Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
E12-8. Determining lease payment and depreciation amounts for a capital lease
(LO 12-1, LO 12-3, LO 12-5)
Note that the calculations will be the same for a finance lease under ASC 842.
Part 1 - Lease payment computations
Case 1 Case 2 Case 3
Amount to recover through payments 66,780 77,802 97,380
PV of ordinary annuity factor
PVOA 10, 12% 5.65022
PVOA 15, 9% 8.06069
PVOA 8, 7% 5.97130
$ 11,819 $ 9,652 $ 16,308
Part 2 - Depreciation expense
Case 1
Amount capitalized
Case 2
Amount capitalized
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part. 12-1
Case 3
Amount capitalized
Present value of payments $ 16,308 x 5.97130 $ 97,380
PV of bargain purchase option 4,500 x 0.58201 2,619
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part. 12-2
E12-9. Determining lease payment, lease classification, and lease liability under ASU 2016-02 (ASC 842) (LO
12-1, LO 12-6)
Part 1: Lease payments
Case 1 Case 2 Case 3
Amount to recover through payments $ 99,372.53 $ 66,588.80 $123,306.59
Divide by pvad factor
pvad 8, 4% 7.00205
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be
copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 12-3
Part 2: Lease classification
Bargain purchase option (criterion 2) no no yes
Ratio of lease term to economic life (critierion 3)
Part 3. Lease liability on the Balance Sheet
Case 1 Case 2 Case 3
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be
copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 12-4
E12-10. Determining lease classification and lease liability under
ASU 2016-02 (LO 12-6)
(AICPA adapted)
Part 1 - Lease classification
Present Value:
Implicit rate is known so
use 11%
Payment pvad 5, 11% Present value
No criterion is met, so it is an operating lease.
Part 2 – Operating lease liability
Since Day knows the lessor’s implicit rate, Day must use Parr’s
implicit discount rate. We can determine the amount of Day’s lease
liability at the beginning of the lease term as follows:
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 12-5
E12-11. Accounting for lessee operating lease under ASU 2016-02
(ASC 842) (LO 12-1, LO 12-6)
(AICPA adapted)
Part 1 - Value of leased equipment
Present Value:
Payment pvoa 5, 11% Present value
Part 2 - Rent expense
Rent payment
Portion of
year
Rent
expense
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 12-6
Refer to the above effective interest table
12/31/2017 12/31/2018
The principal reduction of $5,934.51 is not multiplied by 25% because it
represents the portion of the $36,959 that will be paid in 2018. In contrast,
E12-12. Accounting for lessee guaranteed residual under ASC 840
(LO 12-3, LO 12-5)
(AICPA adapted)
We know that there is no interest accrued when the first payment
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 12-7
Date
Annual
Payment
Interest
on Unpaid
Obligation
Reduction
of Lease
Obligation
Lease
Obligation
Inception $61,615
E12-13. Accounting for executory costs under a capital lease under
ASC 840 and ASU 2016-02 (ASC 842) (LO 12-1, LO 12-3, LO
12-6)
(AICPA adapted)
Requirement 1: ASC 840
A partial lease amortization table for Roe Company follows. Keep
in mind that executory costs are part of the annual payment but
Date
Annual
Payment
Executory
Costs
Interest
on Unpaid
Obligation
Reduction
of Lease
Obligation
Lease
Obligation
As shown in the table, Roe would report $248,686 as its lease
liability on the December 31, 2018 balance sheet.
Requirement 2: ASU 2016-02 (ASC 842)
E12-14. Accounting for sale and leaseback under ASC 840 and ASU
2016-02 (ASC 842) (LO 12-4, LO 12-6)
(AICPA adapted)
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 12-8
Requirement 1 - Deferred gain under ASC 840:
deferred and amortized over the life of the lease. Therefore, no
gain is recognized on the sale and leaseback in 2017.
Requirement 2 – Treatment of gain in subsequent years under
ASC 840:
Lane should defer the $120,000 gain on the sale of equipment and
amortize it over the 12-year lease term.
Requirement 3 – Treatment of gain under ASU 2016-02:
Because the ratio of the lease term to the economic life is 80%
(12-year lease term ÷ 15-year economic term), the lease would
E12-15. Determining cash flow statement effects of capital versus
operating leases under ASC 840 and ASU 2016-02 (ASC 842)
(LO 12-5, LO 12-6)
Requirement 1 – Operating lease under ASC 840:
Requirement 2 – Capital lease under ASC 840:
Operating Investing Financing
Cash Flows Cash Flows Cash Flows
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 12-9
Operating cash flows are reduced by the amount of each period’s
interest expense since GAAP treats interest expense as an
operating cash outflow. Depreciation expense would not affect the
operating section under the direct method. In the initial year of the
lease, a firm treats the capital lease as a significant noncash
Requirement 3 – Operating lease under ASU 2016-02 (ASC
842):
If the lease is an operating lease under ASU 2016-02 (ASC 842),
in the initial year of the lease, the firm would treat the operating
lease as a significant noncash investing and financing activity for
$77,313. Rent expense would be the same as it would have been
under ASC 840. The amortization of the right-of-use asset in each
E12-16. Determining ratio effects of capital versus operating leases
under ASC 840 and ASU 2016-02 (ASC 842) (LO 12-2, LO12-5,
LO 12-6)
Requirement 1 – ASC 840 capital lease effect on current ratio
and debt-to-equity ratio:
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 12-10
Nova’s current ratio prior to the leasing transaction was
$2,000/$2,000 = 1.0. After the leasing transaction is recorded,
Prior to the lease transaction, Nova’s debt-to-equity ratio was
$2,500/
Requirement 2 – ASC 840 capital lease effect on turnover
ratio:
Prior to the lease transaction, Nova’s asset turnover ratio was
$10,500/$5,000 = 2.1. After the leasing, the ratio will decrease
Requirement 3 – ASC 840 operating lease effect on ratios:
Sandra’s current ratio, debt-to-equity ratio, and total asset turnover
Requirement 4 – ASU 2016-02 operating and finance lease
effects on ratios
Under ASU 2016-02, the effects of the lease at commencement
would be identical for Sandra and Nova. Under ASU 2016-02, a
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 12-11
