21-21
E21-6 (con tin ued)
2. (continued)
Dec. 31 Depreciation Expense:
Leased Equipment 6,000
E21-7
2. Summary of lease receipts and interest revenue:
Information needed to prepare table:
21-22
E21-7 (con tin ued)
2. (continued)
3. 2010
Jan. 1 Lease Receivable 200,000.00
Sales 151,867.45
Unearned Interest: Leases 48,132.55
Summary of Lease Payments Received and
Interest Revenue Earned by the Berne Company
(1)
Date
(2)
Annual
Lease
Payment
Received
(3)
Interest
Revenue at
12% on Net
Investment
(4)
Amount of
Net
Investment
Recovered
(5)
Lease
Receivable
(6)
Unearned
Interest:
Leases
(7)
Net
Investment
January 1, 2010
December 31, 2010
$50,000
$18,224.09a
$31,775.91b
$200,000
150,000c
$48,132.55
29,908.46d
$151,867.45
120,091.54e
21-23
E21-7 (continued)
2.
E21-8
2. Summary of lease payments received and interest revenue:
Information needed to prepare table:
Initial present value of the investment:
PV of lease payments (see part 1) $391,371.20
PV of unguaranteed residual value:
E21-8 (con tin ued)
2. (continued)
(1)
Date
(2)
Annual Lease
Payments
Received
(3)
Interest
Revenue at
14% on Net
Investment
(4)
Lease
Receivable
(5)
Unearned
Interest:
Leases
(6)
Net
Investment
Jan. 1, 2010
Jan. 1, 2010
Dec. 31, 2010
$100,000.00
$42,246.20c
$520,000.00a
420,000.00
$118,241.42b
75,995.22
$401,758.58
301,758.58
344,004.78d
3. 2010
Jan. 1 Lease Receivable 520,000.00
21-26
E21-8 (con tin ued)
3. (continued)
Jan. 1 Cash 100,000
Lease Receivable 100,000
E21-9
Summary Table for First 3 Months
(1)
Bullard
Company:
Month
(2)
Lease
Payment
Required
(3)
Interest
Expense
(4)
Balance
of Lease
Obligation
E21-9 (con tin ued)
aLease Unearned Net
Receivable Interest: Leases Investment
$70,0001 $9,183 $60,8172
1. At Lease Receivable 72,000
inception Sales ($58,817 + $2,000) 60,817
Unearned Interest: Leases
($72,000 – $60,817) 11,183
Cost of Asset Leased 50,000
Merchandise Inventory 50,000
=
E21-9 (con tin ued)
2. Computation of Lessee’s Obligation
Using the Implicit Interest Rate
*Note: By definition, the present value of the lease payments equals the
initial payment plus the present value of the remaining lease payments,
since the initial payment is at the beginning of the period.
At Leased Equipment 60,817
inception Capital Leases Obligation 60,817
Second Accrued Interest on
installment Capital Lease Obligation 588
Capital Lease Obligation 1,412
Cash 2,000
E21-9 (continued)
2. (continued)
Third Accrued Interest on
installment Capital Lease Obligation 574
Capital Lease Obligation 1,426
Cash 2,000
E21-10
Computation of the effect on income before income taxes using the sales-type
lease method
21-30
E21-10 (continued)
Incremental effect on income before income taxes
Computation of the effect on income before income taxes using the operating
lease method
Incremental effect on income before income taxes
Rental revenue $60,000
Less: Depreciation expense (34,375)
E21-11
1. Computation of Income Before Income Taxes
Derived by Reuben Company for Year Ended
December 31, 2010
Rental revenue $150,000*
Maintenance expense (20,000)
E21-12
1. Application of Criteria for Determination
of Lease Classification from Lessor’s Viewpoint
Column A Criteria Met Remarks
Column B Criteria
1. Collectibility assured Yes
E21-12 (continued)
2. Summary of lease payments received and interest revenue:
Computation of amount of lease receipts:
3. 2010
Jan. 1 Automobile Held for Lease 8,400.00
Cash 8,400.00
1 Lease Receivable 10,599.84
Automobile Held for Lease 8,400.00
Unearned Interest: Leases 2,199.84
21-33
Summary of Lease Payments Received and Interest
Revenue Earned by the Ravis Rent-A-Car Company
(by Interest Method)
(1)
Date
(2)
Annual
Lease
Payments
Received
(3)
Interest
Revenue at
10% on Net
Investment
(4)
Amount of
Net
Investment
Recovered
(5)
Lease
Receivable
(6)
Unearned
Interest:
Leases
(7)
Net
Investment
January 1, 2010
December 31, 2010
$2,649.96
$840.00a
$1,809.96b
$10,599.84
7,949.88c
$2,199.84
1,359.84d
$8,400.00
6,590.04e
21-33
E21-12 (continued)
2.
20-34
E21-13
1. Present value of lease payments = $10,000 x PV factor for 6 payments at
10%
= $10,000 x 4.355261
2. Since the first three criteria are not met, the classification of the lease depends
on the fourth criterion. A guaranteed residual value is not included in the
E21-14
1. 2010
Jan. 1 Cash 2,500,000
Land 2,000,000
Unearned Profit on Sales-Leaseback 500,000
21-34
21-35
E21-14 (continued)
2. The $500,000 unearned profit is amortized by the straight-line method over the
25 year term of the lease. The yearly entry is
21-36
SOLUTIONS TO PROBLEMS
P21-1
1. Application of Criteria for Determination
of Lease Classification
Column A Criteria Met Remarks
1. Transfer of ownership
at end of lease No
This lease is an operating lease for both the Alice Company (lessee) and the
Superior Equipment Company (lessor).
Reasons: None of the Column A criteria are met.
2. Alice Company (lessee):
21-37
P21-1 (continued)
2. (continued)
Superior Equipment Company (lessor):
2011
Jan. 1 Cash 70,000
Rental Revenue 70,000
Equipment [($500,000 – $5,000) ÷ 10] 49,500
3. Application of Criteria for Determination
of Lease Classification
Column A Criteria Met Remarks
1. Transfer of ownership
at end of lease No
This lease is a capital lease for both the Alice Company (lessee) and the
Superior Equipment Company (lessor).
Reasons:
• The lessee would classify the lease as a capital lease because one of
value = present value of the minimum lease payments).
21-38
P21-1 (continued)
3. (continued)
Alice Company (lessee):
2010
Jan. 1 Leased Equipment 305,000
Capital Lease Obligation 305,000
31 Interest Expense [12% x ($305,000 –
$66,550)] 28,614
Accrued Interest on
Capital Lease Obligation 28,614
2011
Jan. 1 Executory Costs Expense 3,450
Accrued Interest on Capital
21-39
P21-1 (continued)
3. (continued)
2014
Dec. 31 Capital Lease Obligation 64,000
Cash 64,000
Superior Equipment Company (lessor):
During Property Tax Expense 650
The Maintenance Expense 1,600
Year Insurance Expense 1,200
Cash 3,450
Dec. 31 Unearned Interest: Leases 28,614
Interest Revenue: Leases 28,614
21-40
P21-2
1. Application of Criteria for Determination
of Lease Classification
Column A Criteria Met Remarks
1. Transfer of ownership
at end of lease No
2. Two-Year Table of Lease Payment
Receipts and Interest Revenue Recognition
(1)
Date
(2)
Annual Lease
Payments
Received
(3)
Interest
Revenue at
14% on Net
Investment
(4)
Lease
Receivable
(5)
Unearned
Interest:
Leases
(6)
Net
Investment
Jan. 1, 2010
$280,000.00a
$94,909.32b
$185,090.68