Chapter 17: Accounting for Leases
Assignment 17-5
Requirement 1
a.
The lease term is 10 years. The second five-year lease term is a bargain renewal
option, based on the information regarding market rental rates.
b.
Guaranteed residual, none.
c.
Unguaranteed residual exists as the value of the asset to the lessor at the end of the
lease term. There is no way to calculate this amount.
d.
Bargain purchase option, none.
e.
Bargain renewal terms, $29,500 per year for the second five-year lease term
f.
Minimum net lease payment:
(a) ($79,600 – $7,900) × 5 years
(b) ($29,500 – $2,500) × 5 years
g.
$358,500
135,000
$493,500
Incremental borrowing rate, 8%
Requirement 2
To be a capital lease, the lease would have to meet one of three criteria, applied
judgementally:
1. Transfer of title or BPO
2. Economic life vs. lease term
3. PV of MLP vs. fair value
No
Yes; 10/12 > 75%
Yes; $388,418* = 90% of $430,000
* PV of MLP:
(a) PV1 = ($79,600 – $7,900) (P/AD, 8%, 5)
= $71,700 × 4.31213 =
(b) PV2 = ($29,500 – $2,500) (P/AD, 8%, 5) (P/F, 8%, 5)
= $27,000 × (4.31213) × (.68058) =
$309,180
79,238
$388,418
Requirement 3
Beginning of fiscal year and lease term:
Asset under capital lease.......................................................
Lease liability...................................................................
388,418
Insurance expense .................................................................
Lease liability .......................................................................
Cash .................................................................................
7,900
71,700
388,418
79,600
End of fiscal year:
Interest expense ....................................................................
Lease liability ...................................................................
[($388,418 – $71,700) × .08]
25,337
Depreciation expense ............................................................
Accumulated depreciation ...............................................
[$388,418÷ 10]
38,842
25,337
38,842
Assignment 17-9
Requirement 1 – Present value of the lease payments
PV = $7,500 × (P/AD, 8%, 5) = $7,500 × (4.31213) = $32,341
The present value is 90% of the fair value of $36,000. Also, the lease is for a major
portion (5/7) of the equipment’s economic life. The remaining two years of life (after
the end of the lease term) are not likely to be of any value to NLC. Thus, this clearly
is a finance lease.
Requirement 2 – Amortization table
Year
Outstanding
Balance
20x1
20x2
20x3
20x4
20x5
32,341
24,841
19,328
13,374
6,944
Interest
at 8%
—
1,987
1,546
1,070
556
1 October
Cash Flow
Inc/(Dec)
in Balance
Ending
Balance
(7,500)
(5,513)
(5,954)
(6,430)
(6,944)
24,841
19,328
13,374
6,944
0
7,500
7,500
7,500
7,500
7,500
Requirement 3 – Entries for 20X1 and 20X2
1 October 20x1:
Asset under capital lease .....................................................
Lease liability ................................................................
Lease liability ......................................................................
Cash...............................................................................
31 December 20x1:
Interest expense ($24,841 × 8% × 3/12) .............................
Lease liability ................................................................
Depreciation expense ($32,341 × 3/60) ..............................
Accumulated depreciation—leased asset ......................
1 October 20x2:
Lease liability ......................................................................
Cash...............................................................................
31 December 20x2:
Interest expense* .................................................................
Lease liability ................................................................
Depreciation expense ($32,341 × 12/60) ............................
Accumulated depreciation, asset under lease................
*($24,841 × 8% × 9/12) + ($19,328 × 8% × 3/12)
= $1,490 + $387 = $1,877
32,341
32,341
7,500
7,500
497
497
1,617
1,617
7,500
7,500
1,877
1,877
6,468
6,468
Requirement 4
Lease liability, 31 December 20X2:
32,341 – 7,500 + 497 – 7,500 + 1,877 = 19,715
Reconciliation to amortization table:
Lease balance after 2nd payment =
3/12 of 3rd year interest = 1,546 × 3/12 =
$19,328
387
$19,715
Requirement 5
The current liability is the amount of principal payment on 1 October 20X3, plus the
interest accrued between 1 October 20X2 and 31 December 20X2:
Principal component of 1 Oct 20X3 payment* ....................... $ 5,954
Accrued interest (see requirement 4, above) ...........................
387
Current portion of lease ........................................................
6,341
Long-term portion ($19,715 – $6,341) ................................
13,374
Lease liability, total ................................................................. $19,715
* from amortization table
Assignment 17-11
Requirement 1
The lease is a finance lease to the lessee because the term, including the three
bargain renewal terms, is substantially equal to the economic life of the asset. The
PV of the MLP’s is equal to 96% of the asset’s fair value ($17,316* ÷ $18,000)
*PV:
(a) ($5,800 – $1,700) (P/AD, 12%, 5) = $4,100 × (4.03735) ......................
(b) ($2,600 – $2,100) (P/AD, 12%, 3) (P/F, 12%, 5)
= $500 × (2.69005) × (.56743) ......................................................
$16,553
763
$17,316
Requirement 2 – Lease Amortization Schedule, Beginning of Lease Year Payments
Lease
Year
Outstanding
Balance
20x2
20x3
20x4
20x5
20x6
20x7
20x8
20x9
$17,316
13,216
10,702
7,886
4,732
1,200
844
445
Interest
at 12%
$
0
1,586
1,284
946
568
144
101
54
$4,683
1 January
Payment
$4,100
4,100
4,100
4,100
4,100
500
500
500
Inc/(Dec)
in Balance
$(4,100)
(2,514)
(2,816)
(3,154)
(3,532)
(356)
(399)
(446)
Ending
Balance
$13,216
10,702
7,886
4,732
1,200
844
445
(1) rounding
Requirement 3 – Entries
20x2
1 January
Asset under finance lease ................. 17,316
Lease liability............................
Lease liability.................................. 4,100
Insurance and maintenance expense 1,700
Cash..........................................
31 December
Interest expense.............................
Lease liability..........................
Depreciation expense...................
Accumulated depreciation,
leased asset ($17,316 ÷ 8)...
20x3
17,316
4,100
1,700
5,800
1,586
5,800
1,284
1,586
2,165
1,284
2,165
2,165
2,165
Requirement 4
Income Statement
Maintenance and insurance expense
Interest expense
Depreciation expense
Statement of Financial Position
Capital assets
Assets under capital leases
Accumulated depreciation
Current liabilities
Current portion of lease liability
Long-term liability
Lease liability
Less: current portion
20x2
$1,700
1,586
2,165
20x3
$1,700
1,284
2,165
17,316
(2,165)
15,151
17,316
(4,330)
12,986
4,100
4,100
14,802*
4,100
10,702
11,986*
4,100
7,886
*$13,216 + $1,586; $10,702 + $1,284
Statement of Cash Flows
Operations:
Addbacks: depreciation
Increase(decrease) in interest payable
Financing:
Repayment of lease liability
2,165
1,586
(4,100)*
2,165
(302)
(2,514)**
*$17,316 – $14,802 = $(2,514); $1,586 interest and $(4,100) repayment. May also
be shown as the net $(2,514) change in lease liability. Practice differs.
**$14,802 – $11,986 = ($2,816); ($302) interest ($1,586 versus $1,284) and
$(2,514) repayment. May also be shown as the net ($2,816) change in lease
liability.
Requirement 5
Allocation of Interest Expense to Fiscal Years
Lease Payment
20X2
20X3
20X4
20X5
20X6
20X7
20X8
20X9
20X10
Implicit
Interest
Allocation
(5/12: 7/12)
Interest
Expense
Year End
0
1,586
0
661
$661
31 May 20x2
1,284
925
535
1,460
31 May 20x3
946
749
394
1,143
31 May 20x4
568
552
237
789
31 May 20x5
144
331
60
391
31 May 20x6
101
84
42
126
31 May 20x7
54
59
23
82
31 May 20x8
0
$4,683
31
0
$4,683
31
$4,683
31 May 20x9
$
Assignment 17-18
Requirement 1
20x2 31 March Cash...........................................................
Accumulated depreciation ........................
Distribution facility...............................
Deferred gain on sale and leaseback.....
9,000,000
3,600,000
Distribution facility under lease ................
Lease liability .......................................
($875,000 × P/AD 9%,20) (9.95011)
8,706,346
Lease liability ............................................
Cash ......................................................
875,000
31 Dec.
10,400,000
2,200,000
8,706,346
875,000
Interest expense .........................................
528,616
Lease liability .......................................
528,616
($8,706,346 – $875,000) × 9% × 9/12
New balance: $8,706,346 – $875,000 + $528,616 = $8,359,962
Depreciation expense ................................
Accumulated depreciation, leased
distribution facility .............................
($8,706,346 × 1/30 × 9/12)
217,659
Deferred gain on sale and leaseback .........
Depreciation expense ............................
($2,200,000 × 1/30 × 9/12)
55,000
217,659
55,000
Requirement 2
20x3 31 March Interest expense .........................................
176,205
Lease liability .......................................
176,205
($8,706,346 – $875,000) × 9% × 3/12
Lease liability ............................................
875,000
Cash ......................................................
875,000
New balance: ($8,706,346 – $875,000 + $528,616 + $176,205 –
$875,000) = $7,661,167
31 Dec.
Interest expense .........................................
517,129
Lease liability .......................................
($7,661,167 × 9% × 9/12)
Balance: $7,661,167 + $517,129 = $8,178,296
517,129
Depreciation expense ...................................
Accumulated depreciation, leased
distribution facility .............................
$8,706,346 × 1/30
Deferred gain on sale and leaseback .........
Depreciation expense ............................
$2,200,000 × 1/30
290,212
20x4 31 March Interest expense .........................................
Lease liability .......................................
($7,661,167 × 9% × 3/12)
172,376
290,212
73,333
73,333
172,376
Lease liability ............................................
875,000
Cash ......................................................
875,000
New balance : ($7,661,167 + $517,129 + $172,376 – $875,000) =
$7,475,672
Dec 31
Interest expense .........................................
504,608
Lease liability .......................................
($7,475,672 × .09 × 9/12)
New balance: $7,475,672 + $504,608 = $7,980,280
Depreciation expense ................................
Accumulated depreciation, leased
distribution facility .............................
290,212
Deferred gain on sale and leaseback .........
Depreciation expense ............................
73,333
504,608
290,212
73,333
Requirement 3
Statement of Financial Position:
20x2
Capital Assets
Distribution facility under capital lease ... $8,706,346
Less: accumulated depreciation ..............
217,659
$8,488,687
Deferred credits
Deferred gain on sale and leaseback ........ 2,145,000
20x3
20x4
$8,706,346
507,871
$8,198,475
$8,706,346
798,083
$7,908,263
2,071,667
1,998,334
Long-term liability
Lease liability ...........................................
8,359,962
8,178,296
7,980,280
Income Statement:
Interest expense ........................................
Depreciation expense ...............................
528,616
162,659
693,334
216,879
676,984
216,879
Assignment 17-24
Requirement 1
PV of lease payments: $100,000 (P/AD, 6%, 5) = $100,000 × 4.46511 = $446,511
Year
20x4
20x5
20x6
20x7
20x8
Outstanding
balance
446,511
346,511
267,301
183,339
94,340
Interest
@6%
–
20,791
16,038
11,000
5,660
cash
payment
100,000
100,000
100,000
100,000
100,000
Incr/(Decr)
in balance
(100,000)
(79,209)
(83,962)
(89,000)
(94,340)
31 Dec.
balance
346,511
267,301
183,339
94,340
0
Requirement 2
Statement of financial position:
Equipment under finance lease
Accumulated depreciation (assuming full year depreciation)
Current liability for capital lease*
Long-term liability for capital lease**
$446,511
(89,302)
$357,209
$100,000
$267,302
The total lease liability at 31 Dec 20x4 is $346,511 principal
plus $20,791 interest = $367,302.
* Of that amount, the current portion is the $100,000 due
the next day, (consisting of $79,209 principal plus
$20,791accrued interest)
** The long-term portion is (1) the total liability of $367,302
minus the next-day payment of $100,000, or
(2) the remaining principal payments: 83,962 + 89,000 + 94,340
Statement of comprehensive income, earnings section:
Depreciation expense
Interest expense (from amortization table)
$ 89,302
20,791
Cash flow statement:
Operating activities—non-cash expense add-backs:
Depreciation
Interest
Financing activities—finance lease payment
$ 89,302
20,791
100,000
Requirement 3
Yvan Limited entries for 20x5:
2 January 20x5:
Lease liability
Cash
100,000
100,000
31 December 20x5:
Interest expense
Lease liability
16,038
Depreciation expense
Accumulated depreciation—asset under finance lease
89,302
16,038
89,302
Requirement 4
Jeffrey Leasing Inc. entries for 20x5:
2 January 20x5:
Cash
100,000
Lease payments receivable
100,000
31 December 20x5:
Unrealized finance income
Finance income
16,038
16,038