Exercise 15-1
Situation 1
Since none of the criteria is met, this is an operating lease to the lessee:
Lessee’s Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
2 Does the agreement contain a
the major part of the expected {Lease term 4 yrs. ; useful life 6
yrs.}
economic life of the asset?
4 Is the present value of the
* present value of an annuity due of $1: n=4, i=5%
5 Is the asset is of such a specialized
nature that it is expected to have no
alternative use to the lessor at the
Exercises
Exercise 15-1 (connued)
Situation 2
Since at least one (two in this case: #2 and #3) classification criterion is met,
this is a finance lease.
Lessee’s Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
2 Does the agreement contain a
the major part of the expected {Lease term 4 yrs. ; useful life 5
yrs.}
economic life of the asset?
4 Is the present value of the
fair value of the asset? present fair
value value
5 Is the asset is of such a specialized
nature that it is expected to have no
alternative use to the lessor at the
Exercise 15-1 (connued)
Situation 3
Since at least one (#4 in this case) classification criterion is met, this is a
finance lease.
Lessee’s Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
2 Does the agreement contain a
yrs.}
economic life of the asset?
4 Is the present value of the
5 Is the asset is of such a specialized
nature that it is expected to have no
alternative use to the lessor at the
end of the lease term? NO
Exercise 15-1 (concluded)
Situation 4
Since at least one (#4 in this case) classification criterion is met, this is a
finance lease.
Lessee’s Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
2 Does the agreement contain a
yrs.}
economic life of the asset?
4 Is the present value of the
fair value of the asset? present fair
value value
* present value of an ordinary annuity of $1: n=4, i=6%
5 Is the asset is of such a specialized
nature that it is expected to have no
alternative use to the lessor at the
Exercise 15-2
Requirement 1
January 1, 2018
………………………………………………Lease payable
present lease
value payment
** present value of an ordinary annuity of $1: n=4, i=10%
Lease Amortization Schedule
Lease Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
4,000,000
* adjusted for rounding of other numbers in the schedule
Exercise 15-2 (concluded)
Requirement 3 December 31, 2018
……………………….Cash (payment determined above)
………………………………………..Right-of-use asset
Requirement 4 December 31, 2020
……………………….Cash (payment determined above)
………………………………………..Right-of-use asset
Exercise 15-3
1. Calculation of the present value of lease payments
(rounded)
2. Liability at December 31, 2018
Initial balance, June 30, 2018…………………………….. $3,000,000
Right-of-Use Asset at December 31, 2018
3. Expenses for year ended December 31, 2018
June 30, 2018 interest expense…………………………… $ 0*
Exercise 15-3 (concluded)
Calculations:
June 30, 2018*
……………………………..Lease payable (calculated in req. 1)
………………………………………………..Cash (lease payment)
December 31, 2018**
………………………………………………..Cash (lease payment)
…………………………………………………..Right-of-use asset
Exercise 15-4
1. Receivable at December 31, 2018
(rounded)
present value of an annuity due of $1: n=6, i=5%
Net
Receivable
The receivable replaces the $3,000,000 machine on the balance sheet.
2. Interest revenue for year ended December 31, 2018
June 30, 2018 interest revenue…………………………… $ 0*
Exercise 15-4 (concluded)
Calculations:
June 30, 2018
………………………………………….Equipment (lessor’s cost)
……………………………………………………Lease receivable*
December 31, 2018
…………………………………Lease receivable (difference)**