P12-12. Accounting for monthly rental payments under ASC 840 (LO 12-1, LO
12-3, LO 12-5, LO 12-7, LO 12-8)
Requirement 1: Monthly rental computation
Requirement 2: Type of lease
Sales-type because criterion 4 is met and the cost is different than fair value.
Test of criterion 4:
Present value of $3,000/Fair value of $3,000 = 100% > 90%.
Requirement 3: September 1, 2017 journal entries
s
Requirement 4: Amortization table
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MONTHLY REDUCTION
PAYMENT INTEREST LEASE IN RECEIVABLE
DATE INCOME PAYMENTS RECEIVABLE BALANCE
*Rounded.
Requirement 5: Income statement
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Gross profit:
Revenue $ 60,000.00
Requirement 7.2: Lease type
This is a capital lease for Mitchum because Criterion 4 is met. The test is
given in part 2 above.
Requirement 7.3: Journal entry at September 1, 2017
DR Leased asset
Requirement 7.4: Amortization table
In this case, Mitchum would use the same amortization table as used by
Moore in Requirement 4. Mitchum’s Interest expense would be equal to
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Requirement 7.5: Income statement
Depreciation expense
Requirement 7.6: Balance sheet
Obligation under captital lease – current
of $15,722.82 + interest due on 1/01/2018 of $545.53
from Requirement 4)
Obligation under capital lease – non-current
Note that the total liability amount is greater than the asset amount.
P12-13. Comparing financial statement effects of capital and operating leases
under ASC 840 (LO 12-2, LO 12-3, LO 12-5)
Requirement 1:
Trans Global must account for the lease as a capital lease. The lease does
not transfer ownership (criterion 1) or contain a bargain purchase (criterion
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value of the minimum lease payments is $55,348,200 (see below) which is
more than 90% of fair value of the leased assets ($60,000,000 x 0.90 =
$54,000,000).
Requirement 2:
Appearing below is the amortization schedule for the lease liability:
Interest Principal
Date Expense1 Payment2Reduction3Balance4
* Rounded by $16.00.
1 The interest portion is 9% of the carrying amount at the beginning of the period.
2 The cash payment is fixed by the lease at $10,000,000.
1/01/2017:
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12/31/2018:
12/31/2019:
12/31/2020:
2017–2020:
Annual depreciation expense =
$55,348,200/8 = $6,209,550
Requirement 3:
Journal entries for 2017, 2018, 2019, and 2020, assuming the lease is an
operating lease:
Requirement 4:
Year-to-year expense recognition: capital vs. operating lease.
Capital lease
Date Interest expense Depreciation
expense
Total Operating lease Difference
9
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Under the capital lease method, the annual income statement effect is the
As can be seen from the above table, income before tax would be lower
under the capital lease in 2017–2020 and then higher in 2021–2024 when
compared to the operating lease method. Over the term of the lease, both
Requirement 5:
Trans Global’s mangers are likely to prefer the operating lease approach
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P12-14. Comparing financial statement effects of sales-type and operating leases under ASU 2016-02 (ASC
842) (LO 12-9)
The present value of the future lease payments of $99,817,750 (see below) exactly equals the leased
asset’s fair value at the inception of the lease. Specifically, the present value of the future lease payments
is:
The amortization schedule is as follows:
Cash Interest Principal Remaining
Year Payment Income Reduction Principal
*Rounded.
Under the ASU 2016-02 operating lease, the lessor would recognize rental income of $25,000,000 each
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Based on these calculations, the year-to-year income statement and balance sheet differences under the two
different lease-types appear in the following table:
Operating Lease versus Sales-Type Lease:
Income Statement and Balance Sheet Comparisons
Operating Sales-type
Operating Sales-type Lease Lease Asset
Lease Annual Lease Lease Income Asset Asset Balance
Year Payment
(a)
Deprec.
(b)
Income
(c)
Income
(d)
Difference
(e)
Balance
(f)
Balance
(g)
Difference
(h)
(a) The annual payment is given as $25,000,000.
(b) Annual depreciation under the operating lease is: $99,817,750/5 = $19,963,550.
(c) Income under the operating lease is equal to a – b.
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P12-15. Estimating the effects of ASU 2016-02 (ASC 842) from ASC
840 operating lease disclosures (LO 12-2, LO 12-5, LO 12-6,
L12-11)
Requirement 1: Estimating the lease liability under ASU
2016-02
We can estimate the average “After 2022” life by dividing the After
2022 amount by the amount of the 2022 rent payment as follows:
Estimate of capitalized operating lease liability
Year Lease payment PV factor @ 8% Discounted PV
Total $3,053
*Present value of an ordinary annuity for 14 years at 8% minus
present
value of an ordinary annuity for 5 years at 8% (8.24424 –
3.99271).
Requirement 2: Right-of-use asset under ASU 2016-02
Requirement 3: Effect on debt-to-equity ratio
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posted on a website, in whole or part. 12-10
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