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P12-4. Recording operating lease and comparing to finance lease
treatment under ASU 2016-02 (ASC 842) (LO 12-6)
Part 1 - Lease classification
Part 2 - Amortization table
(A) (B) ( C) (D)
Interest Principal
Date Payment Expense Reduction Balance
.09 x prior (D) (A) - (B) Prior (D) - ( C)
*Rounded.
Requirement 3 - Journal entries
© 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
January 1, 2017 January 1, 2018
December 31, 2017 December 31, 2018
aPrincipal reduction from amortization table. Because the payments are the same each year, the amount
for amortization equals the principal reduction in the next lease payment to be made one day later but
which occurs in the next fiscal year. Interest is for year 2017 and the next payment is made in advance
for 2018.
Requirement 4 – Financial statement effects for operating lease
Balance Sheet
Assets December 31
2017 2018
© 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
(lease obligation in amortization table after the next
cash payment)
Requirement 5 - Financial statement effects for a finance lease
31-Dec
Balance Sheet 2017 2018
Assets
Income Statement
© 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
(Finance lease expense less operating
lease expense) [The amount of income
statement difference in each year
accumulates to the total difference on
the balance sheet: 9,559 + 6,822 =
16,381. At the end of the lease term, the
accumulated difference would be zero.]
P12-5. Accounting for lessee finance lease including executory costs
and residual value guarantee under ASU 2016-02 (ASC 842) (LO
12-9)
Requirement 1:
This is a finance lease to Bare Trees Company because the lease
term of
3 years is equal to 75% of the asset’s useful life of 4 years.
(The $59,258.09 figure is the $62,258.09 annual lease payment minus the $3,000
annual executory costs).
Appearing below is the amortization schedule for the lease liability:
Amortization of Capital Lease Liability
Bare Trees Company
($15,000 Guaranteed Residual Value)
Interest Cash Liability Lease
Date Portion1Payment2Reduction3Liability4
1/1/17 $161,582.11
© 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
*Rounded by $0.05.
1 The interest portion is 9% of the carrying amount at the beginning of the
period.
reduction.
Requirement 2:
The journal entries are:
1/1/17:
CR Finance lease liability
$161,583.11
12/31/17:
CR Cash
$62,258.09
12/31/18:
CR Cash
$62,258.09
2017–2019:
Annual amortization expense =
CR Accumulated amortization
© 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
—Right-of-use asset—finance lease
$48,861.70
Requirement 3:
CR Right-of-use asset—finance lease
$161,582.11
*Rounded by $0.01
Requirement 4:
P12-6. Assessing guaranteed and unguaranteed residual values for
the lessee under ASC 840 (LO 12-3, LO 12-5)
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
value.
Requirement 2:
(a) (b) (c) (d)
Total Cash Interest Principal
Lease
Obligation
© 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
Date Payment Expense Payment Balance
9
Requirement 3:
2017
01/01
12/31
*(This is $464,411 ÷ 3)
@(This is $464,411 x .12)
2019
12/31
#(This is $172,640 x .12)
(To record return of leased asset to lessor.)
Requirement 4:
© 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
*(This is $50,000 x .71178)
(a) (b) (c) (d)
Date
Total
Cash
Payment
Interest
Expense
Principal
Payment
Lease
Obligation
Balance
9
2017
01/01
12/31
*(This is [$500,000 – $50,000] ÷ 3)
@(This is $500,000 x .12)
2019
12/31
© 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
#(This is $217,283 x .12)
(To record return of leased asset to lessor.)
P12-7. Assessing guaranteed and unguaranteed residual value for the
lessor under ASC 840 (LO 12-7, LO 12-8)
Assuming the RV is not guaranteed, the entry at January 1, 2017 is:
NOTE: Although the residual value is not guaranteed by Task,
Coleman fully expects to receive the residual value at the end of the
Assuming the RV is guaranteed, the entry at January 1, 2017 is
identical to the entry made above when the RV is not guaranteed.
P12-8. Evaluating effects of ASU 2016-02 (ASC 842) and IFRS 16 on
ratios and income (LO 12-6)
Requirement 1:
The present value of the lease payments at the inception of the
Annual Reduction Balance
© 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
Date
Lease
Payment Interest
of Lease
Liability
of Lease
Liability
Requirement 2: Debt to asset ratio
Before lease
Lease
effects After lease
Requirement 3: Current ratio
Before lease
Lease
effects After lease
The $29,635 is the 2018 principal reduction shown in the amortization
table from Requirement 1.
Requirement 4: Pretax income effect
Before lease
Lease
effects After lease
Requirement 5: Pretax income effect under IFRS 16
© 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
Before lease
Lease
effects After lease
© 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
