Exercise 15-16
Present Value of Lease Payments:
lease present
payments value
calls for quarterly payments]
January 1, 2018
………Lease payable (present value calculated above)
……………………………………….Cash (lease payment)
March 31, 2018
……………………………………….Cash (lease payment)
…………………………………Right-of-use equipment
In an operating lease, the lessee records interest the normal way (at the
effective interest rate) and then “plugs” the right-of-use asset amortization at
the amount needed for interest plus amortization to equal the straight-line lease
payment. The lessee records that amount as a single lease expense in the
income statement.
Exercise 15-16 (concluded)
June 30, 2018
……………………………………….Cash (lease payment)
…………………………………Right-of-use equipment
September 30, 2018
……………………………………….Cash (lease payment)
…………………………………Right-of-use equipment
December 31, 2018
……………………………………….Cash (lease payment)
…………………………………Right-of-use equipment
Exercise 15-17
(a) Nath-Langstrom Services, Inc. (Lessee)
January 1, 2018
present value of an ordinary annuity of $1: n=4, i=2%
June 30, 2018
Cash (lease payment)……………………………….
10,000
Note: In an operating lease, the lessee records interest the normal way (at the
effective interest rate) and then “plugs” the right-of-use asset amortization
at the amount needed for interest plus amortization to equal the
straight-line lease payment. The lessee records that amount as a single
lease expense in the income statement.
December 31, 2018
Exercise 15-17 (concluded)
(b) ComputerWorld Leasing (Lessor)
June 30, 2018
Cash………………………………………… 10,000
December 31, 2018
Cash………………………………………… 10,000
Exercise 15-18
A lease that has a maximum possible lease term (including options to
terminate or renew that are reasonably certain) of twelve months or less is
considered a “short-term lease.”
A lessee that has a short-term lease has the option to not record a
right-of-use asset or lease payable and simply record lease payments as
periodic expense.
January 1, 2018
No entry to record a right-of-use asset and liability
……………………………………….Cash (lease payment)
……………………………………………………………….40,000
March 31, 2018
……………………………………….Cash (lease payment)
June 30, 2018
……………………………………….Cash (lease payment)
September 30, 2018
……………………………………….Cash (lease payment)
Note: These payments technically could be recorded as prepaid expenses at the
beginning of each quarter. Then, at the end of each quarter, we would need to
credit prepaid lease expense and debit lease expense.
Exercise 15–19
The lease term will be five years. The lease term for both the lessee and the
lessor is the contractual lease term modified by any renewal or termination options
Present Value of Lease Payments:
* Present value of an annuity due of $1: n = 20, i = 2%
[i = 2% (8% ÷ 4) because the contract
calls for quarterly payments]
January 1, 2018
………………….Lease payable (PV calculated above)
……………………………………….Cash (lease payment)
…………………………………………………………15,000
March 31, 2018
……………………………………….Cash (lease payment)
…………………………………………………………15,000
…………………………………………Right-of-use asset
Exercise 15-20
Requirement 1
If the amounts of future lease payments depend on an index or a rate, the
Consumer Price Index for instance, the payments are included in calculating the
Lease Lessee’s
payments cost
*Present value of an annuity due of $1: n = 6, i = 10%.
Beginning of the Lease (January 1, 2018)
Requirement 2
December 31, 2018
At the end of one year, the CPI is 124, so the amount of the current payment and
The right-of-use asset and liability are not adjusted to reflect the higher future
payments. A lessee should adjust the right-of-use asset and lease liability for the
present value of the payment increase only if and when the lessee remeasures the
lease liability for reasons other than a change in the index (for example, because of
a term extension or a revision to the base rent).
Cash (new payment)………………………………………. 310,000
Exercise 15-21
When apparent “variable” payments actually are in-substance fixed payments we
include these fixed payments in disguise as part of the lessee’s lease payments.
Because QuickStream, the lessee, is required to make payments each year that are
at least 3 percent more than the previous year, regardless of changes in the CPI,
those payments are considered in-substance fixed payments. At the beginning of
the lease, then, QuickStream measures the right-of-use asset and lease payable at
$1,397,091, the present value of those payments:
Year In-Substance Present value Present
Fixed Payments factor* Value
1 $300,000 x0.90909 = $ 272,727
2 309,000 x0.82645 = 255,373
*Present value of $1: n = 1, 2, 3, 4, 5, 6, i = 10%.
Beginning of the Lease (January 1, 2018)
Exercise 15-22
Requirement 1
Because Taco King is required to make quarterly payments based on sales revenue
of $400,000, lease payments are $12,000 ($400,000 × 3%) and are the basis for
measurement of the right-of-use asset and lessee’s lease liability.
January 1, 2018
Right-of-use asset………………………………………… 397,956
present value of an annuity due of $1: n=40, i=1%
Lease payable……………………………………………… 12,000
Requirement 2
Quarterly variable lease payments based on sales over $400,000 per quarter are
recognized only as incurred:
April 1, 2018
Cash ($660,000 × 3%)………………………………..