12–31
P12–6. Assessing guaranteed and unguaranteed residual values for the lessee
(LO 3, 4, 5)
Requirement 1:
This is a capital lease for Task because the lease meets at least one of the
criteria for capital lease treatment. The lease term is 75% of the equipment’s
90% x $500,000 $450,000
Requirement 2:
(a)
(b)
(c)
(d)
Date
Total Cash
Payment
Interest
Expense
Principal
Payment
Lease
Obligation
Balance
01/01/14
—
—
—
$464,411
12/31/14
$193,357
$55,729
$137,628
326,783
12/31/15
193,357
39,214
154,143
172,640
12/31/16
193,357
20,717
172,640
—
Requirement 3:
2014
01/01
DR Leased Asset $464,411
CR Lease obligation $464,411
12/31
DR Depreciation expense $154,804*
CR Accumulated depreciation $154,804
2016
12/31
DR Depreciation expense $154,804
CR Accumulated depreciation $154,804
DR Interest expense $ 20,717#
DR Lease obligation 172,640
Requirement 4:
Payments $193,357
X Ordinary annuity factor, 3 periods, at 12% 2.40183
= Present value of the MLP $464,411
Plus
PV of guaranteed residual value 35,589*
12–33
DR Interest expense $ 60,000@
DR Lease obligation 133,357
CR Cash $193,357
P12–7. Assessing guaranteed and unguaranteed residual value for the lessor
(LO 3, 4, 5, 8)
Assuming the RV is not guaranteed, the entry at January 1, 2014 is:
DR Gross investment in leased asset $630,071*
P12–8. Evalulating effects of lease accounting on ratios and income (LO 2, 5)
Requirement 1:
The present value of the minimum lease payments at the inception of the
lease is $100,000, i.e., $41,635 x 2.40183. The amortization schedule for the
P12–9. Recording capital lease for lessee and comparing to operating lease
treatment (LO 2, 3, 4, 5)
Part A – June 30 reporting year
Requirement 1: Lease criteria
This is a capital lease for Burgundy because the lease meets the third
the present value computed in this test will be used to record the leased
asset. The criterion 4 test and present value of the minimum lease payments
is as follows:
Payments $42,000
X PVAD 8, 11% 5.71220
12–36
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
The table begins with the present value of minimum lease payments and
goes to a zero balance because there is an unguaranteed residual.
12–37
Requirement 3: Journal entries
DR Lease asset 239,912$
CR Lease obligaton 239,912$
DR Lease obligation 42,000 42,000$ b
CR Cash 42,000 42,000$
DR Interest expense 21,770 19,545
CR Lease obligaton 21,770 19,545
DR Depreciation expense 29,989 29,989
CR Accumulated depreciation 29,989 a29,989
aLease asset of $239,912 ÷ lease term of 8 years)
01-Jul-11
01-Jul-12
30-Jun-12
30-Jun-13
bAfter the interest accrual at June 30, 2012, the obligation grows to $219,682
($197,912 + $21,770). The $42,000 payment reduces the obligation to
$177,682, which is shown in the table from Requirement 2.
12–38
Part B – December 31 reporting year
Requirement 1: Journal entries
DR Interest expense 10,885.00$ c
CR Lease obligaton 10,885.00$
c6/12 x annual interest of $21,770
DR Depreciation expense 14,994.50 d
CR Accumulated depreciation 14,994.50
d6/12 x annual depreciation of $29,989
DR Lease obligation 31,115.00$ e
DR Interest expense 10,885.00
CR Cash 42,000.00$
DR Interest expense 9,772.50$ f
CR Lease obligaton 9,772.50$
f6/12 x annual interest of $19,545
DR Depreciation expense 29,989.00 g
CR Accumulated depreciation 29,989.00
31-Dec-11
01-Jul-12
eAfter the accrual at December 31, 2011, the obligation is $208,797 ($197,912 +
0.5 x $21,770). The debit for $31,115 removes this accrual and the difference
between interest expense and the cash payment for the lease year.
31-Dec-12
gAnnual depreciation of $29,989, assuming that no entry was made earlier in the
year
12–39
Requirement 2: Financial statement effects for the capital lease
The choice between capital lease and operating lease accounting does not
affect cash. Consequently, this analysis does not add the complication of
Requirement 3: Financial statement effects for an operating lease
Balance Sheet
Assets
2011 2012
Prepaid rent 21,000 21,000
– –
Asset Effect 21,000 21,000
Liabilities
– –
Liability Effect – –
Net Effect 21,000 21,000
Income Statement
Rent expense (21,000.00)$ (42,000.00)$
Net effect difference (4,879.50)$ (13,526.00)$
(6/12 x payment of $42,000)
(6/12 x payment of $42,000 in 2011 and
$42,000 in 2012)
31-Dec
P12–10. Recording lessors’ direct financing lease (LO 7, 8)
Requirement 1:
The lease must be accounted for as a direct financing lease because
Railcar Leasing Incorporated is not a manufacturer and because both of the
Type II characteristics discussed in the chapter are met, and two of the
exactly equals the leased asset’s fair value at the inception of the lease
(i.e., it exceeds 90% of the leased asset’s fair value at the inception of
the lease). The present value of the future minimum lease payments is:
= ($1,500,000 x present value factor of an annuity due for
n = 8 periods at r = 12.0%)
12–42
Requirement 3:
The journal entries are:
The journal entry to record the purchase of the boxcars by Railcar Leasing
DR Cash $1,500,000.00
CR Gross investment in leased assets $1,500,000.00
12–43
P12–11. Recording lessors’ direct financing lease (LO 6, 7, 8)
Requirement 1:
Under the operating lease method, the lessor does not make any entry at
the inception of the lease.
The annual lease payment would be recorded as follows:
charge would be $8,345,640/8 = $1,043,205. The journal entries would be:
12/31/2014 and 12/31/2015:
DR Depreciation expense $1,043,205
CR Accumulated depreciation $1,043,205
Requirement 2:
was recognized in P12-10 when the lease was treated as a direct financing
lease. One difference is that, when the lease was classified as a direct
financing lease in P12-10, the income statement reported financing income
each year which totaled $3,654,360 over the life of the lease, while under
the operating lease method, the income statement reported rental income of
P12–12. Accounting for monthly rental payments (LO 1, 4, 5, 8)
Requirement 1:
Fair value 3,000.00
Less: PV of guaranteed residual of
(PV 36, 1% or 0.69892 x 400) 279.57
Amount to be recovered
through rental payments 2,720.43
Divided by PVAD 36, 1% 30.40858
Monthly Lease Payments 89.46$
Monthly payments for 20 machines 1,789.20$
Guaranteed residual for 20 machines 8,000.00
Requirement 2:
Sales-type because criterion 4 is met and the cost is different than fair value.
Test of criterion 4:
PVAD 36, 1% of 30.40858 x payment of $89.46 (rounded) 2,720.43
PV 36, 1% of 0.69892 x guaranteed residual of $400 279.57
3,000.00
Present value of $3,000/Fair value of $3,000 = 100% > 90%.
12–45
Requirement 3:
DR Gross investment in leased asset
[($1,789.20 x 36) + $8,000] 72,411.20$
DR Cost of goods sold
($1,200 x 20) 24,000.00
CR Revenue
($3,000 present value x 20) 60,000.00$
CR Unearned financing income
($72,411 less $60,000) 12,411.20
CR Revenue 24,000.00
($1,200 x 20)
DR Cash 1,789.25
CR Gross investment in leased asset 1,789.25