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
(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
affect the lease liability. The right-of-use asset must be increased as a result of
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
Annual lease payment ……………………………………………. X ¥ 40,000
2. Sales revenue is ¥289,876 (the present value of the 10 annual lease
payments) or, the lease receivable of ¥299,140 minus the PV of the un-
guaranteed residual value of ¥9,264.
3. Cost of goods sold is ¥170,736 (the ¥180,000 cost of the asset less the
PROBLEM 21.9 (Continued)
(b) Kobayashi Group (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
4
5
172,313
6
40,000
7
8
40,000
9
40,000
33,023
*Rounding 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)
Cash ………………………………………………………………… 40,000
Lease Receivable ………………………………………… 40,000
(To record receipt of the first lease
payment)
End of the Year
Lease Receivable ……………………………………………… 20,731
PROBLEM 21.10
(a) Initial Lease Liability:
(b) JAL (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
208,255
4
184,915
5
40,000
25,207
6
132,485
7
103,084
8
40,000
31,753
9
(a) Annual lease payment required by lease contract.
(b) Preceding balance of (d) X 8%, except beginning of first year of lease term.
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
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
For the lessor, it is a sales-type lease.
Note to Instructor: For purposes of measuring the initial lease liability, only
PV of Lease Liability:
PV of rental payments, $30,300 X 7.24689* …………………. $219,581
PROBLEM 21.11 (Continued)
(b) January 1, 2019
Lessee:
Right-of–Use Asset …………………………………………. 221,897
Lease Liability ………………………………………….. 221,897
(see calculation in part a)
January 1, 2019
Lessor:
Lease Receivable …………………………………………… 242,741
December 31, 2019
Lessee:
Interest Expense …………………………………………….. 15,328
December 31, 2019
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
(d) While the lessor still includes even an unguaranteed residual value in the
calculation of a lease receivable under a finance (sales-type) lease, the lack
PROBLEM 21.12
(a) The lease should be treated as a sales-type lease by Ewing. The lease
qualifies for because: (1) title to the engines transfers to the lessee, (2) the
lease term is equal to the estimated life of the asset, and (3) the present
(b) Right-of–Use Asset ……………………………………. 3,000,000
Lease Liability …………………………………….. 3,000,000
(c) Lease Receivable ……………………………………… 3,000,000
PROBLEM 21.12 (Continued)
(e) WINSTON INDUSTRIES/EWING
Lease Amortization Schedule
Date
Annual
Lease
Receipt/
Payment
Reduction in
Receivable/
Liability
Lease
Receivable/
Liability
1/1/19
€3,000,000
1/1/19
€384,532
€384,532
2,615,468
2,146,604
Lessor December 31, 2017
Lease Receivable ……………………………………… 156,928
Interest Revenue …………………………………. 156,928
(f) WINSTON INDUSTRIES
Statement of Financial Position (Partial)
December 31, 2019
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 SA
Statement of Financial Position (Partial)
December 31, 2019
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:
PROBLEM 21.13
(a) 1. £ 20,027 Interest expense (See amortization schedule)
£ 52,174 Depreciation expense (£313,043 ÷ 6 = £52,174)
2. Current liabilities:
£ 62,700 Lease liability
4. Current liabilities:
£ 42,673 Lease liability
Long-term liabilities:
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 Depreciation expense (£313,043 ÷ 6 = £52,174)
4. Current liabilities:
£ 50,240 Lease liability
PROBLEM 21.14
(a) The lease will be classified as an operating lease for 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. In addition,
neither the 75% test (3 ÷ 8 = 37.5%) nor the 90% test (calculation below) are
met.
PV of Lease Payments:
(b)
GARCIA SA
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (6%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/19
R$29,810
(c)
January 1, 2019
Right-of–Use Asset …………………………………………. 29,810
PROBLEM 21.14 (Continued)
December 31, 2019
Interest Expense …………………………………………….. 1,157
(d)
January 1, 2019
Cash ……………………………………………………………… 10,521
Unearned Lease Revenue …………………………. 10,521
(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.
As a result, if the lease were only 1 year, Garcia’s only entry for the lease would be
the following:
January 1, 2019
PROBLEM 21.15
(a) The lease is an operating lease to the 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
1/1/19
PROBLEM 21.15 (Continued)
ABRIENDO CONSTRUCTION
Lease Amortization Schedule (partial)
Annuity-Due Basis
Date
Annual
Payment
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/19
R$209,375
1/1/19
R$48,555
R$ 0
R$48,555
160,820
12/31/19
Interest Expense ……………………………………………….. 12,866
Lease Liability …………………………………………….. 12,866
PROBLEM 21.15 (Continued)
12/31/19
Depreciation Expense ……………………………………….. 32,143
Accumulated Depreciation—Leased Equipment
(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 statement of financial position or in
the notes the cost of the leased crane (R$240,000) and the accumulated
depreciation of R$32,143 separately from assets not leased. Additionally,
Cleveland must disclose in the notes the minimum future rentals as a total of