PROBLEM 21.6 (Continued)
1/1/20
(d)
Right-of–Use Asset ………………………………………………… 647,148
12/31/20
Amortization Expense …………………………………………… 92,450
Right-of–Use Asset
($647,148 ÷ 7) ……………………………………………… 92,450
1/1/21
Lease Liability ………………………………………………………. 109,365*
Cash ……………………………………………………………… 109,365
12/31/21
Amortization Expense …………………………………………… 92,450
Right-of–Use Asset …………………………………………. 92,450
PROBLEM 21.6 (Continued)
1/1/20
(e)
Lease Receivable ………………………………………………….. 700,000
Cost of Goods Sold ………………………………………………. 525,000
12/31/20
Lease Receivable ………………………………………………….. 29,532
Interest Revenue
[($700,000 – $109,365) X .05] ………………………… 29,532
1/1/21
(f) PV of annual payments
($109,365 X 5.91732*) $647,148
*Present value of an annuity due for 7 periods at 6%.
**Present value of $1 for 7 periods at 6%.
In this case, the guaranteed residual value is greater than the expected residual
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
PROBLEM 21.7 (Continued)
(b) AMIRANTE INC. (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
—
—
—
$495,678
1
$ 60,000
—
$ 60,000
435,678
2
60,000
$ 21,784
38,216
397,462
3
4
5
60,000
44,240
270,962
6
7
175,736
8
60,000
51,213
9
$615,000
$495,678
(a) Annual lease payments and guaranteed residual value.
(c) Lessor’s journal entries:
Beginning of the Year
Lease Receivable …………………………………………… 495,678
Cost of Goods Sold ………………………………………… 300,000
PROBLEM 21.7 (Continued)
Cash ………………………………………………………………… 60,000
Lease Receivable …………………………..……………. 60,000
PROBLEM 21.8
(a) The noncancelable lease is a finance 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
asset, as shown below:
PV of Lease Payments:
However, 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
the residual value guarantee and the expected residual value at the end of
the lease term should be included. The calculation of the initial value of the
lease liability is as follows:
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
$489,539
1
$ 60,000
$ 0
$ 60,000
429,539
2
60,000
21,477
38,523
391,016
4
60,000
42,472
308,095
5
60,000
44,595
263,500
7
60,000
49,166
167,509
8
60,000
51,625
115,884
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
(To record the lease of x-ray equipment
PROBLEM 21.8 (Continued)
End of the Year
Interest Expense …………………………..………………… 21,477
Lease Liability ………………………………………….. 21,477
(To record accrual of annual interest on
lease obligation)
Note to instructor: The guaranteed residual value is not subtracted from the
right-of–use asset for purposes of determining the amortizable base. This
reflects the intangible nature of the right-of-use asset. The lessee records as
(d) The document preparation costs are considered initial direct costs. As such,
they will impact the initial measurement of the right-of-use asset, but will not
PROBLEM 21.9
(a) The lease is a sales-type lease because: (1) the lease term exceeds 75% of
the asset’s estimated economic life (10/12 = 83%), and (2) the present value of
the lease payments is greater than 90% of the fair value of the asset, as
calculated below:
$ 40,000 Annual rental payment
1. Present value of an annuity due of $1 for
10 periods discounted at 8% ………………………………. 7.24689
2. Sales revenue is $289,876 (the present value of the 10 annual lease
3. Cost of goods sold is $170,736 (the $180,000 cost of the asset less the
PROBLEM 21.9 (Continued)
(b) GEORGE COMPANY (Lessor)
Lease Amortization Schedule
Annuity Due Basis, Unguaranteed Residual Value
Beginning
of Year
Annual Lease
Payment Plus
Residual Value
Interest (8%)
on Lease
Receivable
Lease
Receivable
Recovery
Lease
Receivable
(a)
(b)
(c)
(d)
Initial PV
$299,140
1
$ 40,000
$ 0
$ 40,000
259,140
2
40,000
20,731
19,269
239,871
3
40,000
20,810
219,061
4
5
40,000
24,273
172,313
6
40,000
26,215
146,098
7
117,786
8
40,000
30,577
9
40,000
33,023
*Rounding error is $3.
(a) Annual lease payment (and return of expected residual value at end of the lease).
(c) Beginning of the Year
Lease Receivable ………………………………………………….. 299,140
Cost of Goods Sold ………………………………………………. 170,736
Selling Expenses ………………………………………………….. 4,000
PROBLEM 21.9 (Continued)
End of the Year
Lease Receivable …………………………………………………….. 20,731
PROBLEM 21.10
(a) The lease is a finance lease because: (1) the lease term exceeds 75% of the
asset’s economic life (10/12 = 83%) and (2) the present value of the lease
payments exceeds 90% of the fair value of the leased asset.
(b) NATIONAL AIRLINES (Lessee)
Lease Amortization Schedule
(Annuity-due basis and URV)
Beginning
of Year
Annual Lease
Payment
Interest (8%)
on Lease
Liability
Reduction
of Lease
Liability
Lease
Liability
(a)
(b)
(c)
(d)
Initial PV
—
—
—
$289,876
1
$ 40,000
—
$ 40,000
249,876
2
40,000
$ 19,990
20,010
229,866
3
40,000
21,611
208,255
4
184,915
5
40,000
25,207
6
40,000
27,223
132,485
7
103,084
8
40,000
31,753
9
40,000
(a) Annual lease payment required by lease contract.
PROBLEM 21.10 (Continued)
(c) Lessee’s journal entries:
Beginning of the Year
Right-of–Use Asset ………………………………………………… 289,876
Lease Liability ……………………………………………….. 289,876
End of the Year
Interest Expense …………………………..………………………. 19,990
Lease Liability ……………………………………………….. 19,990
(To record accrual of annual interest on
PROBLEM 21.11
(a) The lease agreement satisfies the 90% of fair value requirement (calculation
below).
PV of Lease Payments:
PV of rental payments, $30,300 X 7.24689* …………………. $219,581
Note to Instructor: While the present value classification test includes the
full amount of the residual value guarantee, for purposes of measuring the
initial lease liability, only amounts expected to be owed under the residual
PV of Lease Liability:
PV of rental payments, $30,300 X 7.24689* …………………. $219,581
PROBLEM 21.11 (Continued)
(b) January 1, 2020
Lessee:
Right-of–Use Asset …………………………………………. 221,897
January 1, 2020
Lessor:
Lease Receivable …………………………………………… 242,741
December 31, 2020
Lessee:
Interest Expense …………………………..………………… 15,328
Lease Liability
December 31, 2020
Lessor:
Lease Receivable ……………………………………………… 16,995
PROBLEM 21.11 (Continued)
(c) In both (1) and (2), the lessee is no longer obligated or expected to make any
payment at the end of the lease. As a result, there should be no amount of
(d) (1) When a residual value is guaranteed by a 3rd party, it creates a unique
situation for a lessor. In this case, King expects to receive 100% of the fair
value of the asset through the rental payments of the lessee and the
payment of the residual value guarantee (either the return of equipment by
the lessee and/or cash from the 3rd party). While King relinquishes control of
Note to Instructor: while the lease receivable does not change, the net
investment in the lease does. Net investment in the lease is defined as the
lease receivable plus any unguaranteed residual value minus deferred gross
PROBLEM 21.11 (Continued)
(2) While the lessor still includes even an unguaranteed residual value in the
calculation of a lease receivable under a sales-type or direct-finance lease,
the lack of a residual value guarantee in this case could lead the lease to be
PROBLEM 21.12
(a) The lease should be treated as a finance lease by Winston Industries
requiring the lessee to capitalize the leased asset. The lease qualifies for
finance lease accounting by the lessee because: (1) title to the engines
transfers to the lessee, (2) the lease term is equal to the estimated life of the
Present Value of Lease Payments
$384,532 X 7.80169* ………………………………………….. $3,000,000
*Present value of an annuity due at 6% for 10 years, rounded by $1.
Dealer Profit
(b) Right-of-Use Asset ……………………………………. 3,000,000
Lease Liability …………………………………….. 3,000,000
(d) Lessee (January 1, 2020)
Lease Liability ………………………………………….. 384,532
Cash ………………………………………………….. 384,532
PROBLEM 21.12 (Continued)
(e) WINSTON INDUSTRIES/EWING INCORPORATED
Lease Amortization Schedule
Annual
Lease
Receipt/
Payment
Interest on
Receivable/
Liability at 6%
Reduction in
Receivable/
Liability
Lease
Receivable/
Liability
$3,000,000
Lessee December 31, 2020
Interest Expense …………………………..…………… 156,928
Lease Liability …………………………………….. 156,928
(f) WINSTON INDUSTRIES
Balance Sheet (Partial)
December 31, 2020
Non-current assets:
Current liabilities:
Right-of–Use
asset
$2,700,000*
Lease liability
$384,532**
PROBLEM 21.12 (Continued)
Part of the reduction in the lease liability will be attributable to the
previously accrued interest expense, and part will be a reduction of the
EWING INC.
Balance Sheet (Partial)
December 31, 2020
Assets
Current assets:
Lease receivable ………………………………………………… $ 384,532*
(g) Legal fees incurred in connection with a lease are considered initial direct
costs of the lease, and should be capitalized as part of the right-of-use asset. In
contrast, lease incentives reduce the initial value of the right–of-use asset.
However, neither initial direct costs nor lease incentives affect the value of the
lease liability. Thus, the entry to initially record the lease is as follows: