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BRIEF EXERCISE 21.22 (Continued)
Lease liability: $22,156
Legal fees: 1,000
Right-of-use asset: $23,156
BRIEF EXERCISE 21.23
Answer: $78,998
PV of lease payments: $83,498
Cash incentive received from Badger (lessor): (5,000)
BRIEF EXERCISE 21.24
Answer: €46,551
PV of lease payments: €44,651
Cash incentive received from Highlander (lessor): (2,000)
Internal engineering costs are specifically excluded as initial direct costs, and
would not be included in the calculation of the right-of-use asset.
BRIEF EXERCISE 21.25
Lease Expense ............................................................... 15,000
Cash ........................................................................ 15,000
*BRIEF EXERCISE 21.26
The transaction between Irwin and Peete will qualify as a sale-leaseback, as Irwin
has transferred control of the asset to Peete. That is, the terms of the leaseback
BRIEF EXERCISE 21.26 (Continued)
1/1/19
Cash ................................................................................ 35,000
Trucks ..................................................................... 28,000
Gain on Disposal of Plant Assets ......................... 7,000
IRWIN ANIMATION
Lease Amortization Schedule
Ordinary-Annuity Basis
Date
Annual
Payment
Interest (6%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/19
€23,245
*Rounded $1
12/31/19
Interest Expense ............................................................ 1,395
Lease Liability ........................................................ 1,395
*BRIEF EXERCISE 21.27
With the change of facts, the leaseback meets the lease term and present value
classification tests (5/5 = 100% of asset’s economic life; €8,309 x 4.21236 =
1/1/19
Cash ................................................................................ 35,000
Notes Payable [€8,309 X 4.21236*] ........................ 35,000
SOLUTIONS TO EXERCISES
EXERCISE 21.1 (15–20 minutes)
Note to Instructor: The lease term is 100% of the asset’s economic life, and the
present value of the rental payments are 100% of the asset’s fair value, as shown
below:
Present value of first payment
(£5,552.82 X .92593) ................................. £ 5,141.52
12/31/19
Interest Expense (£15,000 X 8%) .............. 1,200.00
Lease Liability ............................................ 4,352.82
Cash................................................ 5,552.82
EXERCISE 21.1 (Continued)
(b) The initial valuation of the lease liability and related right-of-use asset should
not include any unknown increases or decreases in lease payments due to
EXERCISE 21.2 (15–20 minutes)
(a) Computation of present value of lease payments:
$8,668 X 4.54595* = $39,404
*Present value of an annuity-due of 1 for 5 periods at 5%.
EXERCISE 21.3 (20–25 minutes)
(a) The present value of lease payments, for purposes of determining the lease
liability for the lessee, should only include the present value of any
guaranteed residual value probable to be owed under the lease agreement
(i.e. the amount of guaranteed residual value over the expected residual
(b) Right-of-Use Asset .................................................... 8,873
Lease Liability ..................................................... 8,873
(c) Lease Liability ........................................................... 200
Cash .................................................................... 200
(f) As explained in part (a), the lessee should include the present value of any
guaranteed residual value probable to be owed under the lease agreement.
Because the expected residual value (€500) is less than the guaranteed residual
value (€1,180), Delaney should include the present value of the difference in the
initial measurement of the lease liability. Thus, the present value of the lease
payments is calculated as follows:
EXERCISE 21.4 (20–30 minutes)
(a) For purposes of calculating the initial lease liability, the present value of the
lease payments will only include the amount of a residual value guarantee
probable to be owed at the end of the lease term. Thus, the initial lease liability
and right-of-use asset to be recorded on the books of Stora Enso is calculated
as follows:
€ 71,830 Annual rental payment
EXERCISE 21.4 (Continued)
12/31/18
Right-of-Use Asset ............................... 521,934
Lease Liability ........................... 521,934
Lease Liability ....................................... 35,822
Interest Expense
(See Schedule 1) ................................. 36,008
Cash........................................... 71,830
12/31/20
EXERCISE 21.4 (Continued)
Schedule 1 Stora Enso
Lease Amortization Schedule (partial)
(Lessee)
Date
Annual Lease
Payment
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
12/31/18
€521,934
(b) Initial direct costs and lease incentives do not affect the initial measurement
of the lease liability. Instead, they only affect the measurement of the right-of-use
asset. Initial direct costs incurred by the lessee increase the right-of-use asset,
(c) The annual insurance payments of €5,000 are considered part of the annual
payments to the lessor similar to the rental payments, as they do not transfer a
separate good or service to the lessee, but rather are part of the payment to use
EXERCISE 21.4 (Continued)
€ 3,000 Amount probable to be owed under
residual value guarantee (€10,000 - €7,000)
Note how the inclusion of the executory costs leads to an inflated lease liability
and related right-of-use asset. Additionally, note that had the insurance
payments been variable, they would not have been included at all in the
measurement of the lease liability, which would have led to a very different initial
measurement of the liability and asset.
(d) Because Stora Enso expected the residual value of the asset at the end of the
lease to be €7,000, it expected to owe Sheffield an additional €3,000 in addition to
EXERCISE 21.5 (15–25 minutes)
(a) Fair value of leased asset to lessor £245,000
Less: Present value of unguaranteed
residual value £24,335 X .63017
EXERCISE 21.5 (Continued)
(b) MORGAN LEASING GROUP (Lessor)
Lease Amortization Schedule
Date
Annual
Lease
Payment
Plus URV
Interest (8%) on
Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
1/1/19
£245,000
1/1/19
£ 46,000
£ –0–
£ 46,000
199,000
1/1/20
46,000
15,920
30,080
168,920
*Rounded by £2.
1/1/19
(c) Lease Receivable ................................. 245,000*
Cost of Goods Sold 229,665**
Sales Revenue .............................. 229,665***
Inventory ....................................... 245,000
*The lease receivable will include both the present value of the
rental payments (£46,000 X 4.99271) plus the present value of the
EXERCISE 21.5 (Continued)
1/1/19
Cash ................................................................. 46,000
Lease Receivable ................................... 46,000
12/31/19
EXERCISE 21.6 (20–25 minutes)
Computation of annual payments
Fair value of leased asset to lessor $160,000
Less: Present value of residual value
($16,000 X .90703*) 14,512
Amount to be recovered through lease payments $145,488
EXERCISE 21.6 (Continued)
CASTLE LEASING COMPANY (Lessor)
Lease Amortization Schedule
Date
Annual Lease
Payment
Interest (5%)
on Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
1/1/19
$160,000
1/1/19
(a) Lease Receivable ..................... 160,000*
12/31/19
Cash.......................................... 78,244
Lease Receivable .............. 70,244
Interest Revenue ............... 8,000
(b) Cash.......................................... 16,000
Lease Receivable .............. 16,000
EXERCISE 21.7 (15–20 minutes)
(a) The lessee accounts for all leases using the finance lease method and
records the right-of-use asset and lease liability at the present value of the
lease payments using the incremental borrowing rate if it is impracticable to
determine the interest rate implicit in the lease. The lessee’s amortization
The lessor should account for the lease as a sales-type lease. Because title
to the asset passes to the lessee, the lease term is longer than 75% of the
economic life of the asset (3/3 = 100%), and the present value of the lease
payments is more than 90% of the fair value of the asset (€95,000/€95,000 =
100%), it is a finance (sales-type) lease by the lessor. Assuming collectibility
of the rents is probable, the lease is accounted for as a sales-type lease to
the lessor.
Fair value of leased asset
(Amount to be recovered by lessor through lease
payments) ............................................................................ €95,000
EXERCISE 21.7 (Continued)
(b) Amortization Schedule
Rent Receipt/
Payment
Interest (8%)
Revenue/
Expense
Reduction of
Principal
Receivable/
Liability
1/1/19
—
—
—
€95,000
12/31/19
€36,863
€7,600*
€29,263
65,737
(c) 1/1/19
Lease Receivable .................................. 95,000
(d) 1/1/19
Right-of-Use Asset ............................... 95,000
Lease Liability ........................... 95,000
(e) 1/1/19
EXERCISE 21.8 (15–20 minutes)
(b) Because the lease term test is met (8/10 = 80% > 75%), the lease is classified
as a sales-type lease.
1/1/19
Lease Receivable ............................... 230,410
(c) If the collectibility of lease payments is not probable for the lessor, the
lessor does not derecognize the asset or recognize selling profit on the lease.
Instead, Crosley would recognize any cash receipts as a deposit liability.
1/1/19
Cash ................................................................................ 35,004
Deposit Liability ...................................................... 35,004
EXERCISE 21.9 (20-25 minutes)
(a) Lease Liability = $35,004 x 6.20637* = $217,248
Right-of-Use Asset = $217,248 + $15,000** = $232,248
(b) The lease is accounted for using the finance lease method.
1/1/19
Right-of-Use Asset ............................... 232,248
Cash........................................... 15,000
Lease Liability ........................... 217,248
EXERCISE 21.10 (20–30 minutes)
(a) Computation of lease liability:
¥20,471.94 Annual rental payment
X 4.31213 PV of annuity-due of 1 for n = 5, i = 8%
¥88,277.67 PV of periodic rental payments
EXERCISE 21.10 (Continued)
Choi Group (Lessee)
Lease Amortization Schedule
Date
Annual Lease
Payment Plus
BPO
Interest
(8%) on
Liability
Reduction
of Lease
Liability
Lease
Liability
5/1/19
¥91,000.00
5/1/19
¥ 20,471.94
¥20,471.94
70,528.06
*Rounding error is 8 Yen.
5/1/19
(b) Right-of-Use Asset ..................... 91,000.00
Lease Liability ..................... 91,000.00
EXERCISE 21.10 (Continued)
12/31/19
Depreciation Expense ................ 6,066.67
1/1/20
Lease Liability ............................. 3,761.49
Interest Expense ................. 3,761.49
5/1/20
Interest Expense ......................... 5,642.24
12/31/20
Depreciation Expense ................ 2,970.58
Lease Liability ..................... 2,970.58
($4,455.87 X 8/12)
12/31/20
Depreciation Expense ................ 9,100.00
