Problem 21.9 (Time 30–40 minutes)
Purpose—to develop an understanding of the accounting treatment accorded a sales-type lease involving an
unguaranteed residual value. The student is required to discuss the nature of the lease with regard to the
Problem 21.10 (Time 30–40 minutes)
Purpose—to develop an understanding of lessee accounting for a finance lease with an unguaranteed residual
Problem 21.11 (Time 30–40 minutes)
Purpose—to develop an understanding of how residual values affect the accounting for the lessee and the
Problem 21.12 (Time 35–45 minutes)
Purpose—to develop an understanding of the accounting procedures involved in a finance (sales-type) leasing
Problem 21.13 (Time 30–40 minutes)
Purpose—to provide an understanding of how lease information is reported on the statement of financial
Problem 21.14 (Time 30–40 minutes)
Purpose— The student is required to identify the type of lease involved, explain the respective reasons for their
Problem 21.15 (Time 20–30 minutes)
Purpose— The student is required to identify the type of lease involved, explain the respective reasons for their
SOLUTIONS TO PROBLEMS
PROBLEM 21.1
The lessee determines the lease liability as follows.
For purposes of measuring the initial lease liability, only amounts expected to be
£ 113,864 Annual rental payment
X 4.99271 PV of an annuity-due of 1 for n = 6, i = 8%
£ 568,490 PV of periodic rental payments
(a) VANCE PLC (Lessee)
Lease Amortization Schedule
Date
Annual
Lease
Payment
Plus GRV
Interest (8%)
on Liability
Reduction
of Lease
Liability
Lease
Liability
1/1/19
£571,641
1/1/19
£113,864
£ –0–
£113,864
457,777
380,535
1/1/22
1/1/23
1/1/24
PROBLEM 21.1 (Continued)
(b) January 1, 2019
Right-of–Use Asset …………………………………………. 571,641
December 31, 2019
Interest Expense …………………………………………….. 36,622
January 1, 2020
Lease Liability ……………………………………………….. 36,622
Interest Expense ………………………………………. 36,622
December 31, 2020
Interest Expense …………………………………………….. 30,443
Lease Liability ………………………………………….. 30,443
Depreciation Expense …………………………………….. 95,274
Right-of–Use Asset …………………………………… 95,274
Note to instructor: The guaranteed residual value is not subtracted from the
right-of–use asset for purposes of determining the amortizable base. This
PROBLEM 21.1 (Continued)
(c) A lease incentive does not impact the measurement of the lease liability.
PROBLEM 21.2
(a) The $550,000 is the present value of the five annual lease payments of
*Rounded.
Lease Liability ……………………………………………….. 120,987
Cash ……………………………………………………….. 120,987
(c) Depreciation Expense …………………………………….. 220,000
(d) Lease Liability ……………………………………………….. 120,987
Cash ……………………………………………………….. 120,987
CAGE COMPANY (Lessee)
Lease Amortization Schedule (partial)
Date
Annual
Lease
Payment
Interest (5%)
on Liability
Reduction
of Lease
Liability
1/1/19
PROBLEM 21.2 (Continued)
(e) CAGE COMPANY
Statement of Financial Position (Partial)
December 31, 2019
*The current portion of the lease liability will contain a component for the accrued interest
(f) Insurance payments are an executory cost. Assuming a gross lease, the
insurance payments must be included in the present value of the lease payments
when initially valuing the lease liability. Therefore, the initial liability would be
measured as follows:
Present value of rental payments (see part b) ….. $550,000
Assets
Liabilities
Non-current assets:
Current:
Right-of-use Asset
$330,000
Lease liability
$120,987*
Noncurrent:
Lease liability
$329,477**
PROBLEM 21.3
(a) December 31, 2019
Right-of–Use Asset …………………………………………. 175,888
Lease Liability ………………………………………….. 175,888*
December 31, 2019
Lease Liability ……………………………………………….. 40,000
Cash ……………………………………………………….. 40,000
(To record the first rental payment)
(b) LUDWICK STEEL SA (Lessee)
Lease Amortization Schedule
(Annuity-Due Basis)
Date
Annual
Lease
Payment
Interest (8%)
on Liability
Reduction
of Lease
Liability
12/31/19
—
—
—
12/31/23
12/31/24
PROBLEM 21.3 (Continued)
December 31, 2020
Depreciation Expense …………………………………….. 25,127
December 31, 2020
Interest Expense …………………………………………….. 10,871
(c) December 31, 2021
Depreciation Expense ……………………………………….. 25,127
Right-of–Use Asset ……………………………………… 25,127
(To record annual amortization on leased
assets)
PROBLEM 21.3 (Continued)
(d) LUDWICK STEEL SA
Statement of Financial Positon (Partial)
December 31, 2021
Non-current assets:
Current liabilities:
PROBLEM 21.4
Entries on August 1, 2019:
(1) Right-of–Use Asset ……………………………………… 4,119,480
Lease Liability ………………………………………. 4,119,480
(2) Lease Liability ………………………………………….. 40,000
Cash ………………………………………………….. 40,000
Entries on August 31, 2019:
(1) Interest Expense ……………………………………….. 20,397
Lease Liability …………………………………….. 20,397
(2) Depreciation Expense ……………………………….. 28,608
Right-of–Use Asset ……………………………… 28,608
PROBLEM 21.5
(a) GRISHELL TRUCKING
Schedule to Compute the Discounted Present Value
of Terminal Facilities and the Related Obligation
January 1, 2019
Present value of first 10 payments:
Immediate payment ………………………………… $ 800,000
Present value of an ordinary annuity for
9 years at 6% ($800,000 X 6.801692) …….. 5,441,354 $6,241,354*
Present value of last 10 payments:
First payment of $320,000 ……………………….. 320,000
(Note to instructor: The student can compute the $6,241,354 by using the
present value of an annuity-due for 10 periods at 6%.
*The calculation could also be done as a pure annuity-due of 1 for 10
periods as follows ($2 rounding difference):
PROBLEM 21.5 (Continued)
(b) GRISHELL TRUCKING
Journal Entries
(1) 1/1/21
Partial Amortization Schedule
(Annuity-Due Basis)
Date
Lease
Payment
Interest (6%)
on Lease
Liability
Reduction of
Lease
Liability
Lease
Liability
(2) 12/31/21
Depreciation Expense …………………………………….. 190,885
Right-of–Use Asset …………………………………… 190,885
purchase option is available at the end of the lease term.
(3) 12/31/21
Interest Expense …………………………………………….. 361,936
PROBLEM 21.6
(a) This is a sales-type lease for Glaus (lessor), since the lease term is greater
(b) Calculation of annual rental payment
(c) Computation of lease liability, or present value of lease payments:
PV of annual payments: €109,365 X 5.91732* = €647,148
*Present value of an annuity-due at 6% for 7 periods.
1/1/19
(d) Right-of-Use Asset ………………………… 647,148
Lease Liability ………………………… 647,148
PROBLEM 21.6 (Continued)
12/31/19
Depreciation Expense ……………………. 92,450
Right-of–Use Asset
(€647,148 ÷ 7) ………………………. 92,450
12/31/20
Depreciation Expense ……………………. 92,450
Right-of–Use Asset ………………….. 92,450
PROBLEM 21.6 (Continued)
1/1/19
(e) Lease Receivable …………………………... 700,000
Cost of Goods Sold ……………………….. 525,000
Sales Revenue ………………………… 700,000
Inventory ………………………………… 525,000
12/31/19
Lease Receivable …………………………... 29,532
Interest Revenue
[(€700,000 – €109,365) X .05] … 29,532
1/1/20
(f) PV of annual payments
(€109,365 X 5.91732*) €647,148
In this case, the guaranteed residual value is greater than the expected residual
value. Therefore, the lessee must include the present value of the amount
PROBLEM 21.7
(a) The noncancelable lease is a sales-type lease because: (1) the lease term is
for 83% (10 ÷ 12) of the economic life of the leased asset, and
(2) the present value of the lease payments exceeds 90% of the fair value of
the leased property (see calculation below).
1. Lease Receivable:
Present value of annual payments of $60,000
made at the beginning of each period for 10 years,
2. Sales price is the same as the present value of
lease payments ……………………………………………………… R$495,678
PROBLEM 21.7 (Continued)
(b) AMIRANTE SA (Lessor)
Lease Amortization Schedule
(Annuity-Due basis, guaranteed residual value)
Beginning
of Year
Annual Lease
Payment Plus
Residual Value
Interest (5%)
on Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
(a)
(b)
(c)
(d)
Initial PV
—
—
—
R$495,678
1
R$ 60,000
—
R$ 60,000
435,678
2
60,000
R$ 21,784
38,216
397,462
3
357,335
4
315,202
5
60,000
44,240
270,962
6
224,510
7
8
60,000
51,213
9
R$615,000
R$495,678
(a) Annual lease payments and guaranteed residual value.
(b) Preceding balance of (d) X 5%, except beginning of first year of lease term.
(c) Lessor’s journal entries:
Beginning of the Year
Lease Receivable …………………………………………… 495,678
Cost of Goods Sold ………………………………………… 300,000
Sales Revenue …………………………………………. 495,678
PROBLEM 21.7 (Continued)
Cash ………………………………………………………………… 60,000
Lease Receivable ………………………………………… 60,000
(To record receipt of the first lease
payment)
End of the Year
PROBLEM 21.8
(a)
For purposes of measuring the initial lease liability, only probable amounts
expected to be owed under the residual value guarantee should be included.
That is, only the present value of the difference between
PROBLEM 21.8 (Continued)
(b) CHAMBERS MEDICAL (Lessee)
Lease Amortization Schedule
(Annuity-Due Basis, GRV)
Beginning
of Year
Annual Lease
Payment Plus
GRV
Interest (5%)
on Unpaid
Liability
Reduction
of Lease
Liability
Lease
Liability
(a)
(b)
(c)
(d)
Initial PV
R$489,539
1
R$ 60,000
R$ 0
R$ 60,000
429,539
2
60,000
21,477
38,523
391,016
3
60,000
19,551
40,449
350,567
4
60,000
42,472
308,095
5
60,000
44,595
6
60,000
13,175
46,825
216,675
7
60,000
49,166
167,509
8
60,000
51,625
115,884
9
60,000
54,206
60,000
56,916
238
(a) Annual lease payments and amount expected to be owed under residual value
guarantee.
(c) Lessee’s journal entries:
Beginning of the Year
Right-of–Use Asset …………………………………………. 489,539
Lease Liability ………………………………………….. 489,539