EXERCISE 21.11 (20–30 minutes)
(a) The lease agreement has a bargain-purchase option. The collectibility of the
lease payments by Mooney is probable. The lease, therefore, qualifies as a sales-
type lease from the viewpoint of the lessor.
The lease payments associated with this lease are the periodic annual rents plus
the bargain purchase option. There is no residual value relevant to the lessor’s
accounting in this lease.
The lease receivable is computed as follows:
¥20,471.94 Annual rental payment
X 4.31213 PV of an annuity-due of 1 for n = 5, i = 8%
¥88,277.67 PV of periodic rental payments
(b) MOONEY LEASING (Lessor)
Lease Amortization Schedule
Date
Annual Lease
Payment Plus
BPO
Interest (8%)
on Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
5/1/19
¥91,000.00
5/1/19
¥ 20,471.94
¥20,471.94
5/1/22
5/1/23
¥91,000.00
EXERCISE 21.11 (Continued)
5/1/19
(c) Lease Receivable …………………. 91,000.00
Cost of Goods Sold ……………… 65,000.00
Sales Revenue ………………. 91,000.00
5/1/20
Cash……………………………………. 20,471.94
Lease Receivable ………….. 18,591.19
Interest Revenue …………… 1,880.75
(¥5,642.24 – ¥3,761.49)
12/31/20
EXERCISE 21.11 (Continued)
5/1/19
Cash …………………………………………………………………….. 20,471.94
Deposit Liability ……………………………………………… 20,471.94
EXERCISE 21.12 (20–25 minutes)
(a) This is a finance (sales-type) lease to Benson since the lease term is 75%
(6 ÷ 8) of the asset’s economic life. In addition, although the lease payments
(b) Computation of annual rental payment (by the lessor):
Fair value of leased asset ……………………………………………………… $150,000
Less: Present value of bargain-purchase option
EXERCISE 21.12 (Continued)
1/1/19
(c) Lease Receivable ………………………. 150,000*
Cost of Goods Sold …………………… 120,000
12/31/19
Lease Receivable ………………………. 6,100
Interest Revenue ………………… 6,100
[($150,000 – $28,005) X .05]
(d) 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, Bensen would recognize any cash receipts as a deposit liability.
EXERCISE 21.12 (Continued)
1/1/19
(e) Right-of-Use Asset ………………………… 146,677
12/31/19
Depreciation Expense ……………………. 18,335
Right-of–Use Asset ………………….. 18,335
(f) The value of the lease liability for the lessee is unaffected by any initial
direct costs incurred. However, the initial measurement of the right-of-use
asset must be adjusted for initial direct costs incurred. Thus, the initial
right-of–use asset should be measured at $148,677 ($146,677 + $2,000)
EXERCISE 21.13 (20-25 minutes)
(a) The lease will be classified as a sales-type lease for Phelps. While
ownership does not transfer at the end of the lease, there is no bargain purchase
option, the asset is not specialized, and the present value test is not met (see
calculation of lease liability for PV of lease payments), the lease term is greater
than 75% of the useful life of the asset (5 ÷ 6 = 83%).
The calculation of the lease receivable for Phelps is done as follows:
*This value should be used in performing the present value test. The lease fails
the present value test because £20,280 ÷ £23,000 = 88.2%, which is less than
90%.
*Rounded by £2.
The initial lease liability and right–of–use asset, from Walsh’s (lessee’s) point of
EXERCISE 21.13 (Continued)
(b)
Phelps’ Journal Entries
1/1/19
Lease Receivable ……………………….. 23,000*
Cash …………………………..……………… 4,703
Lease Receivable ……………….. 4,703
Walsh’s Journal Entries
1/1/19
Right-of–Use Asset ……………………… 20,280
Lease Liability ……………………. 20,280
EXERCISE 21.13 (Continued)
With respect to the initial measurement of the lease receivable, the lessor always
includes the residual value in the lease receivable, whether it is guaranteed or
not. Therefore, Phelps’ measurement of the lease receivable (£23,000) does not
change as a result of the guarantee.
(d) Walsh would need to include the present value of the amount probable to be
owed under the residual value guarantee in its initial measurement of the lease
liability. Because the expected residual value is less than the guaranteed
residual value, Walsh must include the present value of the difference, or the
amount it expects to pay Phelps at the end of the lease term. Thus, the initial
measurement of the lease liability and right-of-use asset would instead be:
EXERCISE 21.14 (20-25 minutes)
If the lessee is unaware of the rate implicit in the lease, it should use its
incremental borrowing rate to calculate the present value of the lease payments
EXERCISE 21.14 (Continued)
EXERCISE 21.15 (20–30 minutes)
The lessee determines the lease liability and right–of-use asset as follows:
(a) PLOTE AG (Lessee)
Lease Amortization Schedule
Date
Annual Lease
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease
Liability
1/1/19
€73,094.98
1/1/19
€25,562.96
€76,688.88
1/1/19
(b) Right-of-Use Asset …………………. 73,094.98
Lease Liability …………………. 73,094.98
1/1/19
EXERCISE 21.15 (Continued)
12/31/19
Interest Expense ………………………… 2,376.60
Lease Liability …………………….. 2,376.60
1/1/20
Lease Liability ……………………………. 2,376.60
Interest Expense …………………. 2,376.60
12/31/20
Interest Expense ………………………… 1,217.30
Note to instructor:
1. The lessor sets the annual rental payment as follows:
Fair value of leased asset to lessor €80,000.00
Less: Present value of unguaranteed
EXERCISE 21.16 (20-25 minutes)
(a) The calculation for the present value of lease payments is as follows:
€4,892 Annual rental payment
The lessee applies the finance lease method, based on the following
amortization schedule.
DONAHUE SA
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/19
€18,214
1/1/19
1/1/22
EXERCISE 21.16 (Continued)
(b) 1/1/19
Right-of–Use Asset …………………………. 18,214
Lease Liability ……………………… 18,214
12/31/19
Interest Expense …………………………….. 666
12/31/20
Interest Expense …………………………….. 455
1/1/20
Lease Liability ………………………………… 4,892
Cash……………………………………. 4,892
(c) Initial direct costs do not affect the value of the lease liability, but they do
change the value of the right–of–use asset. The initial measurement of the right–
EXERCISE 21.16 (Continued)
DONAHUE SA
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/19
€18,214
1/1/19
€4,892
€ 0
€4,892
13,322
1/1/20
1/1/21
1/1/22
1/1/19
Right-of–Use Asset …………………………. 18,964
12/31/19
Interest Expense …………………………….. 666
Lease Liability ……………………… 666
(d) With fully guaranteed residual value by Donahue the initial measurement of
EXERCISE 21.16 (Continued)
(e) A bargain renewal option would cause Donahue to take the additional year
(and payment) into account when determining how to classify the lease and the
initial measurement of the lease liability and right-of-use asset. However, for
EXERCISE 21.17 (25-30 minutes)
(a) Fair value of leased asset to lessor €25,000
Less: Present value of unguaranteed
residual value €8,250 X .82270
(b) 1/1/19
Cash ……………………………………………… 4,892
Unearned Lease Revenue …….. 4,892
12/31/19
Unearned Lease Revenue ……………….. 4,892
EXERCISE 21.17 (Continued)
(c) Even though the expected residual value declined, the fact that Donahue
has guaranteed a residual value of €8,250 leads Rauch to calculate rental
payments based on the same amount as if a residual value of $8,250 were
unguaranteed. That is, Rauch will look to recover through the lease payments
(d) A fully guaranteed residual value by Donahue would cause the lease to be
classified as a sales-type lease by Rauch. As a result, Rauch would recognize
sales revenue and a lease receivable at the commencement of the lease for the
(e) A bargain renewal option also would cause the lease to be classified as a
sales-type lease by Rauch, as it would cause the lease term to be 83% (5 ÷ 6 =
83%) of the economic life of the asset. Thus, the accounting for the lease by
Rauch would be essentially the same as explained in part (d). However, as sales
revenue, Rauch would only recognize the present value of the lease payments
*EXERCISE 21.18 (20–30 minutes)
Humphrey’s Restaurants (Seller-Lessee)
1/1/19
Cash ……………………………………………. 680,000
Equipment …………………………….. 600,000
Gain on Sale of Equipment …….. 80,000
HUMPHREY’S RESTAURANTS NV
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/19
€322,775
*Rounded by €1.
12/31/19
Interest Expense ………………………….. 16,544
EXERCISE 21.18 (Continued)
Liquidity Finance (Buyer-Lessor)*
1/1/19
Equipment ……………………………………. 680,000
Cash …………………………………… 680,000
*EXERCISE 21.19 (20–30 minutes)
(a) The situation described is a simple sale of equipment. Only one entry for
the sale of the equipment is required:
1/1/19
(b) The situation described is known as a failed sale. That is, the terms of the
EXERCISE 21.19 (Continued)
1/1/19
Cash …………………………………………….. 520,000.00
Note Payable ……………………….. 520,000.00
(c) The situation described is considered a sale-leaseback agreement for
financial reporting purposes. That is, the terms of the lease meet the criteria
1/1/19
Cash …………………………………………….. 520,000
Equipment …………………………... 400,000
Gain on Disposal of Equipment 120,000
EXERCISE 21.19 (Continued)
ZARLE INC.
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/19
$192,559.59
*Rounded $.03
12/31/19
Interest Expense ……………………………. 6,260.86
TIME AND PURPOSE OF PROBLEMS
Problem 21.1 (Time 25–35 minutes)
Problem 21.2 (Time 20–30 minutes)
Purpose—to develop an understanding of the accounting by the lessee for a lease. The student is required to
explain the relationship between the capitalized amount of leased equipment and the leasing arrangement.
Problem 21.3 (Time 25–30 minutes)
Purpose—to develop an understanding of the accounting for a lessee in an annuity-due arrangement. The
Problem 21.4 (Time 20–30 minutes)
Problem 21.5 (Time 20–25 minutes)
Problem 21.6 (Time 20–25 minutes)
Purpose—to develop an understanding of the accounting principles used in a finance (sales-type) lease for
Problem 21.7 (Time 30–40 minutes)
Purpose—to develop an understanding of a sales-type lease with a guaranteed residual value. The student
Problem 21.8 (Time 30–40 minutes)
Purpose—to develop an understanding of a lease with a guaranteed residual value. The student computes the