Problem 15–13
Requirement 1
January 1, 2018
Present Value of Lease Payments for Lessee
Present value of periodic lease payments
Plus: Present value of the excess lessee-guaranteed
* present value of $1: n = 4, i = 5%
** present value of an ordinary annuity of $1: n = 4, i = 5%
If a lessee-guaranteed residual value exceeds the estimate of the actual residual
value, that excess added to the present value of the lease payments the lessee
records as both a right-of-use asset and a lease liability.
Karrier (Lessee)
Problem 15–13 (continued)
Lease Receivable for Lessor
Present value of periodic lease payments
($200,000 x 3.54595**)$709,190
Plus: Present value of the
* present value of $1: n = 4, i = 5%
** present value of an ordinary annuity of $1: n = 4, i = 5%
Allied (Lessor)
………………………………………………………..Asset for lease
December 31, 2018
Karrier (Lessee)
Interest expense (5% x $742,098)……………………………………… 37,105
Lease payable (difference)………………………………………… 162,895
………………………………………………….Cash (lease payment)
Allied (Lessor)
Cash (lease payment)…………………………………………………. 200,000
……………………………………..Lease receivable (difference)
Note: The situation described, in which the lessee-guaranteed residual value
exceeds the estimate of the actual residual value, is unusual in practice.
However, the requirement to account for it in this way serves as a deterrent to
lessees and lessors who might be inclined to manipulate reported numbers by
reducing lease payments while creating an excess lessee-guaranteed residual
value to compensate for the reduced lease payments.
Problem 15–14
Present Value of Lease Payments:
lease present
payments value
** Present value of an annuity due of $1: n = 20, i = 2%
[i = 2% (8% ÷ 4) because the contract
calls for quarterly payments]
Requirement 1
January 1, 2018
Right-of-use asset (PV calculated above)……………. 242,622
………………….Lease payable (PV calculated above)
March 31, 2018
Interest expense (2% x [$242,622 – 14,547])……....… 4,562
Problem 15-14 (concluded)
Requirement 2
January 1, 2018
Lease receivable ([$14,547 x 16.67846**] + [$11,228 x .67297*]).. 250,178
Cost of goods sold ($200,000 – 7,556) ……………………………….. 192,444
* Present value of $1: n = 20, i = 2%
** Present value of an annuity due of $1: n = 20, i = 2%
Note: ..Both (a) the present value of the lease payments, $242,662, and (b) the present
value of the residual value (i.e., the residual asset) are included in the lease
receivable because the two amounts combine to allow the lessor to recover its
$250,178 net investment.
Cash (lease payment)……………………………………………… 14,547
…………………………………………………Lease receivable
………………………………………………………………………14,547
March 31, 2018
Problem 15-15
Quality receives two separate benefits in the lease contract – the right to use
equipment and maintenance on that equipment. So, payments specified in the lease
contract contain a separate lease component (use of equipment for $51,000) and a
nonlease component (maintenance service of $5,000). There also is a fixed
payment for hazard insurance that does not transfer to the lessee a separate good or
service. Payments for hazard insurance and property taxes are specifically
identified in the lease accounting guidance as part of the lease payments (to be
capitalized) rather than nonlease components (to be expensed separately). Thus,
the right-of-use asset and lease liability (and the lessor’s lease receivable) would be
measured as the present value of the $51,000 lease payments, not $56,000.
At the beginning of the lease, Quality records a right-of-use asset and lease
liability for the present value of the ten $51,000 lease payments. For the first
payment of $56,000, $5,000 is recorded as maintenance expense and the remaining
$51,000 reduces the lease liability.
January 1, 2018
Quality Services (Lessee)
Right-of-use asset ([$56,000 – 5,000] x 6.32825**)322,741
Lease payable (present value of lease payments) 322,741
* present value of $1: n=10, i=12%
** present value of an annuity due of $1: n=10, i=12%
Problem 15–15 (continued)
Requirement 2
December 31, 2018
Quality Services (Lessee)
Interest expense (12% x [$322,741 – 51,000])……………………. 32,609
Lesco Leasing (Lessor)
Cash (lease payment)…………………………………………………. 56,000
……………………………………..Lease receivable (difference)
Problem 15-16
Requirement 1
January 1
Cash…………………………………………………………………….. 20,873
………………………………………….Deferred lease revenue *
December 31
Deferred lease revenue ………………………………………….. 20,873
………………………………………………………….Rent revenue
…………………………………………………………………………20,873
* Alternatively, Rent revenue. Either way, an adjusting entry is needed at the end of the
reporting period to assure that the recognized portion of the payment is recorded in
Rent revenue and the deferred portion in Deferred lease revenue
Problem 15-16 (connued)
Requirement 2
In a sales-type lease with no selling profit, initial direct costs are deferred
and expensed over the lease term. This can be accomplished by not
recording the “prepaid expense” separately, but including it in the lease
January 1
Proof that new implicit rate is 9% (not required):
lessor’s lease
net investment payments
** present value of an annuity due of $1: n=6, i=9%
January 1
Lease receivable (fair value / present value)…………………… 100,000
……………………………………………Equipment (lessor’s cost)
……………………………………………………………………….100,000
December 31
Problem 15-16 (concluded)
Requirement 3
January 1
Lease receivable (fair value / present value)…………………… 100,000
Cost of goods sold (lessor’s cost)……………………………….. 85,000
………………………..Sales revenue (fair value / present value)
……………………………………………………………………….100,000Equipment (lessor’s
December 31
Interest receivable………………………………………………….. 7,913
Problem 15-17
Requirement 1
Branson Construction (Lessee)
Interest expense (10% x [$936,492* – 100,000])………………… 83,649
** present value of an annuity due of $1: n=20, i=10%
Maintenance expense……………………………………………………… 3,000
……………………………………………………………..Cash (2019 expenses as incurred)
…………………………………………………………………………..3,000
Branif Leasing (Lessor)
Cash (lease payment)…………………………………………………. 100,000
……………………………………..Lease receivable (difference)
** present value of an annuity due of $1: n=20, i=10%