Exercise 15-29
Requirement 1
Note:
Because exercise of the option appears at the beginning of the lease to be
reasonably certain, payment of the option price ($45,000) is expected to occur
when the option becomes exercisable (at the end of the third year).
* present value of $1: n=3, i=12%
** present value of an annuity due of $1: n=3, i=12%
Requirement 2
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
12% x Outstanding Balance
128,872
Exercise 15-29 (concluded)
Requirement 3
January 1, 2018
December 31, 2018
………………………………………….Right-of-use asset
………………………………………Cash (annual payment)
December 31, 2019
………………………………………….Right-of-use asset
………………………………………Cash (annual payment)
December 31, 2020
………………………………………….Right-of-use asset
…………………………………………..Cash (option price)
* Because title passes with the expected exercise of the option,
amortization is for the entire six-year useful life of the asset. The
amortization entry will be recorded for three years after the completion
of the lease term.
Exercise 15-30
Requirement 1
Amount to be recovered (fair value) $30,900
* present value of $1: n=3, i=10%
** present value of an annuity due of $1: n=3, i=10%
Requirement 2
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
30,900
Exercise 15-30 (concluded)
Requirement 3
January 1, 2018
……………………………………………Equipment (lessor’s cost)
……………………………………………………..Lease receivable
December 31, 2018
……………………………………..Lease receivable (difference)
…………………………………………………………………………..5,710Interest revenue
December 31, 2019
……………………………………………………..Lease receivable
…………………………………………………………………………..6,281Interest revenue
December 30, 2020
………………………………Lease receivable (account balance)
………………………………………………..Interest revenue (10% x $10,909: from schedule)
Exercise 15-31
January 1, 2018
Brand Services (Lessee)
* present value of $1: n=10, i=12%
** present value of an annuity due of $1: n=10, i=12%
……………………………………………….Cash (annual payment)
NRC Credit (Lessor)
……………………………………………Equipment (lessor’s cost)
……………………………Maintenance fee payable [or cash]
…………………………………………………….Lease receivable
Exercise 15-31 (concluded)
Requirement 2
December 31, 2018
Brand Services (Lessee)
………………………………………………….Cash (lease payment)
…………………………………………………..Right-of-use asset
NRC Credit (Lessor)
……………………………………..Lease receivable (difference)
……………………………Maintenance fee payable [or cash]
…………………………………………………………………………..5,000Interest revenue
Exercise 15-32
In a sales-type lease with no selling profit, initial direct costs are deferred and
expensed over the lease term. This can be accomplished by not recording the
“prepaid expense” separately, but including it in the lease receivable (net
investment). Increasing the receivable causes the implicit rate (the effective
interest rate that causes the present value of the lease payments to equal the
receivable) to be lower. Determining interest revenue at this lower rate
accomplishes the purpose of reducing interest revenue each period by a portion of
the prepaid expense.
1. January 1, 2018
……………………………………………..Cash (initial direct costs)
……………………………………………………..Lease receivable
2. Effective rate of interest revenue:
The initial direct costs increase the net investment (lease receivable):
$500,000 + 4,242. The new effective rate is the discount rate that equates
the net investment and the future lease payments:
lessor’s lease
net investment payments
** present value of an annuity due of $1: n=3, i=?%
consult the present value table for an annuity due, you search row 3 (n=3)
for this value and find it in the 10% column. So the new effective interest
rate is 10%. The net investment is amortized at the new rate.
3. December 31, 2018
Exercise 15-33
In a sales-type lease that includes selling profit, initial direct costs are
expensed in the period of “sale” – that is, at the beginning of the lease. This
assumes that in a sales-type lease the primary reason for incurring these costs is
to enable the sale of the leased asset.
Requirement 1
Beginning of the Lease, January 1, 2018
…………………………………………..Sales revenue (fair value)
……………………………………………..Cash (initial direct costs)
……………………………………………………..Lease receivable
Requirement 2
December 31, 2018
Exercise 15-34
January 1, 2018, 2019, 2020
…………………………………………..Deferred lease revenue
……………………………………………………………………..Cash
December 31, 2018, 2019, 2020
………………………………………………………….Rent revenue
……………………………………….Deferred initial direct cost
……………………………………….Accumulated depreciation
Exercise 15-35
List A List B
j_ 1. Effective rate times balance. a. PV of purchase option exercise
price.
k_2. Revenue recognition issues. b. Lessor’s net investment.
c_3. Lease payments plus c. Lessor’s gross investment.
residual value. d. Operating lease.
.