EXERCISE 21.15 (Continued)
12/31/20
Interest Expense ……………………………………………. 2,376.60
Lease Liability ………………………………………….. 2,376.60
12/31/21
Interest Expense ……………………………………………. 1,217.30
Lease Liability ………………………………………….. 1,217.30
Amortization Expense ……………………………………. 24,364.99
Right-of–Use Asset ……………………………………. 24,364.99
Note to instructor:
The lessor sets the annual rental payment as follows:
EXERCISE 21.16 (20–30 minutes)
This lease is an operating lease to the lessee because none of the transfer of
PLOTE COMPANY
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$70,452.63
1/1/20
Lease Expense Schedule
Date
(A)
Lease
Expense
(Straight-Line)
(C)
Amortization of
ROU Asset
(A–B)
Carrying Value
of ROU Asset
1/1/20
$70,452.63
0
Entries in 2020 are:
1/1/20
EXERCISE 21.16 (Continued)
12/31/20
Lease Expense ………………………………………………. 24,638.87
Right-of–Use Asset ………………………………….. 22,348.18
Note to instructor:
The lessor sets the annual rental payment as follows:
Fair value of leased asset to lessor $80,000
Less: Present value of unguaranteed
EXERCISE 21.17 (10–20 minutes)
(a) The lease will be classified as an operating lease for Nelson, as it does not
meet any of the classification tests to be a sales-type lease.
Entries for Nelson are as follows:
1/1/20
EXERCISE 21.17 (Continued)
12/31/20
Unearned Lease Revenue ………………………………… 275,000
Lease Revenue …………………………………………. 275,000
(b) Entries for Wise are as follows:
1/1/20
Right-of–Use Asset …………………………………………… 1,992,895
WISE INC.
Lease Amortization Schedule (partial)
Annuity-Due Basis
Date
Annual
Payment
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$1,992,895
EXERCISE 21.17 (Continued)
Lease Expense Schedule (partial)
Date
(A)
Lease
Expense
(Straight-Line)
(C)
Amortization of
ROU Asset
(A–B)
Carrying
Value of ROU
Asset
1/1/20
$1,992,895
(c) The real estate broker’s fee should be capitalized as part of the right–of–use
EXERCISE 21.18 (15–20 minutes)
(a) Overall from the leased asset, Young Co. will report $38,455 ($150,955 –
$112,500 [$900,000 / 8]) for 2020 when netting the lease revenue with
depreciation expense.
EXERCISE 21.18 (Continued)
12/31/20
Unearned Revenue ………………………………………….. 150,955
Lease Revenue …………………………………………. 150,955
(b) Lessee Entries for 2020:
1/1/20
Right-of–Use Asset …………………………………………… 427,714*
ST. LEGER INC.
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (6%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$427,714
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
$427,714
EXERCISE 21.18 (Continued)
12/31/20
Lease Expense ………………………………………………… 150,955
Lease Liability ………………………………………….. 16,606*
(c) Under the short-term lease election, St. Leger will not need to record the
right-of–use asset or lease liability on its books. Instead, the company can
expense lease payments as incurred.
EXERCISE 21.19 (20-25 minutes)
(a) The lease is an operating lease to both Moeller and Kaluzniak, as none of the
classification tests are met. The lease term is only 43% (3 ÷ 7) of the economic life of
the asset, there is no bargain purchase, ownership does not transfer, and the asset
is not specialized. The calculation for the 90% test shows the present value of lease
payments is below 90% ($3,222 ÷ $7,000 = approximately 46%) and ($3,165 ÷ $7,000 =
approximately 45%):
Kaluzniak Corporation
EXERCISE 21.19 (Continued)
(b) 1/1/20
Right-of–Use Asset ………………………………………. 3,165
MOELLER COMPANY
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
1/1/21
0
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
$3,165
12/31/20
Lease Expense ……………………………………………. 1,137
EXERCISE 21.19 (Continued)
(c) As always, the first step will be determining the initial value of the lease
liability. In this case, initial direct costs and prepayments do not affect the value
of the lease liability (though they will affect the value of the right–of-use asset).
With respect to executory costs, only those considered to be part of fixed
payments to the lessor should be included in the initial measurement of the
*Present value of an annuity due of 1 for 3 periods at 8%.
The initial measurement of the right-of-use asset will be increased for any initial
direct costs (i.e. commissions) and any prepayments. As a result, the calculation
(d) This lease qualifies for the short-term lease election for Moeller, as it is one
year or less. Assuming that Moeller elects to use the short-term lease option, the
company records lease expense when payments are made to the lessor. Thus,
Moeller accounts for the lease as follows:
EXERCISE 21.20 (20-25 minutes)
(a) Fair value of leased asset to lessor $7,000
Less: Present value of unguaranteed
(b) Because this is an operating lease to Kaluzniak, the asset is not
derecognized, but rather kept on the books and depreciated as normal. Lease
(c) For a lessor, initial direct costs (in this case, legal fees) incurred in
accordance with an operating lease should be amortized and expensed over the
term of the lease. However, internal costs in this case, (advertising) occur
whether a lease was executed or not, and as a result should be expensed as
incurred. Thus, for 2020, the following entries are made:
EXERCISE 21.20 (Continued)
12/31/20
EXERCISE 21.21 (20-25 minutes)
(a) The lease is an operating lease for both Rauch and Donahue, as none of the
classification tests are met. The lease term is only 67% (4 ÷ 6) of the economic life of
(b)
DONAHUE CORPORATION
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
EXERCISE 21.21 (Continued)
Lease Expense Schedule
Date
(A)
Lease
Expense
(Straight-Line)
(C)
Amortization of
ROU Asset
(A–B)
Carrying Value
of ROU Asset
1/1/20
$18,214
(c) 1/1/20
Right-of–Use Asset ………………………………………. 18,214
Lease Liability ……………………………………… 18,214
*The accrual of the lease liability is a result of the accrual of interest related to the
lease liability, as shown in the first schedule. Note that this is expensed along with
amortization of the right-of-use asset at the end of 2020.
EXERCISE 21.21 (Continued)
(d) 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–
of-use asset will be increased for any initial direct costs. As a result, the
calculation of the right-of-use asset is as follows:
To demonstrate how this impacts the amortization of the right-of-use asset,
below are the tables associated with the lease in this situation:
DONAHUE CORPORATION
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$18,214
1/1/21
Lease Expense Schedule
Date
(A)
Lease Expense
(Straight-Line)
(B)
Interest (5%) on
Lease Liability
(C)
Amortization of
ROU Asset
(A–B)
Carrying
Value of ROU
Asset
1/1/20
$18,964
12/31/20
$5,080*
$ 666
$4,414
14,550
EXERCISE 21.21 (Continued)
1/1/20
Right-of-Use Asset …………………………. 18,964
Cash……………………………………. 750
Lease Liability ……………………… 18,214
(e) A fully guaranteed residual value by Donahue would lead to a finance lease
for the company, and thus the subsequent treatment of the right–of-use asset
and lease liability would be different. Instead of reporting a single lease expense,
(f) 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 21.22 (25-30 minutes)
(a) Fair value of leased asset to lessor $25,000
Less: Present value of unguaranteed
(b) 1/1/20
Cash ……………………………………………… 4,892
Unearned Lease Revenue …….. 4,892
(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
EXERCISE 21.22 (Continued)
(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
*EXERCISE 21.23 (20–30 minutes)
Elmer’s Restaurants (Seller-Lessee)*
1/1/20
Cash …………………………………………………………….. 680,000
Equipment ……………………………………………… 600,000
Gain on Sale of Equipment ……………………… 80,000
EXERCISE 21.23 (Continued)
ELMER’S RESTAURANTS
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (8%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$322,775
*Rounded by $1.
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
12/31/20
Lease Expense ……………………………………………… 115,970
Lease Liability ……………………………………….. 16,544
EXERCISE 21.23 (Continued)
Liquidity Finance Co. (Buyer-Lessor)*
1/1/20
Equipment …………………………………………………. 680,000
Cash ……………………………………………………. 680,000
*EXERCISE 21.24 (20–30 minutes)
(a) The situation described is a simple sale of equipment. Only one entry for
(b) The situation described is known as a failed sale. That is, the terms of the
lease meet the criteria to be classified as a finance lease to the lessee
*EXERCISE 21.24 (Continued)
1/1/20
Cash ………………………………………………………….. 520,000
Note Payable ……………………………………. 520,000
(c) The situation described is considered a sale-leaseback agreement for
financial reporting purposes. That is, the terms of the lease meet the criteria
1/1/20
Cash ………………………………………………………….. 520,000
Equipment …………………………………………… 400,000
Gain on Disposal of Equipment ……………. 120,000
*EXERCISE 21.24 (Continued)
ZARLE INC.
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (5%) on
Liability
Reduction
of Lease
Liability
Lease Liability
1/1/20
$192,559.59
*Rounded $.03
Lease Expense Schedule
Date
(A)
Lease Expense
(Straight-Line)
(B)
Interest (5%) on
Lease Liability
(C)
Amortization of
ROU Asset
(A–B)
Carrying
Value of ROU
Asset
1/1/20
$192,559.59