Problem 15-23 (connued)
(a) by Western Soya Co. (the lessee)
Since at least one (two in this case) classification criterion is met, this is a
(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:
Fair value $365,760
minus
Requirement 3
December 31, 2018
Western Soya Co. (Lessee)
Right-of-use asset (calculated above)…………………………… 365,760
…………………………………Lease payable (calculated above)
Rhone-Metro (Lessor)
Lease receivable (present value of lease payments)…………… 365,760
Cost of goods sold (lessor’s cost)……………………………….. 300,000
……………….Sales revenue (present value of lease payments)
Problem 15-23 (connued)
Requirement 4
Lessee and lessor (BPO included):
Since both use the same discount rate and since the bargain purchase option is
included as an additional payment for both, the same amortization schedule applies
to both the lessee and lessor. The lease term ends for accounting purposes after 3
lease payments, because the BPO becomes exercisable before the fourth:
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2018 365,760
2018 130,960 130,960 234,800
* adjusted for rounding of other numbers in the schedule
Problem 15-23 (connued)
Requirement 5
December 31, 2019
Western Soya Co. (Lessee)
Amortization expense ($365,760 ÷ 6 years*)…………………….. 60,960
…………………………………………………..Right-of-use asset
…………………………………………………………………………60,960
Rhone-Metro (Lessor)
Cash (lease payment)…………………………………………………. 134,960
…………………………………………….Payable (maintenance)
* If ownership transfers (a) by contract or (b) by the expected exercise of a
bargain purchase option, the asset should be depreciated over the asset’s useful
Problem 15-23 (concluded)
Requirement 6
December 31, 2021
Western Soya Club (Lessee)
Amortization expense ($365,760 ÷ 6 years)………………………. 60,960
…………………………………………………..Right-of-use asset
…………………………………………………………………………60,960
Rhone-Metro (Lessor)
Cash (BPO price)……………………………………………………… 10,000
………………………………………Lease receivable (difference)
…………………………………………………………………………..9,092Interest revenue
*If paid to suppliers of services, the payments and this entry may occur
in 2022.
Problem 15–24
Requirement 1
January 1, 2018
Present Value of Lease payments
Present value of periodic lease payments
($200,000 x 3.54595**)$709,190
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. The present value of the
estimated amount payable also is added to the lessor’s present value of lease
payments for its lease receivable.
Nguyen (Lessee
Right-of-use asset (calculated above)…………………………… 742,098
…………………………………Lease payable (calculated above)
Nevels (Lessor)
Problem 15–24 (concluded)
December 31, 2018
Nguyen (Lessee)
Interest expense (5% x $742,098)……………………………………… 37,105
Nevels (Lessor)
Cash (lease payment)…………………………………………………. 200,000
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 15–25
Requirement 1
$7,000 .86384*** = $6,047
* Present value of $1: n = 1, i = 5%.
** Present value of $1: n = 2, i = 5%.
*** Present value of $1: n = 3, i = 5%.
Beginning of the Lease (January 1, 2018)
Requirement 2
First Lease Payment (December 31, 2018)
Interest expense (5% $16,251)……………………. 813
* You might view this as the following with accrued rent incorporated into the right-of-use asset:
Requirement 3
Second Lease Payment (December 31, 2019)
Interest expense [5% ($16,251 – 4,187)]……….. 603
Problem 15–25 (concluded)
Requirement 4
Third Lease Payment (December 31, 2020)
Interest expense [5% ($16,251 – 4,187 – 5,397)] 333
* You might view this as the following with accrued rent incorporated into the right-of-use asset: