E21-9B (20–30 minutes)
Note: The lease agreement has a bargain purchase option. The collectibility of
the lease payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by the lessor. The
lease, therefore, qualifies as a capital lease from the viewpoint of the lessor.
(a) The lease receivable is computed as follows:
$ 31,415.63 Annual rental payment
X 4.99271 PV of annuity due of 1 for n = 6, i = 8%
$156,849.13 PV of periodic rental payments
E21-9B (Continued)
(b) EARTH LEASING CORPORATION (Lessor)
Lease Amortization Schedule
Date
Annual Lease
Payment Plus
BPO
Interest (8%)
on Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
10/1/14
$160,000.00
10/1/14
$ 31,415.63
$ 31,415.63
128,584.37
10/1/15
10/1/16
10/1/17
10/1/18
10/1/19
5,000.00
$160,000.00
(c) 10/1/14 Lease Receivable ……………………….. 160,000.00
Cost of Goods Sold ……………………. 120,000.00
Sales ………………………………….. 160,000.00
Inventory …………………………….. 120,000.00
E21-9B (Continued)
10/1/14 Cash …………………………………………… 31,415.63
Lease Receivable ………………….. 22,819.19
Interest Receivable ……………….. 2,149.11
E21-10B (15–25 minutes)
(a) Fair market value of leased asset to lessor …………………. $850,000
Less: Present value of unguaranteed
residual value $92,547 X .54027
(b) HORIZON LEASING INC. (Lessor)
Lease Amortization Schedule
Date
Annual Lease
Payment Plus
URV
Interest (8%)
on Lease
Receivable
Recovery of
Lease
Receivable
1/1/14
1/1/14
$ 128,900
$128,900
1/1/15
128,900
$ 57,688
71,212
1/1/16
128,900
76,909
1/1/17
128,900
83,062
1/1/18
128,900
89,707
1/1/19
128,900
96,883
128,900
128,900
6,859 *
$1,123,747
$273,747
$850,000
E21-10B (Continued)
(c) 1/1/14 Lease Receivable ………………………… 71,212
Equipment …………………………... 71,212
E21-11B (20–30 minutes)
Note: This lease is a capital lease to the lessee because the lease term
(6 years) exceeds 75% of the remaining economic life of the asset (7 years).
(a) CHELLS, INC. (Lessee)
Lease Amortization Schedule
Date
Annual Lease
Payment
Interest (9%)
on Liability
Reduction
of Lease
Liability
Lease Liability
1/1/14
$448,074.52
1/1/14
$ 91,637.36
$ 91,637.36
356,437.16
1/1/15
1/1/16
1/1/18
1/1/19
91,637.36
E21-11B (Continued)
(b) 1/1/14 Leased Equipment Under
Capital Leases ……………………….. 448,074.52
Lease Liability …………………….. 448,074.52
12/31/14 Interest Expense ……………………….. 32,079.34
Interest Payable ………………….. 32,079.34
Depreciation Expense ………………… 74,679.09
Accumulated Depreciation—
Capital Leases …………………. 74,679.09
($448,074.52 ÷ 6 = $74,679.09)
E21-11B (Continued)
12/31/15 Interest Expense ………………………… 26,719.12
Interest Payable ………………….. 26,719.12
Note:
1. The lessor sets the annual rental payment as follows:
Fair market value of leased asset to lessor ………………. $460,000.00
Less: Present value of unguaranteed
2. The unguaranteed residual value is not subtracted when depreciating
the leased asset.
E21-12B (10–20 minutes)
(a) Entries for Alphabet Company are as follows:
E21-12B (Continued)
12/31/14 Cash …………………………………………….. 600,000
Rental Revenue ………………………. 600,000
(b) Entries for Numbers, Inc. are as follows:
12/31/14 Rent Expense ……………………………….. 600,000
Cash ……………………………………… 600,000
E21-13B (15–20 minutes)
(a) Annual rental revenue …………………………………………………… $260,000
E21-14B (15–20 minutes)
(a) COUPONS FOR EVERYONE, INC.
Rent Expense
For the Year Ended December 31, 2014
$166,667
(b) KINGS FINANCIAL
Income or Loss from Lease before Taxes
For the Year Ended December 31, 2014
Rental revenue ($500,000 X 4/12) …………….. $166,667
Less expense
Depreciation…………………………………….. $153,333**
*E21-15B (20–30 minutes)
N-Tech (Lessee)*
1/1/14 Cash ……………………………………………. 1,500,000.00
Computer ……………………………… 900,000.00
*E21-15B (Continued)
Throughout 2014
Executory Costs ………………………….. 15,000.00
Accounts Payable or Cash …….. 15,000.00
12/31/14 Depreciation Expense ………………………. 187,500.00
Accumulated Depreciation
($1,500,000 ÷ 8) ………………….. 187,500.00
**The credit could also be to a revenue account.
Note:
1. The present value of an ordinary annuity at 8% for 8 periods should be
*E21-15B (Continued)
2. The unearned profit on the sale-leaseback should be amortized on the
same basis that the asset is being depreciated.
Partial Lease Amortization Schedule
Date
Annual Lease
Payment
Interest (8%)
Amortization
Balance
1/1/14
$1,500,000.00
12/31/14
$261,022.09
$120,000.00
$141,022.09
1,358,977.91
First Tech Leasing Co. (Lessor)*
*E21-16B (20–30 minutes)
(a) Sale-leaseback arrangements are treated as though two transactions
(b) The profit on the sale of $115,000 should be deferred and amortized over
the lease term. Since the leased asset is being depreciated using the
(c) In this case, Olympia would report a loss of $35,000 ($85,000 – $120,000) for
(d) A sale-leaseback is usually treated as a single financing transaction in
which any profit on the sale is deferred and amortized by the seller.
However, GAAP has an exception to this general rule when either only a