Problem 15-9 (continued)
Requirement 2
The lessee’s incremental borrowing rate (12%) is more than the lessor’s implicit
rate (10%). So, both parties’ calculations should be made using a 10% discount rate:
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 excluding
15–102 Intermediate Accounting, 8/e
Problem 15-9 (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)
Since the fair value exceeds the lessor’s book value, the equipment is being “sold”
at a profit, making this a sales-type lease:
Fair value $365,760
Requirement 3
December 31, 2016
Western Soya Co. (Lessee)
Leased equipment (calculated above) …………………………... 348,685
Lease payable (calculated above) ……………………………… 348,685
Rhone-Metro (Lessor)
Lease receivable (fair value)………………………………………. 365,760
Problem 15-9 (continued)
Requirement 4
Lessee (unguaranteed residual value excluded):
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2016 348,685
Lessor (unguaranteed residual value included):
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2016 365,760
Problem 15-9 (continued)
Requirement 5
December 31, 2017
Western Soya Co. (Lessee)
Depreciation expense ([$348,685] ÷ 4 years) …………………….. 87,171
Problem 15-9 (concluded)
Requirement 6
December 31, 2020
Western Soya Co. (Lessee)
Operating expense (2020 expenses) …………………………….. 4,000
15–106 Intermediate Accounting, 8/e
Problem 15-10
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $365,760
Problem 15-10 (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 excluding
executory costs of $4,000 ($130,960 x 2.73554**) $358,247***
Problem 15-10 (continued)
(a) by Western Soya Co. (the lessee)
(b) by Rhone-Metro (the lessor)
Since the fair value exceeds the lessor’s book value, the equipment is being “sold”
at a profit, making this a sales-type lease:
Requirement 3
December 31, 2016
Western Soya Co. (Lessee)
Leased equipment (calculated above) …………………………... 365,760
Lease payable (calculated above) ……………………………… 365,760
Problem 15-10 (continued)
Requirement 4
Lessee and lessor (BPO included):
Since both use the same discount rate and since the bargain purchase option is
included as an additional payment for both, the same amortization schedule applies to
both the lessee and lessor. The lease term ends for accounting purposes after 3 lease
payments, because the BPO becomes exercisable before the fourth:
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2016 365,760
15–110 Intermediate Accounting, 8/e
Problem 15-10 (continued)
Requirement 5
December 31, 2017
Western Soya Co. (Lessee)
Depreciation expense ($365,760 ÷ 6 years*) …………………….. 60,960
Rhone-Metro (Lessor)
Cash (lease payment) …………………………………………………. 134,960
Problem 15-10 (concluded)
Requirement 6
December 31, 2019
Western Soya Club (Lessee)
Depreciation expense ($365,760 ÷ 6 years) ………………………. 60,960
15–112 Intermediate Accounting, 8/e
Problem 15-11
Requirement 1
Lessor’s Calculation of Lease payments
Amount to be recovered (fair value) $659,805
Less: Present value of the third-party-guaranteed
Requirement 2
Since [1] title to the conveyer does not transfer to the lessee, [2] there is no BPO,
and [3] the lease term (3 years) is less than 75% of the estimated useful life (6 years),
Problem 15-11 (continued)
For the lessor, the criterion is met: The present value of minimum lease payments
($659,805) is more than 90% of the fair value ($659,805 x 90% = $593,825). Also,
since the fair value exceeds the lessor’s book value, the conveyer is being “sold” at a
profit, making this a sales-type lease:
Fair value $659,805
minus
Lessee’s Calculation of the
Present Value of Minimum Lease Payments
Present value of periodic lease payments*
15–114 Intermediate Accounting, 8/e
Problem 15-11 (continued)
Requirement 3
December 31, 2016
Poole (Lessee)
Prepaid rent (2016 payment; 2017 expense) …………………….. 200,000
Requirement 4
Since the lessee records the lease as an operating lease, interest expense is not
recorded and an amortization schedule is not applicable.
Lessor (third-party-guaranteed residual value included):
Lease Amortization Schedule
Effective Decrease Outstanding
Dec. Payments Interest in Balance Balance
31 10% x Outstanding Balance
2016 659,805
Problem 15-11 (continued)
Requirement 5
December 31, 2017
Poole (Lessee)
Rent expense …………………………………………………………. 200,000
Allied (Lessor)
Cash (lease payment)…………………………………………………. 200,000
December 31, 2018
Poole (Lessee)
Rent expense …………………………………………………………. 200,000
Allied (Lessor)
15–116 Intermediate Accounting, 8/e
Problem 15-11 (concluded)
December 31, 2019
Poole (Lessee)
Rent expense …………………………………………………………. 200,000
Problem 15-12
Situation
1 2 3 4
A. The lessor’s:
1. Minimum lease payments1 $40,000 $44,000 $44,000 $40,000
1 ($10,000 x number of payments) + Residual value guaranteed by lessee and/or by
third party.
Problem 15-13
Situation
1 2 3 4
A. The lessor’s:
1. Minimum lease payments1 $400,000 $553,000 $640,000 $510,000
Note: Since executory costs are excluded from minimum lease payments, they have no effect on
any of the calculated amounts.
1 ($100,000 x Number of payments) + Residual value guaranteed by lessee and/or by third party;
for situation 4: ($100,000 x 4) + ($60,000 + 50,000)
15–118 Intermediate Accounting, 8/e
Problem 15-14
Requirement 1
Branson Construction (Lessee)
Interest expense (10% x [$936,500 – 100,000]) ………………….. 83,650
Lease payable (difference) …………………………………………. 16,350
Requirement 2
Branson Construction (Lessee)
Interest expense (10% x [$936,500 – 100,000]) ………………….. 83,650
Lease payable (to balance) …………………………………………. 16,350
Problem 15-14 (concluded)
Branif Leasing (Lessor)
Cash (lease payment)…………………………………………………. 103,000
Requirement 3
Branson Construction (Lessee)
Interest expense (10% x [$936,500 – 100,000]) ………………….. 83,650
15–120 Intermediate Accounting, 8/e
Problem 15-15
Requirement 1
Note:
Because exercise of the option appears at the inception of the lease to be
reasonably assured, payment of the option price ($6,000) is expected to occur
Present value of quarterly lease payments ($3,000 x 7.23028**) $21,691