Exercise 15-23
The lease term will be 6 years. The lease term is the contractual lease term
modified by any renewal or termination options for which exercise of the options is
“reasonably certain.”
Requirement 1
January 1, 2018
Requirement 2
December 31, 2018
……………………………………….Cash (lease payment)
…………………………………………Right-of-use asset
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
Exercise 15-24
Situation 1
(a) Lessor’s Calculation of the Periodic Lease Payments:
Lease payments at the beginning
** present value of an annuity due of $1: n=4, i=10%
(b) Lessee’s Calculation of the Right-of-Use Asset and Lease Liability:
lease right-of-use asset/
payments lease payable
** present value of an annuity due of $1: n=4, i=10%
Exercise 15-24 (connued)
Situation 2
(a) Lessor’s Calculation of the Periodic Lease Payments:
* present value of $1: n=7, i=11%
** present value of an annuity due of $1: n=7, i=11%
From the lessor’s perspective, even if a residual value is not guaranteed, the lessor
still expects to receive it. So, the lessor will view the residual asset as contributing
to amount needed to recover its investment causing the lessee’s lease payments to
be less than otherwise.
(b) Lessee’s Calculation of the Right-of-Use Asset and Lease Liability:
lease right-of-use asset/
payments lease payable
Exercise 15-24 (connued)
Situation 3
(a) Lessor’s Calculation of the Periodic Lease Payments:
Amount to be recovered (fair value) $75,000
From the lessor’s perspective, even if a residual value is not guaranteed, the lessor
still expects to receive it. So, the lessor will view the residual asset as contributing
to the amount needed to recover its investment causing the lessee’s lease payments
to be less than otherwise.
(b) Lessee’s Calculation of the Right-of-Use Asset and Lease Liability:
lease right-of-use asset/
payments lease payable
** present value of an annuity due of $1: n=5, i=9%
Exercise 15-24 (concluded)
Situation 4
(a) Lessor’s Calculation of the Periodic Lease Payments:
Amount to be recovered (fair value) $465,000
Less: Present value of the excess guaranteed
* present value of $1: n=8, i=12%
** present value of an annuity due of $1: n=8, i=12%
(b) Lessee’s Calculation of the Right-of-Use Asset and Lease Liability:
* present value of $1: n=8, i=12%
** present value of an annuity due of $1: n=8, i=12%
† $50,000 guaranteed residual value minus $45,000 expected residual val-
ue
If a cash payment under a lessee-guaranteed residual value is predicted, the
present value of that payment is added to the present value of the lease
payments that the lessee records as both a right-of-use asset and a lease liability
and, if a finance lease, that the lessor records as a lease receivable.
Exercise 15-25
Requirement 1
Income Statement:
Requirement 2
Balance Sheet:
Lease Receivable
Initial balance ([$25,000 x 6.33493] + PV of the residual value)… $180,000
$180,000 asset under lease no longer in balance sheet
Exercise 15-25 (concluded)
Journal entries (not required):
Beginning of lease
Asset for lease (lessor’s cost: net investment in the lease)
………………………………………. Lease receivable
present value of an annuity due of $1: n=9, i=10%
value of the residual value (i.e., the residual asset) are included in the lease
receivable because the two amounts combine to allow the lessor to recover its
$180,000 net investment. The description of the lease provided us with the
amount of the residual value the lessor used in its calculation of the lease
End of fiscal year
………………………….Lease receivable (difference)
Exercise 15-26
Situation
1 2 3 4
A. The lessor’s:
1. Lease payments1$700,000 $700,000 $800,000
$800,000
(Lease receivable)
B. The lessee’s:
4. Lease payments4700,000 700,000 800,000
810,000
2Lease payments plus guaranteed residual value plus unguaranteed residual
3 Present value of gross investment (discounted at lessor’s rate); for situation 4:
4($100,000 x number of fixed payments) + excess lessee-guaranteed residual
5Present value of lease payments + present value of excess lessee-guaranteed
residual value* (discounted at lessor’s rate); should not exceed fair value; for
6Present value of lease payments + present value of excess lessee-guaranteed
residual value* (discounted at lessor’s rate); should not exceed fair value; for
* Also would include any exercise price or termination penalty for options whose exercise is
deemed reasonably certain + variable lease payments only if (a) deemed in-substance fixed
payments or (b) based on an index or rate.
Exercise 15-27
Lessee’s Calculation of the Right-of-Use Asset and Lease Liability:
* present value of $1: n=4, i=5%
** present value of an ordinary annuity of $1: n=4, i=5%
† $70,000 guaranteed residual value minus $50,000 expected residual value
If a cash payment under a lessee-guaranteed residual value is predicted,
the present value of that payment is added to the present value of the lease
payments that the lessee records as both a right-of-use asset and a lease liability
and, if a sales-type lease, that the lessor records as a lease receivable.
Beginning of the Lease (January 1, 2018)
Lessee
December 31, 2018
Exercise 15-28
Situation 1
Amount to be recovered (fair value) $60,000
* present value of $1: n=5, i=12%
** present value of an annuity due of $1: n=5, i=12%
Situation 2
Amount to be recovered (fair value) $420,000
* present value of $1: n=5, i=11%
** present value of an annuity due of $1: n=5, i=11%
Note: Since the option is not “reasonably certain” to be exercised, the exercise price is not
considered a lease payment.
Exercise 15-28 (concluded)
Situation 3
Amount to be recovered (fair value) $185,000
* present value of $1: n=3, i=9%
** present value of an annuity due of $1: n=3, i=9%
Note: Since the purchase option is “reasonably certain” to be exercised, the lease term ends
for accounting purposes when the option becomes exercisable.