Problem 15-15 (continued)
Not required in the problem, but helpful to see that the present value calculation
is precisely the reverse of the lessor’s calculation of quarterly payments:
Amount to be recovered (fair value) $26,427
Requirement 2
September 30, 2016
Anything Grows (Lessee)
Leased equipment …………………………………………………. 26,427
Lease payable (present value of minimum lease payments) 26,427
15–122 Intermediate Accounting, 8/e
Problem 15-15 (continued)
Requirement 3
Since both use the same discount rate, the amortization schedule for the lessee and
lessor is the same:
Lease Amortization Schedule
Effective Decrease Outstanding
Date Payments Interest in Balance Balance
3% x Outstanding Balance
9/30/16 26,427
9/30/16 3,000 3,000 23,427
Problem 15-15 (concluded)
Requirement 4
December 31, 2016
Anything Grows (Lessee)
Depreciation expense ([$26,427 ÷ 4 years*] x 1/4 year) ………. 1,652
Requirement 5
September 29, 2018
Anything Grows (Lessee)
Depreciation expense ([$26,427 ÷ 4 years*] x 3/4 year) ……… 4,955
Accumulated depreciation …………………………………… 4,955
15–124 Intermediate Accounting, 8/e
Problem 15-16
Requirement 1
Since at least one (exactly one in this case) criterion is met, this is a capital lease
to the lessee:
Lessee’s Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
Problem 15-16 (continued)
Schedule 1: Lessee’s Calculation of the
Present Value of Minimum Lease Payments
Present value of periodic lease payments
Requirement 2
Present value of lessee’s minimum lease payments, calculated in Schedule 1
Requirement 3
15–126 Intermediate Accounting, 8/e
Problem 15-16 (continued)
Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
Schedule 2: Lessor’s Calculation of the Present Value of Minimum Lease
Payments
Present value of periodic lease payments ($10,000 x 3.48685**) $34,869
Plus: Present value of the guaranteed
Problem 15-16 (continued)
Since the fair value exceeds the lessor’s book value, the asset is being “sold” at a
profit, making this a sales-type lease:
Fair value $45,114
minus
Requirement 4
Lessor’s Calculation of Lease Payments
Amount to be recovered (fair value) $45,114
Problem 15-16 (continued)
Requirement 5
Present value of lessor’s minimum lease payments, calculated in Schedule 2
above: $42,382
Requirement 6
December 31, 2016
Yard Art Landscaping (Lessee)
Leased equipment (calculated in requirement 1) ………………. 39,564
Branch Motors (Lessor)
Lease receivable (to balance) ……………………………………… 45,114
Problem 15-16 (continued)
Requirement 7
Lessee’s Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 9% x Outstanding Balance
39,564
Requirement 8
Lessor’s Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
45,114
15–130 Intermediate Accounting, 8/e
Problem 15-16 (continued)
Requirement 9
December 31, 2017
Yard Art Landscaping (Lessee)
Maintenance expense (2017 fee) ……………………………………… 1,000
Prepaid maintenance expense (paid in 2016) ………………. 1,000
Problem 15-16 (continued)
Requirement 10
December 31, 2019
Yard Art Landscaping (Lessee)
Maintenance expense (2019 fee) ……………………………………… 1,000
Prepaid maintenance expense (paid in 2018) ………………. 1,000
Interest expense (9% x $14,225: from schedule) …………………. 1,280
15–132 Intermediate Accounting, 8/e
Problem 15-16 (concluded)
Requirement 11
December 31, 2020
Yard Art Landscaping (Lessee)
Maintenance expense (2020 fee) ……………………………………… 1,000
Prepaid maintenance expense (paid in 2019) ………………. 1,000
Branch Motors (Lessor)
Inventory of equipment (actual residual value) ………………. 4,000
Cash ($11,000 – 4,000) ………………………………………………. 7,000*
Problem 15-17
Calculation of interest expense for the year ended December 31, 2016
Bonds payable $91,384 [1]
Notes payable 49,500 [2]
[1] $1,827,681 x 10% x ½ = $91,384
Interest $90,000¥ x 17.15909 * = $1,543,581
[2] June 30: $500,000 x 10% x ½ = $25,000
Relevant journal entries:
December 31, 2015 (adjusting entry)
June 30, 2016
Interest expense ($500,000 x 10% x ½) 25,000
December 31, 2016
15–134 Intermediate Accounting, 8/e
Problem 15-17 (concluded)
[3] 10% x $99,474 ($139,474* – 40,000) = $9,947
Problem 15-18
Requirement 1
Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
The lessee’s incremental borrowing rate (11%) is more than the lessor’s implicit
rate (10%). So, both parties’ calculations should be made using a 10% discount rate:
Present value of minimum lease
Problem 15-18 (continued)
(a) Since at least one (two in this case) classification criterion and both additional
Requirement 2
January 1, 2016
Red Baron Flying Club (Lessee)
Leased equipment (calculated above) …………………………... 645,526
Problem 15-18 (continued)
Requirement 3
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
645,526
1/1/16 110,000 110,000 535,526
15–138 Intermediate Accounting, 8/e
Requirement 4
With the initial direct costs, the lease payments are the same, but the net
investment is higher: $645,526 + 18,099 = $663,625. The new effective rate
is the discount rate that equates the net investment and the future lease
payments:
$663,625 ÷ ?** = $110,000
Problem 15-18 (continued)
Requirement 5
Lease Amortization Schedule
Effective Decrease Outstanding
Payments Interest in Balance Balance
9% x Outstanding Balance
663,625
1/1/16 110,000 110,000 553,625
15–140 Intermediate Accounting, 8/e
Problem 15-18 (concluded)
Requirement 6
December 31, 2016
Red Baron Flying Club (Lessee)
Interest expense (10% x [$645,526 – 110,000]) ………………….. 53,553
Requirement 7
December 31, 2022
Red Baron Flying Club (Lessee)
Interest expense (10% x $100,000: from schedule) ……………… 10,000