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CPA Exam Questions (concluded)
5. a. In a capital lease with a bargain purchase option, the lessee will control the
6. a. The guaranteed residual value is a promise made by the lessee that the lessor
7. a. The capitalized lease liability should be the annual lease payments less the
executory cost (real estate taxes) times the present value factor for an
8. a. Since the machine is being leased back for a minor part (present value of
10. d. When recording a capital lease (usually called a finance lease under IFRS) a
lessee using U.S. GAAP uses the lower of the implicit rate and its own
15–82 Intermediate Accounting, 8/e
CMA Exam Questions
1. d. For both sales-type and direct-financing leases, the lessor’s gross investment
in the lease is the amount of the minimum lease payments (which include
2. d. A lessee records a lease as a capital lease if it meets any one of four criteria.
3. b. Initial direct costs have two components: (1) the lessor’s external costs to
originate a lease incurred in dealings with independent third parties and (2)
PROBLEMS
Problem 15-1
December 31, 2020
Rent expense ($10,000 + [$500 x 20 ÷ 2])* ......................... 15,000
Problem 15-2
1. NIC’s lease payable at the inception of the lease
3. Lease term in years
4. Asset’s residual value expected at the end of the lease term
5. Residual value guaranteed by the lessee
6. Effective annual interest rate
7. Total of minimum lease payments
Problem 15-3
Requirement 1
Capital lease to lessee; Direct financing lease to lessor.
Since the present value of minimum lease payments (same for both the lessor and
the lessee) is greater than 90% of the fair value of the asset, the 90% recovery
15–86 Intermediate Accounting, 8/e
Problem 15-3 (concluded)
Physicians’ Leasing (Lessor)
January 1, 2016
Lease receivable (present value calculated above) ......... 2,000,000
Inventory of equipment (lessor’s cost) .................... 2,000,000
Problem 15-4
[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
2. Inception of the lease
3. December 31, 2016
4. December 31, 2017
5. Inception of the lease
15–88 Intermediate Accounting, 8/e
Problem 15-5
1. Calculation of the present value of lease payments
2. Liability at December 31, 2016
Initial balance, September 30, 2016 ......................... $6,000,000
Asset at December 31, 2016
Initial balance, September 30, 2016 ......................... $6,000,000
3. Expenses for year ended December 31, 2016
Sept. 30, 2016 interest expense ................................ $ 0*
Problem 15-5 (concluded)
4. Statement of cash flows for year ended December 31, 2016
Werner would report the $6,000,000* investment in the protein analyzer and its
financing with a capital lease as a significant noncash investing and financing
activity in the disclosure notes to the financial statements.
The $783,096 ($391,548 x 2) cash lease payments are divided into the interest
Calculations:
September 30, 2016*
Leased equipment (calculated in req. 1) ........................... 6,000,000
December 31, 2016**
Interest expense (3% x [$6 million – 391,548]) ................ 168,254
Problem 15-6
1. Receivable at December 31, 2016
Calculation of the present value of lease payments
$391,548 x 15.32380 = $6,000,000
Receivable
Initial balance, September 30, 2016 ... $6,000,000
2. Interest revenue for year ended December 31, 2016
Sept. 30, 2016 interest revenue ................................ $ 0*
3. Statement of cash flows for year ended December 31, 2016
Abbott would report the $6,000,000* direct financing lease of the protein
analyzer as a significant noncash investing activity (acquiring one asset and
Problem 15-6 (concluded)
Calculations:
September 30, 2016*
Lease receivable (present value calculated above) ............ 6,000,000
December 31, 2016**
Cash (lease payment) ........................................................ 391,548
Problem 15-7
1. Calculation of the present value of lease payments (“selling price”)
2. Receivable at December 31, 2016
Receivable
Initial balance, September 30, 2016 ... $6,000,000
Sept. 30, 2016 reduction .................... (391,548)*
3. Income effect for year ended December 31, 2016
Sept. 30, 2016 interest revenue ................................ $ 0*
Problem 15-7 (continued)
4. Statement of cash flows for year ended December 31, 2016
NutraLabs would report the $6,000,000* sales-type lease of the protein analyzer
as a significant noncash activity in the disclosure notes to the financial
statements.
The $783,096 ($391,548 x 2) cash lease payments are considered to be cash
Note: By the indirect method of reporting cash flows from operating activities,
the $1,000,000 (Sales revenue: $6,000,000 – Cost of goods sold:
$5,000,000) dealer’s profit must be deducted from net income because it
Noncash adjustments to convert net income to cash flows from operating activities:
Increase in lease receivable ........................................ ($6,000,000)
15–94 Intermediate Accounting, 8/e
Problem 15-7 (concluded)
Calculations:
September 30, 2016*
Lease receivable (present value calculated above) ............. 6,000,000
December 31, 2016**
Cash (lease payment) ........................................................ 391,548
Problem 15-8
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Requirement 2
15–96 Intermediate Accounting, 8/e
Problem 15-8 (continued)
Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
Present Value of Minimum Lease Payments
Present value of periodic lease payments
Problem 15-8 (continued)
(a) By Western Soya Co. (the lessee)
Since at least one criterion is met, this is a capital lease to the lessee. Western
(b) By Rhone-Metro (the lessor)
Requirement 3
December 31, 2016
Western Soya Co. (Lessee)
Leased equipment (calculated above) ................................. 365,760
15–98 Intermediate Accounting, 8/e
Problem 15-8 (continued)
Requirement 4
Since both use the same discount rate and since the residual value is lessee-
guaranteed, the same amortization schedule applies to both the lessee and lessor:
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2016 365,760
Requirement 5
December 31, 2017
Western Soya Co. (Lessee)
Interest expense (10% x [$365,760 – 100,000]) ....................... 26,576
Rhone-Metro (Lessor)
Cash (lease payment) .......................................................... 100,000
Problem 15-8 (concluded)
Requirement 6
December 31, 2020
Western Soya Club (Lessee)
Depreciation expense ([$365,760 – 25,000] ÷ 4 years) ........ 85,190
15–100 Intermediate Accounting, 8/e
Problem 15-9
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Less: Present value of the unguaranteed
