Problem 15-9
Situation
1 2 3 4
A. The lessor’s:
1. Lease payments1$40,000 $40,000 $40,000 $33,000
B. The lessee’s:
4. Lease payments440,000 40,000 40,000 33,000
1 ($10,000 x number of fixed payments) + exercise price or termination penalty
3Present value of gross investment; for situation 2: ($10,000 x 3.44371) +
6 Present value of lease payments; for situation 3: ($10,000 x 3.44371); for
* Also would include any variable lease payments only if (a) deemed in-substance fixed
payments or (b) based on an index or rate.
Problem 15-10
Requirement 1
Note:
Because exercise of the option appears at the beginning of the lease to be
reasonably certain, payment of the option price ($6,000) is expected to occur
when the option becomes exercisable (at the end of the eighth quarter). Also,
the lease contract specifies that the BPO becomes exercisable before the
designated lease term ends. Since a BPO is expected to be exercised, the lease
term ends for accounting purposes when the option becomes exercisable (after
two years of the three-year lease term).
Present value of quarterly lease payments ($3,000 x 7.23028**)$21,691
* present value of $1: n=8, i=3%
** present value of an annuity due of $1: n=8, i=3%
“Selling price” $26,427
minus
Problem 15-10 (connued)
Not required in the problem, but helpful to see that the present value
calculation is precisely the reverse of the lessor’s calculation of quarterly
payments:
Amount to be recovered (fair value) $26,427
Less: Present value of the BPO price ($6,000 x .78941*) (4 ,736)
* present value of $1: n=8, i=3%
** present value of an annuity due of $1: n=8, i=3%
Requirement 2
September 30, 2018
Anything Grows (Lessee)
Right-of-use asset………………………………………………….. 26,427
……………….Lease payable (present value of lease payments)
Mid-South Auto Leasing (Lessor)
Lease receivable (calculated above)…………………………….. 26,427
Cost of goods sold (lessor’s cost)……………………………….. 25,000
………………………………….Sales revenue (calculated above)
Problem 15-10 (connued)
Requirement 3
Since both use the same discount rate, the amortization schedule for the lessee
and lessor is the same:
Lease Amortization Schedule
Effective Decrease Outstanding
Date Payments Interest in Balance Balance
3% x Outstanding Balance
9/30/18 26,427
9/30/18 3,000 3,000 23,427
12/31/18 3,000 .03 (23,427) = 703 2,297 21,130
3/31/19 3,000 .03 (21,130) = 634 2,366 18,764
6/30/19 3,000 .03 (18,764) = 563 2,437 16,327
* adjusted for rounding of other numbers in the schedule
Problem 15-10 (connued)
Requirement 4
December 31, 2018
Anything Grows (Lessee)
Amortization expense ([$26,427 ÷ 4 years*] x 1/4 year)……… 1,652
…………………………………………………..Right-of-use asset
Mid-South Auto Leasing (Lessor)
Cash (lease payment)…………………………………………………. 3,000
………………….Lease receivable (difference : from schedule)
* Because title passes with the expected exercise of the BPO, depreciation is over the
full 4-year useful life.
Problem 15-10 (concluded)
Requirement 5
September 29, 2020
Anything Grows (Lessee)
Amortization expense ([$26,427 ÷ 4 years*] x 3/4 year)…….. 4,955
…………………………………………………..Right-of-use asset
…………………………………………………………………………..4,955
Mid-South Auto Leasing (Lessor)
Cash (BPO price)……………………………………………………… 6,000
…………………..Lease receivable (difference: from schedule)
* Because title passes with the expected exercise of the BPO, depreciation is over the
full 4-year useful life.
Problem 15–11
Requirement 1
January 1, 2018
Operating lease: no entry
December 31, 2018
Requirement 2
January 1, 2019
Operating lease: no entry
The lease term now is expected to be four years, three years remaining
Requirement 3
December 31, 2019
Cash (lease payment)………………………………………. 8,000
Problem 15–12
Requirement 1
The lease term will be five years. The lease term for both the lessee and the
lessor is the contractual lease term modified by any renewal or termination options
Present Value of Lease Payments:
$15,000 x 7.47199*= $112,080
January 1, 2018
Right-of-use asset ………………………………………………. 185,732
………Lease payable (present value calculated above)
March 31, 2018
Interest expense (2% x [$185,732 – 15,000])………….. 3,415
Lease payable (difference)………………………………. 11,585
……………………………………….Cash (lease payment)
Problem 15–12 (concluded)
Requirement 2
Amortization Schedule:
Cash Decrease
Payment
s Effective Interest in Balance
Balanc
e
185,73
2
1 15,000 15,000
170,73
2
2 15,000 .02 (170,732) = 3,415 11,585
159,14
7
3 15,000 .02 (159,147) = 3,183 11,817
147,33
0
135,27