Exercise 15-36
Requirement 1
The specific citation that specifies when a lessee remeasures the lease payments is
FASB ASC 842–10–35–4: “Leases–Overall–Subsequent Measurement–Lease
Payments.”
Requirement 2
A lessee shall remeasure the lease payments if any of the following occur:
a. The lease is modified, and that modification is not accounted for as a separate contract
b. A contingency upon which some or all of the variable lease payments that will be paid
c. There is a change in any of the following:
2. The assessment of whether the lessee is reasonably certain to exercise or not to
exercise an option to purchase the underlying asset, as described in paragraph
3. Amounts probable of being owed by the lessee under residual value guarantees. A
The FASB Accounting Standards Codification represents the
single source of authoritative U.S. generally accepted accounting principles. The
specific citation for each of the following items is:
1. Definition of initial direct costs:
2. Lessor’s gross investment in a sales-type lease:
3. The disclosures required in the notes to the financial statements for a
lessor.
4. Classification criteria for when a lessee classifies a lease as a finance lease
and a lessor classifies a lease as a sales-type lease.
Exercise 15-37
Exercise 15-38
Requirement 1
Transfer of ownership indicates that the leaseback arrangement qualifies as a
finance lease, instead of an operating lease. So, the transaction does not qualify for
Present value of periodic payments*
* rounded
** present value of an annuity due of $1: n=13, i=11%
January 1, 2018
Cash (given)……………………………………………………………. 770,000
Requirement 2
December 31, 2018
……………………………………………………..Interest payable
……………………………………….Accumulated depreciation
* The airplane is depreciated over its remaining useful life rather than the lease (loan)
term because there is no sale or lease. The title remains with the lessee.
Exercise 15-39
Requirement 1
January 1, 2018
………………………………………………Building (original cost)
……………………………………………Gain on sale (difference)
present value of an ordinary annuity of $1: n=12, i=9%
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
amount that is 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.
Problem 15-1
Calculation of interest expense for the year ended December 31, 2018
Bonds payable $91,421 [1]
Interest $90,000¥x 17.15909 * = $1,544, 318
¥ 9% x ½ x $2,000,000
*present value of an ordinary annuity of $1: n=40, i=5%
** present value of $1: n=40, i=5%
Problems
Problem 15-1 (concluded)
[2] June 30: $500,000 x 10% x ½ = $25,000
Relevant journal entries:
December 31, 2017 (adjusting entry)
June 30, 2018
Interest expense ($500,000 x 10% x ½)25,000
December 31, 2018
[3] 10% x $99,474 ($139,474* – 40,000) = $9,947
lease present
payment value
Problem 15-2
[Note: This problem is the lease equivalent of Problem 14-12, which deals with a parallel
situation in which the machine was acquired with an installment note.]
1. Effective rate of interest implicit in the agreement
present lease present value
value payment table amount
This is the ordinary annuity present value table amount for n = 4, i = ?
2. Beginning of the lease
3. December 31, 2018
4. December 31, 2019
5. Beginning of the lease
lease present
payment value
** present value of an ordinary annuity of $1: n=4, i=11%
…………………………………………………………Lease payable
Problem 15-3
1. Majestic’s lease payable at the beginning of the lease
lease balance minus first payment)
2. Right-of-use asset
3. Lease term in years
4. Effective annual interest rate
5. Total of lease payments
6. Total effective interest expense over the term of the lease
