Problem 15-4
Requirement 1
Finance lease to lessee; Sales-type lease to lessor.
Since the present value of lease payments (same for both the lessor and the
Calculation of the Present Value of Lease Payments
Present value of periodic lease payments
(rounded)
** present value of an annuity due of $1: n=20, i=3%
The lease term criterion is met also because the lease term is the entire
estimated economic life of the asset.
Requirement 2
Mid-South Urologists Group (Lessee)
January 1, 2018
…………………………………Lease payable (calculated above)
………………………………………………….Cash (lease payment)
April 1, 2018
………………………………………………….Cash (lease payment)
Problem 15-4 (concluded)
Physicians’ Leasing (Lessor)
January 1, 2018
……………………………………..Equipment (lessor’s cost)
………………………………………………Lease receivable
………………………………………………………………….130,516
April 1, 2018
………………………………..Lease receivable (difference)
Requirement 3
Rand Medical (Lessor)
January 1, 2018
…………………Sales revenue (present value calculated above)
…………………………………………………….Lease receivable
April 1, 2018
……………………………………..Lease receivable (difference)
Problem 15-5
Requirement 1
Beginning of the Lease (January 1, 2018)
* present value of an ordinary annuity of $1: n=3, i=5%
First Lease Payment (December 31, 2018)
Note: For most leases, the asset and liability will be the same at any point during the life of the
lease. If there are uneven payments (advance payment, scheduled rent increases, or
scheduled rent decreases), the rent leveling effect will be reflected in the right-of-use as-
set.
Second Lease Payment (December 31, 2019)
Problem 15-5 (concluded)
Third Lease Payment (December 31, 2020)
Problem 15-6
December 31, 2022
………………….Deferred rent expense payable (difference)
December 31, 2032
* This is the average rent over the 20-year period.
Beginning Ending
Rent Rent
Problem 15-7
1. Lease term in years
20 years
2. Asset’s residual value expected at the end of the lease term
$35,000: Even if not guaranteed, the residual value is expected by the
lessor.
3. Effective annual interest rate
4. Total of lease payments – United
residual value is expected by the lessor.
5. Total of lease payments – NIC
6. United’s net investment in the lease at the beginning of the lease
rentals plus residual value], or initial lease balance minus first payment).
Remember, we include the residual asset (PV of residual value) in the Lease
receivable along with the PV of the periodic lease payments.
7. Total effective interest revenue over the term of the lease
8. Right-of-use asset
*present value of annuity due; n=20, i=10%
Problem 15-8
Requirement 1
The lease term should be reassessed only when there is a significant event or
change is circumstances, within the control of the lessee, that the lessee’s
economic incentive to exercise any options to extend or terminate the lease has
changed. That is the case here. At the end of the second year, Rick’s had made
significant improvements to the asset whose cost could be recovered only if it
exercises the extension option, making it “reasonably certain” that the Rick’s will
exercise the option to extend the lease having considered the relevant economic
factors. So, the lessee would re-assess the lease term, so the revised term is now a
total of nine years with seven years remaining. Rick’s should remeasure the lease
payable as the present value of the remaining seven lease payments. The discount
rate for the new term is the incremental borrowing rate of the lessee using market
interest rates at the time of the reassessment, 6% in this instance, rather than the
present value of an ordinary annuity of $1: n=6, i=5%
December 31, 2018
……………………………………….Cash (lease payment)
……………………………………………………………….10,000
…………………………………………Right-of-use asset
In an operating lease, the lessee records interest the normal way (at the
effective interest rate) and then “plugs” the right-of-use asset amortization at the
amount that is needed for interest plus amortization to equal the straight-line lease
payment. The lessee records that amount as a single lease expense in the income
statement.
Problem 15-8 (concluded)
December 31, 2019
……………………………………….Cash (lease payment)
……………………………………………………………….10,000
…………………………………………Right-of-use asset
January 1, 2020
Reassessment:
Lease payable (increase in balance*) …………
…………………………………………………………20,364
* PV of remaining 7 payments, discounted at 6% ($10,000 x 5.58238) $55,824
Also, lessees are required to reassess the classification of a lease when there is
a change in the lease term (or a change in the assessment of a lessee option to
purchase the underlying asset). Because, with the assumed renewal, the lease term
December 31, 2020
Interest expense (6% x $55,824)…………………………… 3,346
…………………………………………Right-of-use asset
Requirement 2
A lessor is never required to reassess the lease term.