Problem 15-20 (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
12/31/19 110,000 .10 (479,079) = 47,908 62,092 416,987
* adjusted for rounding of other numbers in the schedule
Requirement 4
December 31, 2018
Red Baron Flying Club (Lessee)
Interest expense (10% x [$645,526 – 110,000])………………….. 53,553
Lease payable (difference)………………………………………… 56,447
………………………………………………….Cash (lease payment)
Bidwell Leasing (Lessor)
Cash (lease payment)…………………………………………………. 110,000
……………………………………..Lease receivable (difference)
Problem 15-20 (concluded)
Requirement 5
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)
……………………………………………………………………….100,000Interest revenue
Problem 15-21
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Less: Present value of the
* present value of $1: n=4, i=10%
** present value of an annuity due of $1: n=4, i=10%
Requirement 2
The lessor’s implicit rate (10%) is known by the lessee. So, both parties’
calculations should be made using a 10% discount rate:
Problem 15-21 (connued)
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
b Present Value of Lease Payments
Present value of periodic lease payments
($100,000 x 3.48685**)$348,685
Plus: Present value of the lessee-guaranteed
* present value of $1: n=4, i=10%
** present value of an annuity due of $1: n=4, i=10%
Problem 15-21 (connued)
(a) By Western Soya Co. (the lessee)
Since at least one criterion is met, this is a finance lease to the lessee.
(b) By Rhone-Metro (the lessor)
Problem 15-21 (connued)
Requirement 3
Western Soya Co. (Lessee)
Present Value of Lease Payments
** present value of an annuity due of $1: n=4, i=10%
* The lessee views the residual value as a lease payment only if a cash payment is predicted due to a
lessee-guaranteed residual value..
Western Soya Co. (Lessee)
Right-of-use asset (calculated above)…………………………… 348,685
…………………………………Lease payable (calculated above)
Rhone-Metro (Lessor)
……………………………………………Equipment (lessor’s cost)
*See lessor’s calculation of the present value of payments (that include the residual value in
Requirement 2 above.
……………………………………………………..Lease receivable
Problem 15-21 (connued)
Requirement 4
Requirement 4
Both (a) the present value of the lease payments and (b) the present value of
the unguaranteed residual value combine to allow the lessor to recover its $365.760
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2018 365,760
2018 100,000 100,000 265,760
Problem 15-21 (connued)
The lessee, though, views the residual value as a lease payment only if a cash
payment is predicted due to a lessee-guaranteed residual value. That’s not the case
here:
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2018 348,685
2018 100,000 100,000 248,685
Requirement 5
December 31, 2019
Western Soya Co. (Lessee)
Interest expense (10% x [$348,685 – 100,000])………………….. 24,869
Lease payable (difference)………………………………………… 75,131
………………………………………………….Cash (lease payment)
Rhone-Metro (Lessor)
Cash (lease payment)…………………………………………………. 100,000
……………………………………..Lease receivable (difference)
Problem 15-21 (concluded)
Requirement 6
December 31, 2022
Western Soya Club (Lessee)
Amortization expense ($348,685 ÷ 4 years)………………………. 87,171
…………………………………………………..Right-of-use asset
Rhone-Metro (Lessor)
Equipment (actual residual value)………………………………… 1,500