21-1
CHAPTER 21
ACCOUNTING FOR LEASES
CONTENT ANALYSIS OF EXERCISES AND PROBLEMS
Number
Content
Time Range
(minutes)
E21-1
Operating Lease. (Easy) Annual rental payments, no
renewable option clause, executory costs. Lessee’s journal
entries to record agreement, payments, expenses.
5-10
E21-4
Direct Financing Lease. (Moderate) Calculation of rental
receipts, made at end of year. Table summarizing rental
receipts, interest revenue. Journal entries.
10-15
E21-5
Direct Financing Lease. (Easy) Journal entries to record
contract, first rental receipt.
5-10
E21-9
Sales-Type Lease / Capital Lease. (Moderate) Computation of
lease payments. Journal entries for lessor and lessee.
10-15
21-2
Number
Content
Time Range
(minutes)
E21-12
Determining Type of Lease. (Moderate) Title passes at lease-
end, collectibility reasonably assured, no uncertainties
surrounding costs to be incurred. Table summarizing receipts,
revenue. Lessor’s journal entries.
15-20
P21-1
Determining Type of Lease. (Moderate) No bargain purchase
option, no agreement to transfer ownership at lease-end, no
uncertainties surrounding costs to be incurred. Journal entries
for lessee and lessor. Guaranteed residual value.
30-40
P21-2
Determining Type of Lease. (Moderate) Lessor’s viewpoint.
Option to buy, collectibility reasonably assured, no
uncertainties surrounding costs. Journal entries, disclosure
requirements.
25-35
P21-6
Direct Financing Lease. (Moderate) Unguaranteed residual
value. Computation of rental amounts. Table summarizing
lease and interest receipts. Journal entries.
30-40
Number
Content
Time Range
(minutes)
P21-10
Initial Direct Costs. (Moderate) Analysis for various lease
classifications. Determination of lessor’s lease classification.
Discussion of lessor’s journal entries.
20-30
contracts.
P21-14
(Appendix). Determining Types of Leases. (Moderate) For
lessee, for lessor. Lease of land. No bargain purchase option,
collectibility reasonably assured, no uncertainties surrounding
10-20
ANSWERS TO QUESTIONS
Q21-1 GAAP provides a common set of criteria for determining the classification of leases
by both the lessee and the lessor.
Q21-2 The advantages of leasing for the lessee include:
1. Financing benefits:
a. The lease provides 100% financing so that the lessee acquires the asset
2. Risk benefit: The lease may reduce the risk of obsolescence for the lessee.
4. Financial reporting benefit: For operating leases, the lease does not add an asset
or a liability to the lessee’s balance sheet.
5. Billing benefit: For certain contract-type work, leasing may permit higher charges
21-4
Q21-3 By structuring the terms of the lease so that it qualifies as an operating lease, the
lessee avoids having to include the asset and the liability in the balance sheet.
Q21-4 a. A lease is “an agreement conveying the right to use property, plant, or
equipment (land and/or depreciable assets), usually for a stated period of time.”
b. A sales-type lease for the lessor is a lease that meets any one of the Column A
criteria and both of the Column B criteria in Exhibit 20-2, and results in a
Q21-5 a. Inception of lease is the date of the lease agreement; or, if the leased property is
being constructed, the date that the title passes to the lessor.
b. Bargain purchase option is a provision allowing the lessee to purchase the leased
property at the end of the life of the lease at a price so favorable that the
Q21-5 (continued)
e. Initial direct costs are costs incurred by the lessor to originate a lease that (1)
Q21-6 If there is a bargain purchase option, the components of the minimum lease
payments are: (1) the minimum periodic rental payment required by the lease over
Q21-7 The criteria for a capital lease are:
1. Transfer of ownership at end of lease
Q21-8 Under an operating lease, the lessee records each rental payment as rent expense;
no amount is capitalized. The lessor records each rental receipt as rent revenue. The
leased asset is retained on the lessor’s books and is depreciated by the lessor.
Q21-9 Under a capital lease, the lessee records the present value of the minimum lease
Q21-10 The two additional criteria for a sales-type lease are:
1. Collectibility of the minimum lease payments is reasonably assured.
21-6
Q21-11 The basic difference in accounting for a sales-type lease is that the carrying value of
the asset is charged to cost of asset leased (expense), and the present value of the
Q21-12 The FASB states that the interest revenue from a lease is recognized so as to yield a
Q21-13 Owens Company records the lease as a capital lease due to the bargain purchase
option, and depreciates the asset over its estimated economic life.
Q21-14 The original lease was a capital lease and McFarland Company is relieved of its
Q21-15 a. Lessee’s disclosure:
1. For all leases, a general description of the leasing arrangement
2. For operating leases having lease terms in excess of one year:
3. For all operating leases, rental expense for each period
4. For capital leases:
Q21-15 (continued)
a.4. (continued)
b. Lessor’s disclosure:
1. A general description of all leasing arrangements
2. For operating leases:
3. For direct financing and sales-type leases:
(a) The components of the net investment in direct financing and sales-type
leases including:
(1) The future minimum lease payments to be received Including any
profit thereon
Q21-16 IFRS classify leases as either finance leases or operating leases. A finance lease is
equivalent to a capital lease under U.S. GAAP.
Q21-17 In general, IFRS provide a series of indicators that, individually or in combination,
normally lead a lease to be classified as a finance lease. U.S. GAAP contains a series
of four criteria which, if any one is met, will result in the classification of a lease as a
21-8
Q21-18 The primary accounting issue in accounting for a sales-leaseback transaction from
the seller-lessee’s viewpoint is the recognition of a profit or a loss on the sale. Any
Q21-19 The fact that there are three or four parties (equity participant, asset user, debt
ANSWERS TO MULTIPLE CHOICE
SOLUTIONS TO REVIEW EXERCISES
RE21-1
Classification Criteria Criteria Met? Remarks
1. Transfer of ownership at end of lease No
RE21-2
RE21-3
Classification Criteria Criteria Met? Remarks
1. Transfer of ownership at end of lease No
RE21-4
Jan, 1
Leased Equipment 250,000.00
21-10
RE21-4 (continued)
Depreciation Expense: Leased Equipment 50,000.00*
RE21-5
Jan, 1
Leased Equipment 275,000.00
Capital Lease Obligation 275,000.00
RE21-6
PV of lease payments = $25,000 x 6.710081 = $167,752
PV of single sum of $4,000 = $4,000 x 0.463193 = 1,853
Present value of minimum lease payments $169,605
RE21-7
RE21-8
21-11
RE21-9
Jan, 1
Lease Receivable ($65,949.37 x 5) 329,746.85
Equipment 250,000.00
RE21-10
Jan, 1
Lease Receivable 329,746.85
Sales Revenue 250,000.00
SOLUTIONS TO EXERCISES
Note to Instructor: Although students may use their calculators or software to make
E21-1 1. Determination of Lease Classification
Criteria Met Remarks
1. Transfer of ownership at
end of lease No Reverts to lessor
2. 2010
Dec. 31 Rent Expense 100,000
Cash 100,000
E21-2 1. Determination of Lease Classification
Criteria Met Remarks
1. Transfer of ownership at
end of lease No
E21-2 (continued)
Criteria Met Remarks
3. Lease term is 75% or more
of economic life Yes 100%
3. Summary of Lease Payments and
Interest Expense for the Sax Company
(1)
Date
(2)
Lease
Payment
Required
(3)
Interest Expense
at 12% on
Obligation Balancea
(4)
Reduction
of Lease
Obligationb
(5)
Balance of
Obligationc
January 1, 2010
$300,000.00
4. 2010
Jan. 1 Leased Equipment 300,000
Capital Lease Obligation 300,000
E21-2 (con tin ued)
4. (continued)
Dec. 31 Depreciation Expense:
Leased Equipment 60,000
5. Under U.S. GAAP, the Sax Company would classify the lease as an operating
lease. The lease does not meet either of the first two criteria. The third criterion
is not met since the 3-year lease life is 60% of the economic life of 5 years. The
E21-3
1. Application of Criteria for Determination
of Lease Classification from Lessee’s Viewpoint
Group I Criteria Met Remarks
1. Transfer of ownership No
21-15
E21-3 (con tin ued)
1. (continued)
Since the lease meets at least one of the Column A criteria, it is a capital
lease.
2. Summary of Lease Payments and Interest Expense
for the Adden Company
(1)
Date
(2)
Annual Lease
Payment
(3)
Interest at 12%
on Unpaid
Obligation
(4)
Balance of
Capital
Lease
Obligation
January 1, 2010 Before the initial payment $68,036.62
3. 2010
Jan. 1 Leased Equipment 68,036.62
Capital Lease Obligation 68,036.62
E21-3 (continued)
3. (continued)
Dec. 31 Depreciation Expense:
Leased Equipment 17,009.16
Accumulated Depreciation: Leased
Equipment ($68,036.62 ÷ 4) 17,009.16
E21-4
21-17
Summary of Lease Payments Received
and Interest Revenue Earned
by the Rexon Company
(1)
Date
(2)
Annual
Lease
Payment
Received
(3)
Interest
Revenue at
14% 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
$107,785.01
$70,000.00a
$37,785.01b
$862,280.08
754,495.07c
$362,280.08
292,280.08d
$500,000.00
462,214.99e
E21-4 (continued)
2.
21-18
E21-4 (continued)
3. 2010
Jan. 1 Lease Receivable 862,280.08
Equipment 500,000.00
Unearned Interest: Leases 362,280.08
E21-5
Proof that the yield is 1%:
thus37.973959;isittext;ingivennotis
1%i48,n
PV ==
PV of lease payments received = Monthly lease payment x PV factor
for 48 receipts at 1%
E21-6
1. Annual lease payment = 14%atadvanceinyears5forfactorPV
equipmettheofCost
(1)
Lessee
Company
Lessor
Company
Date
(2)
Lease
Payment
Required
Lease
Rental
Collected
(3)
Interest at 14%
on Unpaid
Obligation
Interest at 14%
on Net Investment
(4)
Balance of
Lease
Obligation
Net
Investmenta
January 1, 2010 $30,000.00
21-20
E21-6 (con tin ued)
Lease Unearned Net
Date Receivable Interest: Leases Investment
01/01/10 $38,326.801 $8,326.802 $30,000.00
2. Lessor Leasing Company:
2010
Jan. 1 Lease Receivable ($7,665.36 x 5) 38,326.80
Equipment 30,000.00
=
–