Financial Reporting and Analysis (7th Ed.)
Chapter 12 Solutions
Financial Reporting for Leases
Exercises
Exercises
E12-1. Accounting for lessee with purchase option under ASC 840 (LO
12-3)
Requirement 1: Amount capitalized by Leland at 07/01/2017
The $100,000 represents a bargain purchase as the amount is
significantly below the expected residual value of $600,000. Given
that the lease contains a bargain purchase option, it meets criterion
Requirement 2: Lease obligation amortization table
Part 2 – Amortization table
Interest Principal
Date Expense Payment Reduction Balance
7/1/17 $ 1,849,591
*Rounded
Requirement 3: Depreciation and interest expense
December 31, 2017
Interest expense: .5 x the interest expense associated with the June 30, 2018 payment
December 31, 2018
Interest expense:
.5 x the interest expense associated with the June 30, 2018 payment
Requirement 4: Do requirements 1 to 3 for payments in
advance
Requirement 4.1: Amount capitalized by Leland at 07/01/2017
The $100,000 represents a bargain purchase as the amount is
significantly below the expected residual value of $600,000. Given
that the lease contains a bargain purchase option, it meets criterion
2 and is classified as a capital lease. The amount to be capitalized
Requirement 4.2: Lease obligation amortization table
Part 2 – Amortization table
Interest Principal
Date Expense Payment Reduction Balance
*Rounded
Note that all of the first payment on July 1, 2017 goes for principal
reduction because no interest has accrued at July 1. Also, note that the
obligation balance increases instead of decreases from July 1, 2021 to
Requirement 4.3: Depreciation and interest expense
December 31, 2017
Interest expense: .5 x the interest expense associated with the July 1, 2018 payment
depreciation expense: .5 x the capitalized amount divided by the economic life (because criterion 2 is
met)
(from requirement 1)
December 31, 2018
Interest expense:
.5 x the interest expense associated with the July 1, 2018 payment
.5 x the interest expense associated with the July 1, 2019 payment
depreciation expense: Capitalized amount divided by the economic life of 10 years
(from requirement 1)
E12-2. Accounting for lessee with uneven, beginning of period lease
payments under ASU 2016-02 (LO 12-1, LO 12-6)
Requirement 1 – Journal entry at 1/1
Present value of each payment at 1/1
Payment Payment
PV
assumption
7% PV
factor Present Value
DR Right-of-use asset—Operating lease
96,549.25
To record first payment
Requirement 2 – Amortization table
Total Interest Principal
Date Payment Expense Reduction Balance
Requirement 4 – Right-of-use asset—Operating lease
Relation between lease liability and right-of-use asset
payment)
Less difference between prior cash
payments and rent expense
Journal entry approach:
12/31/17
(Straight-line expense of $19,289.03 less interest on liability $5,708.45)
To record lease expense and effects on right-of-use asset and liability
1/1/2018
Right of use asset
Operating lease liability
E12-3. Accounting for lessee with purchase option under ASC 840 (LO
12-3)
(AICPA adapted)
Because the purchase option approximates the fair value of the
To find the amount of the capitalized lease, we need to find the
present value of the minimum lease payments plus the present
So, the amount of the capitalized lease asset is $230,863.
E12-4. Accounting and reporting for lessee under ASC 840 (LO 12-3,
LO 12-5)
(AICPA adapted)
Requirement 1:
To compute the 12/31/2018 lease liability amount, we can construct
an amortization schedule.
Date
Annual
Lease
Payments
Interest
on Unpaid
Obligation
Reduction of
Lease
Obligation
Lease
Obligation
Inception $676,000
We can see from the amortization table that the reduction of the
Requirement 2:
Based on the above table, $42,400 would be classified as a current
To extend it one more year and obtain the current liability at
12/31/2018, we need to look at the next year on the amortization
schedule.
Date
Annual
Lease
Payments
Interest on
Unpaid
Obligation
Reduction of
Lease
Obligation
Lease
Obligation
Inception $676,000
We can see that in 2019, the reduction of the lease obligation will be
E12-5. Accounting for lessee under ASU 2016-02 (LO 12-6)
(AICPA adapted)
Part 1 – Lease classification
Criterion 4
Present Value:
Payment pvoa 3, 9% Present value
0
Ratio of present value to fair value
5
No criterion is met, so it is an operating lease.
Part 2 – Amortization table
Interest Principal
Date Payment Expense Reduction Balance
The lease liability equals $225,165 from the above table. Because
Part 3 – Rent expense
Given that Child used the asset for an entire year, Child would have
one year of expense equal to the amount of the $128,000 lease
E12-6. Accounting for a sales-type lease under ASC 840 (LO 12-7, LO
12-8)
(AICPA adapted)
To find the amount of interest income for 2018, we need to look at
the lease amortization schedule below. Benedict accrues the
Date
Annual
Payment
Interest
Revenue
Reduction
in Net
Investment
Net
Investment
We can see from the table that for the second year, ending
E12-7. Accounting for a direct financing lease under ASC 840 (LO
12-1, 12-7, 12-8)
(AICPA adapted)
To find the amount of interest revenue earned over the life of the
lease, we need to first determine the amount of the each lease
payment. Let Y = amount of each payment.
Next, we must find the gross investment or lease payments
receivable:
The interest revenue earned over the life of the lease is equal to the
gross investment less the net investment.
Total interest revenue that Glade will earn over the life of the lease