January1. 2007

InterestPayable
ObligationsUnder
CapitalLeases
Cash

2,986

Cash

17,208
LeasePayments
Receivable

14,222

17,208

17,209
December31. 2007

Amortization
Expense
15,000
Accumulated
Amortization
15,000
Interest
Expense
InterestPayable

InterestPayable
ObligationsUnder
CapitalLeases
Cash

UnearnedInterest
Income
InterestIncome

I,567
I,567

1,567
15,64I

January1. 2008
Cash
LeasePayments
Receivable
17.208
December31. 2008

AmortizationExpense
15,000
AccumulatedAmortization

15,000

Accumulated

Amortization
60,000
LeasedComputer
60,000

10

1,567
1,567
17,208
17,208

ILLUSTRATION
20-2(continued)
LEASEAMORTIZATION
SCHEDULES
VELDE COMPANY
Date
Jan.1,2005
Jan.1,2005
Jan.1,2006
Jan.1,2007
Jan1
. ,2008

Annual
LeasePayment
$1 7 , 2 0 8
17,209
17,209
17,209

(10%)
Interest

Reductionof
Obligation

$ -04,279
2,996
1,567*

$17,209
12,929
14,222
15,641

Lease
Obligation
$60,000
42,792
29,963
15,641
-0-

EXCEPTIONAL COMPUTER COMPANY

Date

Jan1
. ,2005
Jan.I ,2005
Jan.I ,2006
Jan.1,2007
Jan1
. .2008

Annual
LeasePayment
$1 7 , 2 0 9
17,209
17,209
17,209

(r0%)
Interest

$ -o4,279
2,996
1,567*

*Adjustedfor rounding.

ll

Investment
Recovery

Net
Investment

$1 7 , 2 0 9
12,g2g
14,222
15,64r

$60,000
42,792
42,792)9,8 6-t
15,641
-0-

TLLUSTRATION
2O-4( AsFE)
LESSOR'SCLASSIFICATION
CRITERIA
FORDIRECTFINANCING
AND SALES-TYPE
LEASES
GROUP
I
THELEASE
AGREEMENT
MUSTMEETONE OR MOREOF THEFOLLOWING
CRITERIA:
1 . T H EL E A S T
ER A N S F EO
RW
S N E R S HOI PF T H EP R O P E R T O
Y T H EL E S S EOER
T H EL E A SC
EO N T A I NASB A R G A I P
NU R C H A S
OEP T I O N .
2, THE LEASETERMIS EQUALTO 75% OR MORE OF THE ESTIMATED
ECONOMIC
LIFE
O FT H EL E A S EPDR O P E R T Y .
(EXCLUDING
VALUEOF THEMINIMUMLEASEPAYMENTS
3. THEPRESENT
EXECUTORY
EQUALS
COSTS)
OR EXCEEDS
90%OFTHEFAIRVALUE
OFTHE
LEASED
PROPERTY.

G R O U PI I
THELEASEAGREEMENT
MUSTMEETBOTHOF THEFOLLOWINGCRITERIA:
I . T H EC R E D IRTI S K
A S S O C I A TW
E DI T H
T H EL E A SIESN O R M A W
L HEN
C O M P A R ETDOT H ER I S K
O FC O L L E C T I O
ON
FS I M I L AR
RE C E I V A B L E S .
2. THEAMOUNTSOF ANY UNREIMBURSABLE
COSTSTHATARELIKELYTOBE
I N C U R R EBDYT H EL E S S OURN D E T
RH EL E A SC
EA N B ER E A S O N A B L Y
ESTIMATED.

13

ILLUSTRATION
20.5 ( hSPE)
LESSOR-SALES-TYPELEASE
LESSEE-CAPITALLEASE
EXAMPLE
On Januaty 1,2005, Velde Company(lessee)enteredinto a 4-year,noncancellablecontract
to lease a computer from Exceptional Computer Company (lessor). Annual rentals of
$17'208 are to be paid each January 1, Velde will assumeresponsibility for all normal
ownership costs, and at the end of the lease period the computer will be returned to
Exceptional Computer Company. The cost of the computer to Exceptional Computer
Companywas $40'000 and it had an estimatedfair value of $60,000,an estimateduseful life
of four yearsand no residual value. Velde has an incrementalborrowing rate of 12% but
has knowledge that Exceptional Computer Company used a rate of I0% in setting annual
rentals. Collection of the rentals is reasonably predictable and there are no important
uncertaintiesregardingfuture unreimbursablecoststo be incurred by the lessor.
Capitalization Criteria
Lessee

Criteria#1
Criteria#2
Criteria#3

Lessor
No
Yes
Yes
Yes
Yes

Sales-type
leasebecause
thereis a dealer
profit of $20,000
EXCEPTIONAL COMPUTER COMPANY

VELDE COMPANY
Presentvalue
: $60,000
x3.48685
$17,208
(TableA-5)

GroupI:
Criteria# 1
Criteria#2
Criteria#3
GroupII:
Criteria# 1
Criteria#2

No
Yes
Yes

Annualrental
F . V . $ 6 0 " 0 0 :0 $ 1 7 , 2 0 8
3.48685 x 4
$68-832
January1. 2oo5

Leased
Computer
60,000
Obligations
Under
CapitalLeases
60.000

LeasePayments
Receivable68,832
Costof GoodsSold
40,000
Inventory
UnearnedInterestIncome
-emputg.Lr.

t4

'c,'
:,

i 6.1rtht,.G'r

40,000
8,832
60,000

ILLUSTRATION
20-5(continued)
VELDECOMPANY
Obligations
Under
CapitalLeases
Cash

EXCEPTIONAL COMPUTER COMPANY

Cash
LeasePayments
Receivable

17,208
17.208

17,208
17,208

December31. 2005

Amortization
Expense
15,000
Accumulated
Amortization 1 5 , 0 0 0
InterestExpense
InterestPavable

4,279

UnearnedInterestIncome
InterestIncome

4,279

4,279

4,279

Januaryl. 2006
InterestPayable
ObligationsUnder
Capital Leases
Cash

4,279

Cash
LeasePayments
Receivable

12,929

17,208

17,208

17.208
December31. 2006

Amortization
Expense
15,000
Accumulated
Amortization
15,000
InterestExpense
InterestPavable

2,986

UnearnedInterestIncome
InterestIncome

2.986

2,986

2,986

January1.2007
InterestPayable
ObligationsUnder
CapitalLeases
Cash

2,986

Cash
LeasePayments
Receivable

14,222
17,208

December3 1. 2007
AmortizationExpense
15,000
AccumulatedAmortization
15,000

l5

17,208
17,208

ILLUSTRATION
20-5(continued)
VELDECOMPANY
InterestExpense
InterestPayable

EXCEPTIONAL COMPUTER COMPANY

1,567

UnearnedInterestIncome
InterestIncome

1,567

1,567

1,567

January1.2008
InterestPayable
Obligations
Under
CapitalLeases
Cash

1,567

Cash
LeasePayments
Receivable

15,641
17,209

December
31. 2008
AmortizationExpense
15,000
AccumulatedAmortization

15,000

Accumulated
Amortization
60.000
LeasedComputer
60.000

t6

17,209
17,208

ILLUSTRATION
20'8 ( A5FE)
RESIDUAL VALU E-G UARANTEED
LESSEE-CAPITALLEASE
LESSOR-DIRECTFINANCING
LEASE
EXAMPLE
On January1,2005, Velde Company(lessee)enteredinto a 4-year,noncancellable
contract
to lease a computer from Exceptional Computer Company (lessor). Annual rentals of
S161228are to be paid each January l, Velde will assumeresponsibility for all normal
ownership costs, and at the end of the lease period the computer will be returned to
Exceptional Computer Company. The cost of the computer to Exceptional Computer
Companywas $60,000and it had an estimateduseful life of four yearsand a $5,000residual
value. Velde has guaranteed the lessora residualvalue of $5,000.Velde has an incremental
borrowing rate of l2%obut has knowledge that Exceptional Computer Company used a rate
of l}oh in settingannualrentals.Collectionof the rentalsis reasonablypredictableand there
are no important uncertaintiesregarding future unreimbursablecosts to be incurred by the
lessor.At the end of the leaseterm, the computer'sfair value was $5,000.

Capitalization Criteria
Lessee
Criteria#l
Criteria #2
Criteria#3

Lessor
Group I:
Criteria#1
Crrterra#2
Criteria#3
GroupII:
Criteria#1
Criterta #2

No
Yes
Yes

No
Yes
Yes
Yes
Yes

Direct financing leasebecausecost of

computer: fair value.

2l

20-8(continued)
fLLUSTRATION

EXCEPTIONAL COMPUTER COMPANY

VBLDE COMPANY

Annual rental
Cost
$60,000
T(A-2) 3.415(P. V. of residual)

Presentvalue

(Rent)
$56.585 : 516,228
x 4
T(A-5) 3.48685
64,912
5.000
Residualvalue

: $56,585
x3.48685
516,228
(TableA-5)
3.415
$ 5 , 0 0 0x . 6 8 3 0 1
(TableA-2)

$@pJ2

$60J00

January1. 2005

LeasedComputer
Under
Obligations
CapitalLeases

60,000

Under
Obligations
CapitalLeases
Cash

I
16,2281
16,228
|

LeasePayments
69,912
Receivable
Interest
Unearned
9,912
Income
60,000
Computer

60,000

Cash
LeasePayments
Receivable

16,228
16,228

December
31"2005
Expense
Amortization
Amortization
Accumulated
InterestExpense
InterestPayable

13,750|
13,7
50
I
UnearnedInterest
Income
InterestIncome

4,377

4,,377

4,377
4,377

January1.2006
InterestPayable
ObligationsUnder
CapitalLeases
Cash

Cash
LeasePayments
Receivable

4,377
11,851

16,228

22

16,228
16,228

20-8(continued)
ILLUSTRATION
EXCEPTIONAL COMPUTER COMPANY

VELDECOMPANY

December31. 2006
13,750|
AmortizationExpense
13,750
AccumulatedAmortization
|
InterestExpense
InterestPavable

UnearnedInterest
Income
InterestIncome

3,192
3,192

3,192

3,r92

1.2007
January
InterestPayable
ObligationsUnder
CapitalLeases
Cash

Cash
LeasePayments
Receivable

3,192
13,036

16,228
16,228

16,228
December31. 2007

13,750
Expense
Amortization
13,7
50
Amortization
Accumulated
InterestExpense
InterestPayable

UnearnedInterest
Income
InterestIncome

1,889
1,889

1,889
1,989

1.2008
January
InterestPayable
ObligationsUnder
CapitalLease
Cash

Cash
LeasePayments
Receivable

1,889
14,339

16,228
31.2008
December

I3,750
AmortizationExpense
13,7
50
AccumulatedAmortization

23

16,228
16,228

ILLUSTRATION20-8 (continued)
UnearnedInterestIncome 454
InterestIncome

454

InterestExpense
ObligationsUnder
CapitalLease
Accumulated
Amortization
LeasedComputer

454

4,546
Computer
LeasePayments
Receivable

55,000
60.000

5,000
5,000

LEASE AMORTIZATION SCHEDULES

VELDECOMPANY

Date

Jan.1,2005
Jan.1,2005
Jan.1,2006
Jan.1,2007
Jan1
. ,2008
Dec.31,2008

Annual
LeasePayment

(10%)
Interest

sl6,228
16,228
16,228
16,228
5,000

$ -04,377
3,192
1,989
454*

Reductionof
Obligation

sl6,228
11 , 8 5 1
13,036
14,339
4,546

Lease
Obligation
s60,000
43,772
31,921
18,885
4,546

-o-

EXCEPTIONALCOMPUTERCOMPANY

Date
Jan.1,2005
Jan.1,2005
Jan.1,2006
Jan.1,2007
Jan1
. ,2008
Dec.31,2008

Annual
LeasePayment
$16,228
16,228
16,228
16,228
5,000

(t0%)
Interest
$ -04,377
3,192
1,889
454*

*Adjustedfor rounding.

24

Investment
Recovery

Net
Investment

$16,228
11 , 8 5 1
13,036
14,339
4,546

$60,000
43,772
31,921
18,885
4,546
-0-

20-9( ASPE)
ILLUSTRATION
RESIDUAL VALU E-U NGUARANTEED
LESSEE-CAPITALLEASE
LEASE
FINANCING
LESSOR_DIRECT
EXAMPLE
On January1,2005, Velde Company(lessee)enteredinto a 4-year,noncancellablecontract
to lease a computer from Exceptional Computer Company (lessor). Annual rentals of
S161228are to be paid each January 1, Velde will assumeresponsibility for all normal
ownership costs, and at the end of the lease period the computer will be returned to
Exceptional Computer Company. The cost of the computer to Exceptional Computer
Companywas $60,000 and it had an estimateduseful life of four years and a $5'000 residual
value. Velde has an incrementalborrowing rate of 12% but has knowledge that Exceptional
ComputerCompanyused a rateof l0o/oin settingannualrentals.Collection of the rentalsis
reasonably predictable and there are no important uncertainties regarding future
coststo be incurredby the lessor.At the end of the leaseterm, the computer's
unreimbursable
fair value was $4"000.
Capitalization Criteria
Lessor

Lessee

Criteria#1
Criteria#2
Criteria#3

GroupI:
Criteria#1
Criteria#2
Criteria#3
GroupII:
Criteria#l
Criteria#2

No
Yes
Yes

No
Yes
Yes
Yes
Yes

Direct financing leasebecausecost of

computer: fair value.

VELDE COMPANY

x 3.48685: $56J85
$16,228
(TableA-5)

EXCEPTIONAL COMPUTBR COMPANY

Annualrental
Cost
$60,000
3.41s(P.V. of residual)
r(A-2)
$ 5 6 " 5 8 :5 516,228(Rent)
x 4
T(A-s) 3.4868s
64,,912
5.000
Residualvalue

$6egl2

25

20-g(continued)
fLLUSTRATION
VELDECOMPANY

EXCEPTIONAL COMPUTER COMPANY

January1.2005

56,585|
LeasedComputer
ObligationsUnder
I
56,585
CapitalLeases
I

f,easePayments
Receivable
69,912
9,912
UnearnedInterestIncome
Computer
60,000

Obligations
Under
CapitalLeases
Cash

Cash
LeasePayments
Receivable

I
16,2281
16,228
|

16,228
16,228

December31. 2005
14,146
AmortizationExpense
14,146
AccumulatedAmortization
InterestExpense
InterestPayable

4,036
4,036

UnearnedInterestIncome
InterestIncome

4,377

4,377

January
1.2006
InterestPayable
ObligationsUnder
CapitalLeases
Cash

Cash
LeasePayments
Receivable

4,036
12,192

16,228
16,228

16,228
December3 1. 2006

AmortizationExpense
AccumulatedAmortization
InterestExpense
InterestPayable

14,146

14,146
2,817
2,817

UnearnedInterestIncome
InterestIncome

26

3,192

3,192

fLLUSTRATION
20-g(continued)
VELDECOMPANY

EXCEPTIONAL COMPUTER COMPANY

Januarv1.2007
InterestPayable
ObligationsUnder
Capital Leases
Cash

2,817

Cash
LeasePayments
Receivable

13,4ll

16,228

r6,229

16,228
December31 2007

AmortizationExpense
14,,r46
AccumulatedAmortization
14,146

Interest
Expense
Interest
Payable

1,47
4l
| 1.474

UnearnedInterestIncome
InterestIncome

1,889
l,8gg

January1.2008
InterestPayable
ObligationsUnder
Capital Lease
Cash

I,474

Cash
LeasePayments
Receivable

14,7
54
16,228

rc,2281
I

16,228

December
31.2008
Amortization
Expense
14,147
|
Accumulated
Amortization
I 14,147
Accumulated
Amortization
LeasedComputer

56,sss
I5 6 , 5 8 5

Unearned
InterestIncome

454
454

InterestIncome
Computer
Losson Lease
LeasePayments
Receivable

27

4,000
1,000

5,000

20-9(continued)
ILLUSTRATION
LEASEAMORTIZATIONSCHEDULES

VELDE COMPANY

Date
Jan.1,2005
Jan.1,2005
Jan.1,2006
Jan.1,2007
Jan1
. ,2008

Annual
LeasePayment
$16,228
16,228
16,228
16,228

(10%)
Interest

s -04,036
2,817
1,474*

Reductionof
Obligation

Lease
Obligation

$16,228
12,192
13,411
54
14,7

$56,585
40,357
28,165
14,754
-0-

EXCBPTIONAL COMPUTERCOMPANY

Date
Jan.1,2005
Jan.1,2005
Jan.1,2006
Jan.1,2007
Jan1
. ,2008
Dec3
. 1 ,2 0 0 8

Annual
LeasePayment

s16,228
16,228
16,228
16,228
5,000

(r0%)
Interest

s -04,377
3,192
1,889
454*

*Adjustedfor rounding.

28

Investment
Recovery

s|6,228
I 1,851
13,036
14,339
4,546

Net
Investment
$60,000
43,772
31,921
18,885
4,546
-0-