Problem 15-29 (concluded)
Calculations:
September 30, 2018*
Lease receivable (present value calculated above)…………. 6,000,000
December 31, 2018**
Problem 15-30
1. Calculation of the present value of lease payments (“selling price”)
$391,548 x 15.32380= $6,000,000
(rounded)
present value of an annuity due of $1: n=20, i=3%
2. Receivable at December 31, 2018
Receivable
The receivable replaces the $5,000,000 machine in the balance sheet.
* First payment has zero interest.
3. Income effect for year ended December 31, 2018
Sept. 30, 2018 interest revenue………………………….. $ 0*
Sales revenue*…………………………………………………… 6,000,000
Cost of goods sold*…………………………………………….
Problem 15-30 (continued)
4. Statement of cash flows for year ended December 31, 2018
analyzer as a significant noncash activity in the disclosure notes to the
financial statements.
flows from operating activities. In a sales-type lease, we assume the lessor
is actually selling its product, an operating activity. Thus, both the interest
reported as cash inflows from operating activities.
Note: By the indirect method of reporting cash flows from operating
activities, the $1,000,000 (Sales revenue: $6,000,000 – Cost of goods
The $168,254 interest revenue that increased net income actually did
increase 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.
Noncash adjustments to convert net income to cash flows from operating
activities:
Increase in lease receivable…………………………………. ($6,000,000)
Problem 15-30 (concluded)
Calculations:
September 30, 2018*
Lease receivable (present value calculated above)…………. 6,000,000
Cost of goods sold (lessor’s cost)………………………………. 5,000,000
December 31, 2018**
Cash (lease payment)……………………………………………….. 391,548
Problem 15-31
Requirement 1
Present value of periodic lease payments
* rounded
** present value of an ordinary annuity of $1: n=10, i=12%
January 1, 2018
Note: Because the title transfers to the lessee, this transaction is considered a loan.
December 31, 2018
Interest expense (12% x $500,000)……………………………………. 60,000
* The building is depreciated over its original useful life.
Problem 15-31 (continued)
Requirement 2
BALANCE SHEET
Assets:
Building………………………………………………………. $1,000,000
Liabilities:
Current:
Noncurrent:
INCOME STATEMENT
Interest expense……………………………………………. $60,000
Portion of Amortization Schedule – not required, but verifies several
amounts:
Note Amortization Schedule
Effective Decrease Outstanding
Date Payments Interest in Balance Balance
12% x Outstanding Balance
1/1/18 500,000
Research Case 15-1
Requirement 1
After the first full year under the warehouse lease, the balance in Dowell’s
lease payable is $30,816,422. This is the balance after reductions from the
first five quarterly lease payments as shown in this amortization schedule.
(The first payment was at December 31 of the previous year, the beginning of
the lease.)
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
2% x Outstanding Balance
40,000,000
2,398,303 2,398,303 37,601,697
2,398,303 .02 (37,601,697) = 752,034 1,646,269 35,955,428
2,398,303 .02 (35,955,428) = 719,109 1,679,194 34,276,234
* rounded
CASES
Case 15-1 (continued)
Requirement 2
After the first full year under the warehouse lease, the book value (after
Right-of-use asset) of Dowell’s leased warehouses is 32,000,000:
$40,000,000 Leased warehouses, PV of lease payments
$40,000,000 Leased warehouses, PV of lease payments
Requirement 3
The specific citation that specifies the guidelines for derecognition of finance
840–20–40–3:
If the nature of a sublease is such that the original lessee is relieved of the primary
Because Dowell’s proposed sublease is a termination of a finance lease before the
expiration of the lease term, it falls under Par. 40–1:
40–1 A termination of a finance lease before the expiration of the lease term is
accounted for by the lessee by removing the asset and obligation, with gain or
loss recognized for the difference.
Case 15-1 (concluded)
Requirement 4
In accordance with FASB ASC 842–20–40–1, the asset and obligation representing
the original lease would be removed from the accounts and a loss would be
recognized for the difference. The journal entry Dowell would record in
connection with the sublease is:
Lease payable (balance after 4 quarters; from req. 1)... 30,816,422