Problem 15–26
Requirement 1
$5,000 .86384*** = $4,319
* 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% $16,428)……………………. 821
Requirement 3
Second Lease Payment (December 31, 2019)
Interest expense [5% ($16,428 – 6,179)]……….. 512
* You might view this as the following with prepaid rent incorporated into the right-of-use asset:
Problem 15–26 (concluded)
Requirement 4
Third Lease Payment (December 31, 2020)
Interest expense [5% (16,251 – 6,187 – 5,497)].. 228
* You might view this as the following with prepaid rent incorporated into the right-of-use asset:
Problem 15–27
Requirement 1
Modification of the Lease (January 1, 2020)
Worchester Construction (Lessee)
Right-of-use asset (increase in balance)………………… 324,440
Lease payable (increase in balance)………………… 324,440
*Present value of an ordinary annuity of $1: n = 3, i = 9%.
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
2018 697,370
* adjusted for rounding of other numbers in the schedule
Problem 15–27 (continued)
Requirement 2
Modification of the Lease (January 1, 2020)
Newton LeaseCorp, the lessor, previously viewed its operating lease as simply
renting the asset to the lessee and thus recorded rent revenue of $200,000 each year
Natick LeaseCorp (Lessor)
Lease receivable (PV of 3 remaining lease payments from req. 1) 506,258
Because the receivable is less than the carrying amount of the equipment,
profit
$9,682
profit
$9,682
Problem 15–27 (concluded)
Requirement 3
Worchester Construction accounts for the modified lease in the same manner as
any other finance lease, recording interest at the now current interest rate of 9%
and amortizing the balance in the right-of-use asset over the remaining four years:
Worchester Construction (Lessee)
Interest expense (9% $506,258)………………………….. 45,563
Requirement 4
Newton LeaseCorp accounts for the modified lease in the same manner as any
other sales-type lease, recording interest at the now current interest rate of 9%.
Newton LeaseCorp (Lessor)
Problem 15-28
1. Calculation of the present value of lease payments
(rounded)
present value of an annuity due of $1: n=20, i=3%
2. Liability at December 31, 2018
Initial balance, September 30, 2018……………………. $6,000,000
The current and noncurrent portions of the liability would be reported separately.
Asset at December 31, 2018
Initial balance, September 30, 2018……………………. $6,000,000
3. Expenses for year ended December 31, 2018
Sept. 30, 2018 interest expense………………………….. $ 0*
Dec. 31, 2018 interest expense…………………………… 168 ,254**
Problem 15-28 (concluded)
4. Statement of cash flows for year ended December 31, 2018
Werner would report the $6,000,000* investment in the protein analyzer and
The $783,096 ($391,548 x 2) cash lease payments are divided into the
Note: By the indirect method of reporting cash flows from operating
activities, we would add back to net income the $300,000 depreciation
expense since it didn’t actually reduce cash. The $168,254 interest
expense that reduced net income actually did reduce cash [the interest
portion of the $783,096 ($391,548 x 2) cash lease payments], so for it,
no adjustment to net income is necessary.
Calculations:
September 30, 2018*
Right-of-use asset (calculated in req. 1)………………………. 6,000,000
……………………………..Lease payable (calculated in req. 1)
December 31, 2018**
Interest expense (3% x [$6 million – 391,548])…………….. 168,254
Problem 15-29
1. Receivable at December 31, 2018
Calculation of the present value of lease payments
(rounded)
present value of an annuity due of $1: n=20, i=3%
Receivable
Initial balance, September 30, 2018… $6,000,000
The receivable replaces the $6,000,000 machine in the balance sheet.
2. Interest revenue for year ended December 31, 2018
Sept. 30, 2018 interest revenue………………………….. $ 0*
3. Statement of cash flows for year ended December 31, 2018
Abbott would report the $6,000,000* sales-type lease of the protein analyzer
In a sales-type lease, we assume the lessor is actually selling its product, an
Note: By the indirect method of reporting cash flows from operating
activities, the $168,254 interest revenue that increased net income