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P12-9. Recording capital lease for lessee and comparing to
operating lease treatment under ASC 840 (LO 12-2, LO12-3,
LO12-5)
Part A – June 30 reporting year
Requirement 1: Lease criteria
This is a capital lease for Burgundy because the lease meets the
third criterion (lease term greater than or equal to 75% of the
equipment’s economic life). In this case, the percentage is 80%
(lease term of 8 years divided by 10 year economic life. Criteria 1
Requirement 2: Amortization table
Part 2 - Amortization table
(A) (B) ( C) (D)
Interest Principal
Date Payment Expense Reduction Balance
.11 x prior (D) (A) - (B) Prior (D) - ( C)
© 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
The table begins with the present value of minimum lease
Requirement 3: Journal entries
Requirement 3 - Journal entries
July 1, 2017 July 1, 2018
June 30, 2018 June 30, 2019
aLease asset of $239,912 ÷ lease term of 8
years)
bAfter the interest accrual at June 30, 2018, 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.
Part B – December 31 reporting year
Requirement 1: Journal entries
Requirement 1 - Journal entries
December 31, 2017
DR Interest expense $ 10,885.00 c
© 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
d6/12 x annual depreciation of $29,989
July 1, 2018
eAfter the accrual at December 31, 2017, 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.
December 31, 2018
f6/12 x annual interest of $19,545
gAnnual depreciation of $29,989, assuming that no entry was made earlier in the year
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 considering the effects on Cash.
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. 12-3
Requirement 3: Financial statement effects for an operating
lease
Balance Sheet
Assets December 31
2017 2018
Liabilities
- -
Liability Effect - -
(6/12 x payment of $42,000 in 2017 and
$42,000 in 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. 12-4
(Capital lease balance sheet net effect
less operating lease balance sheet net
effect)
Income statement difference $
$
(Capital lease expense less operating
lease expense)
The top portion of the above schedule shows the balance sheet and
income statement effects of treating the lease as an operating lease. The
calculations below the income statement show the difference between
capital lease and operating lease treatment. In 2017, the net balance sheet
P12-10. Recording lessor sales-type lease under ASU 2016-02 (ASC
842) (LO 12-9)
Requirement 1: Lease classification
The lease must be accounted for as a sales-type lease because
two of the Type I characteristics (only one is required) are met. In
addition, there are no cash flow uncertainty or uncertainties
regarding unreimbursable costs.
The two Type I characteristics met are:
b) The present value of the future lease payments of $8,345,640
equals 95.4% of the leased asset’s $8,749,520 fair value at the
© 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
Requirement 2: Amortization schedule
The amortization schedule for Railcar Leasing Incorporated is as
follows:
(A) (B) ( C) (D)
Interest Receivable
Date Payment Income Reduction Balance
.12 x prior (D) (A) - (B) Prior (D) - ( C)
*Rounded.
Requirement 3:
The journal entries are:
The journal entry to record the purchase of the boxcars by Railcar
Leasing Incorporated would be:
1/1/2017:
CR Net investment in leased assets
$1,500,000.00
© 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
12/31/2017:
CR Interest income—leases
$869,942.40
12/31/2017:
CR Net investment in leased assets
After the interest accrual at December 31, 2017, the total receivable
grows to $8,119,462 ($7,249,520 + $869,942.40). To reflect the
1/1/2018:
CR Net investment in leased assets-current
$1,500,000.00
12/31/2018:
CR Interest income—leases
$794,335.49
12/31/2018:
CR Net investment in leased assets
$1,500,000.00
P12-11. Recording lessor sales-type lease under ASU 2016-02 (ASC
842) (LO 12-9)
Requirement 1: Journal entries when collectibility is an issue
The lease still meets the definition of a sales-type lease. However,
Railcar cannot treat it as a sales-type lease until the collectibility
© 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
The annual lease payment would be recorded as follows:
12/31/2017 and 12/31/2018:
CR Lease deposit liability
$1,500,000
Until the collectibility issues are resolved, the lessor depreciates
the assets over 9 years, the remaining useful life at lease
commencement. The annual depreciation charge would be
$8,749,520/9 = $972,168.89. The journal entries would be:
12/31/2017 and 12/31/2018:
CR Accumulated depreciation
$972,168.89
Requirement 2: Income statement effects
Railcar would not recognize any interest income. Instead, it
recognizes additional depreciation expense of $972,168.89 in both
Requirement 3: Improved collectibility journal entry on
1/1/2020
When collectibility becomes probable, the lessor reverses the prior
accounting and begins accounting for the lease as if it had always
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aPresent value of remaining payments and residual value
bCheck for selling profit
The small difference is due to rounding.
© 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
