PROBLEM 21.13
(a) 1. $ 20,027 Interest expense (See amortization schedule)
$ 52,174 Amortization expense ($313,043 ÷ 6 = $52,174)
2. Current liabilities:
$ 62,700 Lease liability
3. $ 16,614 Interest expense (See amortization schedule)
$ 52,174 Amortization expense ($313,043 ÷ 6 = $52,174)
4. Current liabilities:
$ 62,700 Lease liability
PROBLEM 21.13 (Continued)
2. Current liabilities:
$ 47,680 Lease liability ($42,673 + $5,007)
3. $ 19,174 Interest expense
[($20,027 – $5,007) + ($16,614 X 3/12) =
[$15,020 + $4,154 = $19,174]
$ 52,174 Amortization expense ($313,043 ÷ 6 = $52,174)
4. Current liabilities:
$ 50,240 Lease liability
($46,086 + [$16,614 X 3/12] =
PROBLEM 21.14
2. Current assets:
$ 62,700 Lease receivable ($42,673 + $20,027)
Noncurrent assets:
$207,670 Lease receivable (net investment)
(b) 1. $313,043 Sales revenue
$280,000 Cost of goods sold
$ 5,007 Lease revenue ($20,027 X 3/12 = $5,007)
2. Current assets:
$ 47,680 Lease receivable ($42,673 + $5,007)
PROBLEM 21.15
(a) The lease agreement satisfies the 90% of fair value requirement (calculation
below).
PV of Lease Payments:
PV of rental payments, $12,471 X 3.72325* …………………. $46,433
PV of guaranteed residual value, $17,500 X .82270** …… 14,397
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
(b) January 1, 2020
Right-of–Use Asset ………………………………………………… 46,433
PROBLEM 21.15 (Continued)
Lease Liability ………………………………………………………. 12,471
Cash ……………………………………………………………… 12,471
December 31, 2020
Interest Expense …………………………………………………… 1,698
(c)
January 1, 2020
Lease Receivable ………………………………………………….. 67,000
Cost of Goods Sold ($50,000 – $14,397) ………………….. 35,603
December 31, 2020
Lease Receivable …………………………………………………….. 2,726
Lease Revenue
[($67,000 – $12,471) X .05] ………………………………. 2,726
(d) Without the residual value guarantee, the lease agreement fails to satisfy the
90% of fair value requirement (calculation below).
PROBLEM 21.15 (Continued)
Irving Company (Lessee) Entries
January 1, 2020
Right-of–Use Asset ………………………………………………… 46,433
IRVING COMPANY
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$46,433
1/1/20
1/1/21
1/1/22
0
Lease Expense Schedule
Date
(B)
Interest (5%) on
Lease Liability
(C)
Amortization
of ROU Asset
(A–B)
1/1/20
12/31/20
$1,698
$10,773
12/31/21
12/31/22
0
PROBLEM 21.15 (Continued)
December 31, 2020
Lease Expense ……………………………………………………… 12,471
Lease Liability ……………………………………………….. 1,698*
Anthony Incorporated (Lessor) Entries
January 1, 2020
Cash …………………………………………………………………….. 12,471
Unearned Lease Revenue …………………………..…… 12,471
PROBLEM 21.16
(a) The lease will be classified as an operating lease for both the lessee and the
lessor. The lease does not transfer ownership at the end of the lease term,
does not have a bargain purchase option, and the asset is not specialized.
(b)
DAWKINS COMPANY
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (6%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$29,810
1/1/21
Lease Expense Schedule
Date
(B)
Interest (6%) on
Lease Liability
(C)
Amortization
of ROU Asset
(A–B)
Carrying Value
of ROU Asset
1/1/20
$29,810
12/31/20
PROBLEM 21.16 (Continued)
(c)
January 1, 2020
Right-of–Use Asset ………………………………………………… 29,810
Lease Liability ……………………………………………….. 29,810
(see calculation in part a)
(d)
January 1, 2020
Cash …………………………………………………………………….. 10,521
Unearned Lease Revenue …………………………..…… 10,521
PROBLEM 21.16 (Continued)
(e) When a lessee elects to use the short-term lease option, the company need
not recognize a lease liability or right-of-use asset on its books. Instead, the lessee
expenses payments as they are made.
PROBLEM 21.17
(a) The lease is an operating lease to the lessee and lessor because:
1. it does not transfer ownership,
2. it does not contain a bargain purchase option,
5. it does not meet the specialized asset test.
At least one of the five tests would have had to be satisfied for the lease to
be classified as other than an operating lease.
(b) Lessee’s Entries
1/1/20
Right-of–Use Asset …………………………………………………… 209,375
PROBLEM 21.17 (Continued)
ABRIENDO CONSTRUCTION
Lease Amortization Schedule (partial)
Annuity-Due Basis
Date
Annual
Payment
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$209,375
Lease Expense Schedule (partial)
Date
(A)
Lease Expense
(Straight-Line)
(B)
Interest (8%) on
Lease Liability
(C)
Amortization
of ROU Asset
(A–B)
Carrying Value
of ROU Asset
1/1/20
$209,375
12/31/20
Lease Expense ………………………………………………………… 48,555
Right-of–Use Asset …………………………………………… 35,689
Lease Liability ………………………………………………….. 12,866
Lessor’s Entries
PROBLEM 21.17 (Continued)
12/31/20
Depreciation Expense ……………………………………………… 32,143
(c) Abriendo as lessee must record both a lease liability, as well as a right-of-use
asset. The first cash payment is a total reduction of the lease liability (as no
time has passed, and thus no interest has accrued). At the end of the year,
Abriendo must make an accrual for the annual lease expense. In this case,
Cleveland as lessor must disclose in the balance sheet or in the notes the cost
of the leased crane ($240,000) and the accumulated depreciation of $32,143
separately from assets not leased. Additionally, Cleveland must disclose in
the notes the minimum future rentals as a total of $194,220, and for each of
the succeeding four years: 2021—$48,555; 2022—$48,555; 2023—$48,555;
2024—$48,555.
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 21.1 (Time 15–25 minutes)
Purpose—to provide the student with an understanding of the theoretical reasons for requiring certain leases to
CA 21.2 (Time 25–35 minutes)
Purpose—to provide an understanding of the factors underlying the accounting for a leasing arrangement from
CA 21.3 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the classification of three leases. The student
CA 21.4 (Time 15–25 minutes)
Purpose—to provide the student with an assignment to describe: (a) the accounting for a finance lease both at
CA 21.5 (Time 20–25 minutes)
Purpose—to provide the student with a lease arrangement with a bargain-purchase option in order to examine
the ethical issues of lease accounting.
CA 21.6 (Time 30–40 minutes)
Purpose—to develop a memo to your audit supervisor to discuss: (a) why you inspected the lease agreement,
*CA 21.7 (Time 15–25 minutes)
Purpose— The student is required to discuss the accounting issues related to a sale-leaseback.
CA 21.1
(a) The FASB believes that the reporting of an asset and liability for a lease arrangement is
consistent with the conceptual framework definition of assets and liabilities. That is, assets are
probable future economic benefits obtained or controlled by a particular entity as a result of past
(b) Evans should account for this lease at its commencement as an asset and an obligation at an
amount equal to the present value at the beginning of the lease term of lease payments during
(c) Evans will incur interest expense equal to the interest rate used to capitalize the lease at its
commencement multiplied by the appropriate net carrying value of the lease liability at the
(d) The right-of-use asset recorded under the finance lease should be classified on Evans’
December 31, 2020, balance sheet as noncurrent and should be separately identified by Evans
CA 21.2
(a) (1) Because the present value of the lease payments is greater than 90 percent of the fair
value of the asset at commencement of the lease, Sylvan should record this as a finance
lease.
(2) Since the given facts state that Sylvan (lessee) does not have access to information that
would enable determination of Breton Leasing Corporation’s (lessor) implicit rate for this
(3) The amount recorded as an asset on Sylvan’s books should be shown in the non-current
asset section of the balance sheet as “Right–of-Use Asset or another similar title. At the
same time as the asset is recorded, a corresponding liability (“Lease Liability” or similar
title) is recognized in the same amount. This liability is classified as both current and
(4) The lessee should make the following qualitative disclosures:
• Nature of its leases, including general description of those leases.
• How variable lease payments are determined.
In addition, the quantitative information that should be disclosed for the lessee is follows:
• Total lease cost
• Finance lease cost, segregated between the amortization of the right–of-use assets
and interest on the lease liabilities
(b) (1) Based on the given facts, Breton has entered into a sales-type lease. The discounted
present value of the lease payments is in excess of 90 percent of the fair value of the asset
at commencement of the lease arrangement and collectibility of lease payments is
probable.
(2) Breton should record a Lease Receivable for the present value of the lease payments and
the present value of the residual value. It might be noted that since the residual value is
(3) During the life of the lease, Breton will record payments received as a reduction in the
receivable. Interest is recognized as interest revenue by applying the implicit interest rate
(4) Breton must make the following disclosures with respect to this lease:
▪ Lease-related income, including profit and loss recognized at lease commencement for
sales-type, and Interest income.
CA 21.3
(a) A lease should be classified as a finance lease when it transfers substantially all of the benefits
and risks inherent to the ownership of property by meeting any one of the five tests for
classifying a lease as a finance lease.
(b) For Lease L, Santiago Company should record as a liability at the commencement of the lease
an amount equal to the present value of the lease payments during the lease term.
(c) For Lease L, Santiago Company should allocate each lease payment between a reduction of
the liability and interest expense so as to produce a constant periodic rate of interest on the
remaining balance of the liability. Thus, the interest expense and amortization of the right-of-use
asset will not equal the lease payment.
For Lease M, Santiago Company should allocate each lease payment in the same manner as
for Lease L.
CA 21.4
Part 1
(a) A lessee would account for a finance (and an operating lease) as an asset and a liability at the
commencement of the lease. For a finance lease, rental payments during the year are allocated
between a reduction in the liability and interest expense. The asset is amortized in a manner
consistent with the lessee’s normal depreciation policy for owned assets, except that in most
circumstances, the period of amortization would be the lease term.
(b) If the lease does not meet any of the lease classification tests for a finance lease, a lessee
Part 2
(a) A lease receivable is recorded in as sales-type lease by the lessor. The lease receivable is the
present value of the lease payments plus the present value of the unguaranteed residual value
CA 21.5
(a) The ethical issues are fairness and integrity of financial reporting versus profits and possibly
misleading financial statements. On one hand, if Buchanan can substantiate her position, it is
possible that the agreement should be considered an operating lease. On the other hand, if
Buchanan cannot or will not provide substantiation, she would appear to be trying to manipulate
the financial statements to reduce the recorded lease liability, to increase net income in the
earlier years of the lease term, and/or get straight-line lease expense reporting.
*CA 21.6
Memorandum Prepared by: (Your Initials)
Date:
HOCKNEY, INC.
December 31, 2020
Reclassification of Leased Auto
as a Finance Lease
While performing a routine inspection of the client’s garage, I found a used automobile which was not
listed among the company’s assets in the equipment subsidiary ledger. I asked Stacy Reeder, plant
manager, about the vehicle, and she indicated that because it was only being leased, it was not listed
I advised the client to capitalize this lease at the present value of its rental payments: $5,778 (the present
value of the monthly payments). After inquiring of management about the residual value expected at the
end of the lease agreement, and ensuring management’s significant judgments and assumptions were
reasonable, I determined that the expected residual value of the lease equals the guaranteed residual, and
To account for the first year’s payments as well as to reverse the original entries, I advised the client
to make the following entry: