Problem 15-17 (connued)
Requirement 2
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%
…………………………………………………..Right-of-use asset
*** This debit to maintenance expense is the net effect of (a) expensing the current year’s
costs that were prepaid with the first lease payment the last day of 2018 and (b)
prepaying next year’s expense with the 2019 payment:
Maintenance expense (2019 costs)………………………………………… 3,000
…………………………….Prepaid maintenance expense (paid in 2018)
………………………………………………………………………………………..3,000
Branif Leasing (Lessor)
Cash (lease payment)…………………………………………………. 103,000
……………………………………..Lease receivable (to balance)
** present value of an annuity due of $1: n=20, i=10%
Problem 15-17 (concluded)
Requirement 3
Branson Construction (Lessee)
** present value of an annuity due of $1: n=20, i=10%
Whether to include costs as separate components of the lease contract (to
be expensed by the lessee) or, instead, included in the payments to be
capitalized as part of the right-of-use asset depends on whether the charge
represents a transfer of a good or service to the lessee. If so, it qualifies as a
“nonlease component” of the payment and is separated from the lease
payments and expensed. That was the case for maintenance costs, but not for
insurance costs. In fact, ASC 842 specifically excludes insurance and taxes
from costs that can be expensed. So, in this case, the entire $103,000 is
capitalized.
…………………………………………………..Right-of-use asset
…………………………………………………………………………48,229
Branif Leasing (Lessor)
……………………………………..Lease receivable (to balance)
…………………………………………………………………………16,841Interest revenue
Problem 15-18
Requirement 1
Since at least one (exactly one in this case) criterion is met, this is a finance
lease to the lessee:
Lessee’s Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
2 Does the agreement contain a
bargain purchase option? NO
** present value of an annuity due of $1: n=4, i=9%
* present value of $1: n=4, i=9%
Note: The lessee uses its incremental borrowing rate (9%) because it is unaware of the
lessor’s implicit rate (10%)
Requirement 2
Present value of lessee’s periodic payments ( not including residual value):
** present value of an annuity due of $1: n=4, i=9%
Problem 15-18 (connued)
Requirement 3
Since at least one classification criterion is met, this is a sales-type lease to
the lessor.
Lessor’s Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
2 Does the agreement contain a
bargain purchase option? NO
** present value of an annuity due of $1: n=4, i=10%
* present value of $1: n=4, i=10%
Problem 15-18 (connued)
Requirement 4
Lessor’s Calculation of Lease Payments
Amount to be recovered (fair value) $45,114
Less: Present value of the residual value ($15,000 x .68301*) (10 ,245)
* present value of $1: n=4, i=10%
** present value of an annuity due of $1: n=4, i=10%
Problem 15-18 (connued)
Requirement 5
Lessor’s Calculation of the Sales Revenue
Present value of periodic payments ([$11,000 – 1,000] x 3.53129**)$34,869
Plus: Present value of the lessee-guaranteed
residual value ($6,000*** x .68301*) 4 ,908
Since the “selling price”(present value of the lease receivable) exceeds the lessor’s
book value, the asset is being “sold” at a profit, making this a sales-type lease:
* This is the unguaranteed residual value: $15,000 – 6,000. Alternatively, since the
fair value exceeds the lessor’s book value, the selling profit can also be
calculated as:
Problem 15-18 (connued)
Requirement 6
December 31, 2018
Yard Art Landscaping (Lessee)
Right-of-use asset (calculated in requirement 2)……………… 35,313
…………………………Lease payable (calculated requirement 2)
…………………………………………………………………………35,313
Branch Motors (Lessor)
Cash (lease payment)…………………………………………………. 11,000
…..Maintenance fee payable [or prepaid maintenance*]
……………Lease receivable (payment less maintenance costs)
a This is the unguaranteed residual value: $15,000 – 6,000.
* If paid previously.
Problem 15-18 (connued)
Requirement 7
Lessee’s Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 9% x Outstanding Balance
35,313
2018 10,000 10,000 25,313
Requirement 8
Lessor’s Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
45,114
2018 10,000 10,000 35,114
* adjusted for rounding of other numbers in the schedule
Problem 15-18 (connued)
Requirement 9
December 31, 2019
Yard Art Landscaping (Lessee)
Maintenance expense (2019 fee)……………………………………… 1,000
………………….Prepaid maintenance expense (paid in 2018)
…………………………………………………………………………..1,000
Branch Motors (Lessor)
…..Maintenance fee payable [or prepaid maintenance*]
……………Lease receivable (payment less maintenance costs)
* If paid previously.