BRIEF EXERCISE 21.16 (Continued)
Schedule B
Lease Expense Schedule
Date
(A)
Lease Expense
(Straight-Line)
(B)
Interest (6%) on
Lease Liability
(C)
Amortization
of ROU Asset
(A–B)
Carrying Value
of ROU Asset
1/1/20
$99,169
12/31/21
12/31/20
Lease Expense ……………………………………………………… 35,000
BRIEF EXERCISE 21.17
1/1/20
Cash …………………………………………………………………….. 35,000
Unearned Lease Revenue ……………………………….. 35,000
BRIEF EXERCISE 21.18
1/1/20
Right-of–Use Asset (2.78326* X $12,000) …………………. 33,399
Lease Liability ……………………………………………….. 33,399
Schedule A
RODGERS CORPORATION
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Reduction
of Lease
Liability
Lease Liability
1/1/20
$33,399
Schedule B
Lease Expense Schedule
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
$33,399
BRIEF EXERCISE 21.18 (Continued)
12/31/20
Lease Expense ……………………………………………………… 12,000
BRIEF EXERCISE 21.19
1/1/20
Cash …………………………………………………………………….. 12,000
Unearned Lease Revenue ……………………………….. 12,000
12/31/20
BRIEF EXERCISE 21.20
$17,000 X 2.83339* = $48,168
*Present value of an annuity due of 1 for 3 periods at 6%.
BRIEF EXERCISE 21.21
(a) The value of the lease liability would remain the same if the only fact changed
from BE 21.20 was the guarantee of the expected residual value. Residual
(b) Following from the above reasoning, if the expected residual value drops to
$5,000 and Escapee guarantees a residual of $9,000, Escapee will need to
account for the difference between the expected and guaranteed residual
BRIEF EXERCISE 21.22
12/31/2019
Right-of–Use Asset ………………………………………………… 215,544*
Lease Liability ……………………………………………….. 215,544
BRIEF EXERCISE 21.22 (Continued)
Lease Liability ………………………………………………………. 40,000
Cash ……………………………………………………………… 40,000
BRIEF EXERCISE 21.23
12/31/19
Lease Receivable …………………………..……………………… 222,593*
Cash …………………………………………………………………….. 40,000
Lease Receivable …………………………………………… 40,000
12/31/20
Cash …………………………………………………………………….. 40,000
BRIEF EXERCISE 21.24
Lease Liability
In calculating the lease liability, Forrest must determine which of the executory
costs are considered a component of the lease (to be considered in the
measurement of the lease liability).
• The real estate taxes in this case are variable payments and therefore are not
Right-of–Use Asset
The right-of–use asset is initially measured the same as the lease liability, though it
is also adjusted for any initial direct costs, prepaid rent, and lease incentives
associated with the lease. The legal fees resulting from the execution of the lease
are considered initial direct costs, and must be included in the calculation of the
right-of–use asset:
BRIEF EXERCISE 21.25
Answer: $78,998
PV of lease payments: $83,498
Cash incentive received from Badger (lessor): (5,000)
BRIEF EXERCISE 21.26
Answer: $46,551
PV of lease payments: $44,651
Cash incentive received from Highlander (lessor): (2,000)
Commissions for selling agents: 900
BRIEF EXERCISE 21.27
1/1/20
Right-of–Use Asset ………………………………………………… 33,974*
Lease Liability ……………………………………………….. 33,974
12/31/20
Interest Expense [($33,974 – $5,300) X .08] ……………… 2,294
Lease Liability ……………………………………………….. 2,294
BRIEF EXERCISE 21.28
Lease Expense ……………………………………………………… 15,000
Cash ……………………………………………………………… 15,000
*BRIEF EXERCISE 21.29
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
do not meet any of the tests to be classified as a finance lease, and thus does
not transfer control back to Irwin. Irwin will recognize a gain on the sale of the
asset, and record a right-of-use asset and corresponding lease liability for the
operating lease entered into with Peete. Subsequent accounting treatment will
follow the normal accounting for an operating lease.
1/1/20
Cash …………………………………………………………………….. 35,000
IRWIN ANIMATION
Lease Amortization Schedule
Ordinary-Annuity Basis
Date
Annual
Payment
Reduction
of Lease
Liability
Lease Liability
*BRIEF EXERCISE 21.29 (Continued)
Lease Expense Schedule
Date
(A)
Lease Expense
(Straight–Line)
(B)
Interest (6%) on
Lease Liability
(C)
Amortization of
ROU Asset (A–B)
Carrying Value
of ROU Asset
1/1/20
$23,245
12/31/20
12/31/20
Lease Expense ……………………………………………………… 8,696
Right-of–Use Asset …………………………………………. 7,301
*BRIEF EXERCISE 21.30
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 =
1/1/20
Cash …………………………………………………………………….. 35,000
Notes Payable [$8,309 X 4.21236*] …………………… 35,000
* Present value of an ordinary annuity for 5 periods at 6%.
*BRIEF EXERCISE 21.30 (Continued)
At December 31, 2020, it makes the following entry to record interest on the note
payable.
12/31/20
*BRIEF EXERCISE 21.31
The above lease will be classified as a direct financing lease for Bulls. None of
the lease classification criteria are met for a sales-type lease. That is, ownership
does not transfer at the end of the lease, there is no bargain purchase option, the
asset is not specialized, and the lease term is less than 75% of the useful life of
the asset (5 ÷ 8 = 62.5%). In addition, the present value of the lease payments is
less than 90% of the fair value of the asset, as shown below:
*BRIEF EXERCISE 21.31 (Continued)
Annual rental payments ………………………………………… $4,523
Present value of an ordinary annuity
for 5 periods at 4% …………………………………………….. x 4.45182
Present value of lease payments ………………………….... $20,136
Because the lease qualifies as a direct financing lease, the gross profit from the
lease is deferred and recognized over the course of the lease. The initial entry at
the commencement of the lease would be as follows:
*BRIEF EXERCISE 21.32
In a normal sale-type lease, Bulls would receive lease payments over the life of
the lease which, on a present value basis, equals the lease receivable of $30,000
(using a 4% return). This is demonstrated in the amortization schedule on the
next page:
*BRIEF EXERCISE 21.32 (Continued)
BULLS, INCORPORATED (Lessor)
Lease Amortization Schedule
Sales-Type Lease
Date
Annual Lease
Payment
Interest (4%)
on Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
1/1/20
$30,000
12/31/20
26,677
12/31/23
In a direct financing arrangement, Bulls will receive the same lease payments,
but will recognize lease revenue based on the rate of return that will amortize the
net lease receivable to zero (7.11% for Bulls). The following shows the direct
financing lease amortization schedule for Bulls:
BULLS, INCORPORATED (Lessor)
Lease Amortization Schedule
Direct Financing Lease
Date
Annual Lease
Payment
Interest
(7.11%) on
Receivable
Reduction of
Net Lease
Receivable
Net Lease
Receivable
1/1/20
$27,000
12/31/22
12/31/24
*BRIEF EXERCISE 21.32 (Continued)
The difference between the interest under a sales-type lease ($1,200) and the
overall revenue recognized for a direct financing lease ($1,920) is the amount of
deferred gross profit that is amortized in the current period ($720).
SOLUTIONS TO EXERCISES
EXERCISE 21.1 (15–20 minutes)
Note to Instructor: This is a finance lease, as 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
12/31/19
Right-of-Use Asset …………………………..……… 15,000
Lease Liability ……………………………….. 15,000
12/31/20
12/31/21
Interest Expense
[($15,000 – $4,352.82) X 8%] …………………… 851.77
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) This is a finance lease to Burke since the lease term (5 years) is greater than
75% of the economic life (6 years) of the leased asset. The lease term is
(c)
12/31/19
Right-of–Use Asset ……………………………………………. 39,404
Lease Liability …………………………………………….. 39,404
LO: 2, 4 Bloom: AN, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 21.3 (20–25 minutes)
(a) To Delaney, the lessee, this lease is a finance lease because the terms
satisfy the following tests:
1. The lease term is greater than 75% of the economic life of the leased
asset; that is, the lease term is 831/3 % (50/60) of the economic life.
2. The present value of the lease payments for purposes of classifying the
Note to the Instructor: The lease payments used in the calculation of the
present value for classification purposes for the lessee include the full
amount of any guaranteed residual value by the lessee. This contrasts
with the calculation of the present value of lease payments to determine
the lease liability, as seen in (b).
(b) The present value of lease payments, for purposes of determining the lease
liability for the lessee, are different than the present value of lease payments
in determining the classification of the lease when a residual value is
guaranteed by the lessee. That is, to determine the lease liability, the lessee
EXERCISE 21.3 (Continued)
(c) Right-of–Use Asset ……………………………………………. 8,873
Lease Liability …………………………………………….. 8,873
(g) As explained in part (b), 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) The lease will be treated as a finance lease for Kimberly-Clark because the
lease meets both the economic life test and the present value test. That is,
1. the present value test in that the present value of the payment is $525,176
*Present value of an annuity due of 1 for 10 periods at 8%.
**Present value of $1 for 10 periods at 8%.
Note that for purposes of calculating the initial lease liability, however, the
$ 71,830 Annual rental payment
X 7.24689 PV of annuity due of 1 for n = 10, i = 8%
$ 520,544 PV of periodic rental payments
EXERCISE 21.4 (Continued)
12/31/19
Right-of–Use Asset …………………………. 521,934
Lease Liability ……………………… 521,934
Lease Liability ………………………………… 35,822
Interest Expense
(See Schedule 1) …………………………... 36,008
Cash……………………………………. 71,830
12/31/21