Problem 15-18 (connued)
Requirement 10
December 31, 2021
Yard Art Landscaping (Lessee)
Maintenance expense (2021 fee)……………………………………… 1,000
………………….Prepaid maintenance expense (paid in 2020)
…………………………………………………………………………..1,000
Branch Motors (Lessor)
Cash (lease payment)…………………………………………………. 11,000
…..Maintenance fee payable [or prepaid maintenance*]
……………Lease receivable (payment less maintenance costs)
* If paid previously.
Problem 15-18 (concluded)
Requirement 11
December 31, 2022
Yard Art Landscaping (Lessee)
Maintenance expense (2022 fee)……………………………………… 1,000
………………….Prepaid maintenance expense (paid in 2021)
…………………………………………………………………………..1,000
Branch Motors (Lessor)
Equipment (actual residual value)………………………………… 4,000
Problem 15-19
Requirement 1
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=8, i=10%
The implicit rate (10%) is known by the lessee. So, both parties’ calculations
should be made using a 10% discount rate:
Problem 15-19 (connued)
(a) Since at least one (two in this case) classification criterion are met, this is a
(b) Since at least one (two in this case) criteria are met, this is a finance lease to
Requirement 2
January 1, 2018
Red Baron Flying Club (Lessee)
Right-of-use asset (calculated above)…………………………… 645,526
…………………………………Lease payable (calculated above)
Bidwell Leasing (Lessor)
Lease receivable (calculated above)…………………………….. 645,526
……………………………………………Equipment (lessor’s cost)
Problem 15-19 (connued)
Requirement 3
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
645,526
1/1/18 110,000 110,000 535,526
12/31/18 110,000 .10 (535,526) = 53,553 56,447 479,079
* adjusted for rounding of other numbers in the schedule
Problem 15-19 (connued)
Requirement 4
With the initial direct costs, the lease payments are the same, but the net
rate is the discount rate that equates the net investment and the future lease
payments:
$663,625 ÷ ?**
$110,000
lessor’s lease
investment payments
** present value of an annuity due of $1: n=8, i=?
Rearranging algebraically we find that the present value table value is
Problem 15-19 (connued)
Requirement 5
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
9% x Outstanding Balance
663,625
1/1/18 110,000 110,000 553,625
12/31/18 110,000 .09 (553,625) = 49,826 60,174 493,451
* adjusted for rounding of other numbers in the schedule
Problem 15-19 (concluded)
Requirement 6
December 31, 2018
Red Baron Flying Club (Lessee)
Interest expense (10% x [$645,526 – 110,000])………………….. 53,553
………………………………………………….Cash (lease payment)
…………………………………………………..Right-of-use asset
Bidwell Leasing (Lessor)
……………………………………..Lease receivable (difference)
Requirement 7
December 31, 2024
Red Baron Flying Club (Lessee)
Interest expense (10% x $100,000: from schedule)……………… 10,000
Lease payable (difference)………………………………………… 100,000
………………………………………………….Cash (lease payment)
Bidwell Leasing (Lessor)
Cash (lease payment)…………………………………………………. 110,000
……………………………………..Lease receivable (difference)
Problem 15-20
Requirement 1
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=8, i=10%
The implicit rate (10%) is known by the lessee. So, both parties’ calculations
should be made using a 10% discount rate:
Problem 15-20 (connued)
(a) Since at least one (two in this case) classification criterion are met, this is a
finance lease to the lessor (Bidwell Leasing).
Since the fair value exceeds the lessor’s book value, the plane was “sold” at
a profit, making this a sales-type lease with a selling profit:
Fair value $645,526
minus
(b) Since at least one (two in this case) criterion is met, this is a finance lease to
the lessee. Red Baron records the present value of lease payments as a
right-of-use asset and a lease payable.
Requirement 2
January 1, 2018
Red Baron Flying Club (Lessee)
Right-of-use asset (calculated above)…………………………… 645,526
…………………………………Lease payable (calculated above)
……………………………………………………………………….645,526
Lease payable………………………………………………………… 110,000
………………………………………………….Cash (lease payment)
Bidwell Leasing (Lessor)
Lease receivable (calculated above)…………………………….. 645,526
Cost of goods sold (lessor’s cost)……………………………….. 400,000
………………………………….Sales revenue (calculated above)