Problem 15-19
Requirement 1
Application of Classification Criteria
1 Does the agreement specify that
ownership of the asset transfers
to the lessee? NO
2 Does the agreement contain a
bargain purchase option? 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
15–142 Intermediate Accounting, 8/e
Problem 15-19 (continued)
(a) Since at least one (two in this case) classification criterion and both additional
lessor conditions are met, this is a capital lease to the lessor (Bidwell Leasing).
Since the fair value exceeds the lessor’s book value, the plane was “sold” at a
profit, making this a sales-type lease:
Requirement 2
January 1, 2016
Red Baron Flying Club (Lessee)
Leased equipment (calculated above) …………………………... 645,526
Lease payable (calculated above) ……………………………… 645,526
Problem 15-19 (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
Requirement 4
December 31, 2016
Red Baron Flying Club (Lessee)
Interest expense (10% x [$645,526 – 110,000]) ………………….. 53,553
15–144 Intermediate Accounting, 8/e
Problem 15-19 (concluded)
Requirement 5
December 31, 2022
Red Baron Flying Club (Lessee)
Interest expense (10% x $100,000: from schedule) ……………… 10,000
Problem 15-20
Requirement 1
Present value of periodic lease payments
January 1, 2016
December 31, 2016
Interest expense (12% x $500,000) ……………………………………. 60,000
15–146 Intermediate Accounting, 8/e
Problem 15-20 (continued)
Requirement 2
BALANCE SHEET
Assets:
Leased asset …………………………………………………. $500,000
Portion of Amortization Schedule – not required, but verifies several
amounts:
Lease Amortization Schedule
Effective Decrease Outstanding
Date Payments Interest in Balance Balance
12% x Outstanding Balance
1/1/16 500,000
Problem 15-21
Requirement 1
Since the fair value of the land ($400,000) is more than 25% of the combined fair
value ($1,450,000), both the lessee and the lessor treat the land and building as
two separate leases. The land lease is an operating lease, and the building lease
January 1, 2016
Leased building (calculated above) ……………………………… 953,022
December 31, 2016
Depreciation expense ($953,022 ÷ 10 years) …………………….. 95,302
15–148 Intermediate Accounting, 8/e
Problem 15-21 (continued)
Requirement 2
Since the fair value of the land ($200,000) is less than 25% of the combined fair
value ($1,450,000), it is in effect ignored and the land and building are treated as
January 1, 2016
Leased property (calculated above) ………………………………. 1,351,804
December 31, 2016
Depreciation expense ($1,351,804 ÷ 10 years) ………………….. 135,180
Problem 15-22
Requirement 1
Under U.S. GAAP, land and building elements generally are accounted for as a
single unit, unless land represents more than 25% of the total fair value of the
January 1, 2016
Leased building (calculated above) ……………………………… 953,022
December 31, 2016
Depreciation expense ($953,022 ÷ 10 years) …………………….. 95,302
15–150 Intermediate Accounting, 8/e
Problem 15-22 (continued)
Requirement 2
Under U.S. GAAP, land and building elements generally are accounted for as a
single unit, unless land represents more than 25% of the total fair value of the
January 1, 2016
Leased property (calculated above) ………………………………. 1,149,033
December 31, 2016
Depreciation expense ($1,149,033 ÷ 10 years) ……………….. 114,903
SUPPLEMENT PROBLEMS
Problem 15-23
Requirement 1
Lessee
January 1, 2016
Right-of-use equipment 1,000,000
December 31, 2016
Interest expense ([$1,000,000 – 279,556] x 8%) 57,636
Requirement 2
Lessor
January 1, 2016
Lease receivable ($279,556 x 3.5771) 1,000,000
December 31, 2016
15–152 Intermediate Accounting, 8/e
Problem 15-24
1. Balance Sheet:
Lease Payable
Initial balance ($25,000 x 25.10278 ) $627,570
Quarter 1 reduction (9,311)
Right-of-Use Asset
Initial balance $627,570
Quarter 1 amortization (9,311)
2. Income Statement:
Interest Amortization Total Lease
Expense Expense Expense
Quarter 1 $15,689 $ 9,311 $25,000
Problem 15-24 (continued)
Journal entries (not required, but provide the calculations of numbers reported
above):
Beginning of lease
Right-of-use asset ($25,000 x 25.10278) ……………… 627,570
End of quarter 1
Interest expense (2.5% x $627,570) …………………………… 15,689
End of quarter 2
Interest expense (2.5% x [$627,570 – 9,311]) …………….. 15,456
End of quarter 3
Interest expense (2.5% x [$627,570 – 9,311 – 9,544]) …. 15,218
15–154 Intermediate Accounting, 8/e
Problem 15-24 (concluded)
End of quarter 4
Interest expense (2.5% x [$627,570 – 9,311 – 9,544 – 9,782]) 14,973
Problem 15-25
1. Calculation of the present value of lease payments
$562,907 x 5.32948 = $3,000,000
2. Lease Payable at December 31, 2016
Initial balance, June 30, 2016 ………………………….... $3,000,000
Right-of-Use Asset at December 31, 2016
Initial balance, June 30, 2016 ………………………….... $3,000,000
3. Expenses for year ended December 31, 2016
June 30, 2016 interest expense ………………………….. $ 0
15–156 Intermediate Accounting, 8/e
Problem 15-25 (continued)
Calculations:
June 30, 2016*
Right-of-use asset (present value: calculated in req. 1) ………. 3,000,000