Problem 15-22
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Less: Present value of the
residual value ($25,000 x .68301*) (17 ,075)
* present value of $1: n=4, i=10%
** present value of an annuity due of $1: n=4, i=10%
Problem 15-22 (connued)
Requirement 2
The lessee is aware of the lessor’s implicit rate (10%). So, both parties’
calculations should be made using a 10% discount rate:
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
a Present Value of Lease Payments
Present value of periodic lease payments excluding
** present value of an annuity due of $1: n=4, i=10%
* Since the residual value is not guaranteed, it is excluded from both the
lessor’s and the lessee’s lease payments and therefore does not affect
the fair value criterion.
Problem 15-22 (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)
Since the fair value exceeds the lessor’s book value, this a sales-type lease with
a selling profit:
Problem 15-22 (connued)
Requirement 3
December 31, 2018
Western Soya Co. (Lessee)
Right-of-use asset (calculated above)…………………………… 348,685
…………………………………Lease payable (calculated above)
……………………………………………………………………….348,685
Rhone-Metro (Lessor)
Lease receivable (fair value)……………………………………… 365,760
Cost of goods sold ($300,000 – [$25,000 x .68301])…………… 282,925
Problem 15-22 (connued)
Requirement 4
Lessee (unguaranteed residual value excluded):
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
348,685
2018 100,000 100,000 248,685
Lessor (unguaranteed residual value included):
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
2019 100,000 .10 (265,760) = 26,576 73,424 192,336
Problem 15-22 (connued)
Requirement 5
December 31, 2019
Western Soya Co. (Lessee)
Amortization expense ($348,685 ÷ 4 years)………………………. 87,171
…………………………………………………..Right-of-use asset
…………………………………………………………………………87,171
Rhone-Metro (Lessor)
Cash (lease payment)…………………………………………………. 104,000
……………………………………………..Payable (maintenance, insurance, etc.)
Problem 15-22 (concluded)
Requirement 6
December 31, 2022
Western Soya Co. (Lessee)
Maintenance expense (2022 expenses)…………………………. 4,000
………………….Prepaid maintenance expense (paid in 2021)
Rhone-Metro (Lessor)
Equipment (actual residual value)………………………………… 1,500
Problem 15-23
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Less: Present value of the BPO price ($10,000 x .75131*) (7 ,513)
* present value of $1: n=3, i=10%
** present value of an annuity due of $1: n=3, i=10%
Requirement 2
The lessee is aware of the lessor’s implicit rate (10%). So, both parties’
calculations should be made using a 10% discount rate:
Problem 15-23 (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? YES
Present Value of Lease Payments
Present value of periodic lease payments excluding
maintenance costs of $4,000 ($130,960 x 2.73554**)$358,247***
* present value of $1: n=3, i=10%
** present value of an annuity due of $1: n=3, i=10%
*** rounded
Note: The BPO price is included in both the lessor’s and the lessee’s lease payments. Also
the lease term ends for accounting purposes after 3 years, when the BPO becomes
exercisable.