CHAPTER 21
Accounting for Leases
SOLUTIONS TO EXERCISES
EXERCISE 21-1 (15–20 minutes)
(a) This is a capital lease to Adams since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 831/3% (5 ÷ 6) of the asset’s economic life.
(b) Computation of present value of minimum lease payments: $9,968 X 4.16986* = $41,565
*Present value of an annuity due of 1 for 5 periods at 10%.
(c) 1/1/12 Leased Equipment................................... 41,565 Lease Liability.................................. 41,565
Lease Liability.......................................... 9,968 Cash................................................... 9,968
12/31/12 Depreciation Expense............................. 8,313 Accumulated Depreciation— Capital Leases.............................. 8,313 ($41,565 ÷ 5 = $8,313)
Interest Expense...................................... 3,160 Interest Payable................................ 3,160
[($41,565 – $9,968) X .10]
1/1/13 Lease Liability.......................................... 6,808 Interest Payable....................................... 3,160
Cash................................................... 9,968
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EXERCISE 21-2 (20–25 minutes)
(a) To Brecker, the lessee, this lease is a capital lease because the terms satisfy the following criteria:
1. The lease term is greater than 75% of the economic life of the leased asset; that is, the lease term is 831/3 % (50/60) of the economic life.
2. The present value of the minimum lease payments is greater than 90% of the fair value of the leased asset; that is, the present value of $10,515 (see below) is 96% of the fair value of the leased asset:
(b) The minimum lease payments in the case of a guaranteed residual value by the lessee include the guaranteed residual value. The present value therefore is:
Monthly payment of $250 for 50 months........... $ 9,800 Residual value of $1,180...................................... 715 Present value of minimum lease payments....... $10,515
(c) Leased Equipment....................................................... 10,515 Lease Liability....................................................... 10,515
(d) Depreciation Expense................................................. 186.70 Accumulated Depreciation—Capital Leases................................................................ 186.70 [($10,515 – $1,180) ÷ 50 months = $186.70]
(e) Lease Liability.............................................................. 144.85 Interest Expense (1% X $10,515)................................ 105.15
Cash....................................................................... 250.00
EXERCISE 21-3 (20–30 minutes)
Capitalized amount of the lease: Yearly payment........................................................... $90,000 Executory costs.......................................................... (3,088 ) Minimum annual lease payment................................ $86,912
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EXERCISE 21-3 (Continued)
Present value of minimum lease payments $86,911.86 X 6.32825 = $550,000.00
1/1/13 Leased Buildings............................................. 550,000 Lease Liability.......................................... 550,000
1/1/13 Executory Costs................................................ 3,088 Lease Liability.................................................. 86,912
Cash........................................................... 90,000
12/31/13 Depreciation Expense..................................... 55,000 Accumulated Depreciation— Capital Leases...................................... 55,000 ($550,000 ÷ 10)
12/31/13 Interest Expense (See Schedule 1)........................................... 55,571
Interest Payable........................................ 55,571
1/1/14 Executory Costs................................................ 3,088 Interest Payable............................................... 55,571 Lease Liability.................................................. 31,341
Cash........................................................... 90,000
12/31/14 Depreciation Expense..................................... 55,000 Accumulated Depreciation— Capital Leases...................................... 55,000
12/31/14 Interest Expense.............................................. 51,810 Interest Payable........................................ 51,810
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EXERCISE 21-3 (Continued)
Schedule 1 KIMBERLY-CLARK CORP. Lease Amortization Schedule
(Lessee)
Date
Annual Payment Less
Executory Costs
Interest (12%) on Liability
Reduction of Lease Liability Lease Liability
1/1/12 $550,000 1/1/12 $86,912 $ 0 $86,912 463,088 1/1/13 86,912 55,571 31,341 431,747 1/1/14 86,912 51,810 35,102 396,645
EXERCISE 21-4 (20–25 minutes)
Computation of annual payments Cost (fair value) of leased asset to lessor.................................. $240,000.00 Less: Present value of salvage value
(residual value in this case) $16,000 X .82645 (Present value of 1 at 10% for 2 periods)........................ 13,223.20
Amount to be recovered through lease payments.................... $226,776.80
Two periodic lease payments $226,776.80 ÷ 1.73554*.............. $130,666.42
*Present value of an ordinary annuity of 1 for 2 periods at 10%
KRAUSS LEASING COMPANY (Lessor) Lease Amortization Schedule
Date
Annual Payment Less Executory
Costs
Interest on Lease
Receivable
Recovery of Lease
Receivable Lease
Receivable
1/1/13 $240,000.00 12/31/13 $130,666.42 *$24,000.00 $106,666.42 133,333.58 12/31/14 130,666.42 * 13,332.84* 117,333.58 16,000.00
*$37,332.84
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*Difference of $.52 due to rounding.
Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e, Solutions Manual ( For Instructor Use Only) 21-5
EXERCISE 21-4 (Continued)
(a) 1/1/13 Lease Receivable......................... 240,000.00 Equipment............................ 240,000.00
12/31/13 Cash ($130,666.42 + $7,000)....... 137,666.42 Executory Costs Payable.... 7,000.00 Lease Receivable................. 106,666.42 Interest Revenue.................. 24,000.00
12/31/14 Cash.............................................. 137,666.42 Executory Costs Payable.... 7,000.00 Lease Receivable................. 117,333.58 Interest Revenue.................. 13,332.84
(b) 12/31/14 Cash.............................................. 16,000.00 Lease Receivable................. 16,000.00
EXERCISE 21-5 (15–20 minutes)
(a) Because the lease term is longer than 75% of the economic life of the asset and the present value of the minimum lease payments is more than 90% of the fair value of the asset, it is a capital lease to the lessee. Assuming collectibility of the rents is reasonably assured and no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor, the lease is a direct financing lease to the lessor.
The lessee should adopt the capital lease method and record the leased asset and lease liability at the present value of the minimum lease payments using the lessee’s incremental borrowing rate or the interest rate implicit in the lease if it is lower than the incremental rate and is known to the lessee. The lessee’s depreciation depends on whether ownership transfers to the lessee or if there is a bargain purchase option. If one of these conditions is fulfilled, amortization would be over the economic life of the asset. Otherwise, it would be depreciated over the lease term. Because both the economic life of the asset and the lease term are three years, the leased asset should be depreciated over this period.
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EXERCISE 21-5 (Continued)
The lessor should adopt the direct-financing lease method and replace the asset cost of $75,000 with Lease Receivable of $75,000. (See schedule below.) Interest would be recognized annually at a constant rate relative to the unrecovered net investment.
Cost (fair value of leased asset)............................................... $75,000
Amount to be recovered by lessor through lease payments................................................................................. $75,000
Three annual lease payments: $75,000 ÷ 2.53130*................ $29,629
*Present value of an ordinary annuity of 1 for 3 periods at 9%.
(b) Schedule of Interest and Amortization
Rent Receipt/ Payment
Interest Revenue/ Expense
Reduction of Principal
Receivable/ Liability
1/1/13 — — — $75,000 12/31/13 $29,629 *$6,750* $22,879 52,121 12/31/14 29,629 4,691 24,938 27,183 12/31/15 29,629 2,446 27,183 0
*$75,000 X .09 = $6,750
EXERCISE 21-6 (15–20 minutes)
(a) $38,514 X 5.7122* = $220,000
*Present value of an annuity due of 1 for 8 periods at 11%.
(b) 1/1/13 Lease Receivable................................. 220,000 Cost of Goods Sold............................. 170,000
Sales Revenue............................. 220,000 Inventory....................................... 170,000
1/1/13 Cash...................................................... 38,514 Lease Receivable......................... 38,514
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EXERCISE 21-6 (Continued)
12/31/13 Interest Receivable.............................. 19,963 Interest Revenue [($220,000 – $38,514) X .11].... 19,963
EXERCISE 21-7 (20–25 minutes)
(a) This is a capital lease to Woods since the lease term is 75% (6 ÷ 8) of the asset’s economic life. In addition, the present value of the minimum lease payments is more than 90% of the fair value of the asset.
This is a capital lease to Palmer since collectibility of the lease payments is reasonably predictable, there are no important uncertainties surrounding the costs yet to be incurred by the lessor, and the lease term is 75% of the asset’s economic life. Because the fair value of the equipment ($200,000) exceeds the lessor’s cost ($150,000), the lease is a sales- type lease.
(b) Computation of annual rental payment:
= $41,452
**Present value of $1 at 11% for 6 periods. **Present value of an annuity due at 11% for 6 periods.
(c) 1/1/12 Leased Equipment................................ 190,877 Lease Liability ($41,452 X 4.60478)***............... 190,877
Lease Liability....................................... 41,452 Cash................................................ 41,452
***Present value of an annuity due at 12% for 6 periods.
12/31/12 Depreciation Expense.......................... 31,813 Accumulated Depreciation— Capital Leases ($190,877 ÷ 6 years).................. 31,813
Interest Expense................................... 17,931 Interest Payable ($190,877 – $41,452) X .12........ 17,931
21-8 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e, Solutions Manual ( For Instructor Use Only)
EXERCISE 21-7 (Continued)
(d) 1/1/12 Lease Receivable............................... 200,000* Cost of Goods Sold........................... 144,654**
Sales Revenue........................... 194,654*** Inventory..................................... 150,000
* *($41,452 X 4.6959) + ($10,000 X .53464) **$150,000 – ($10,000 X .53464)
***$41,452 X 4.6959
Cash.................................................... 41,452 Lease Receivable....................... 41,452
12/31/12 Interest Receivable............................ 17,440 Interest Revenue [($200,000 – $41,452) X .11].... 17,440
EXERCISE 21-8 (20–30 minutes)
(a) The lease agreement has a bargain-purchase option and thus meets the criteria to be classified as a capital lease from the viewpoint of the lessee. Also, the present value of the minimum lease payments exceeds 90% of the fair value of the assets.
(b) 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-type lease from the view- point of the lessor. Due to the fact that the initial amount of lease receivable (net investment) (which in this case equals the present value of the minimum lease payments, $81,000) exceeds the lessor’s cost ($65,000), the lease is a sales-type lease.
(c) Computation of lease liability: $18,829.49 Annual rental payment X 4.16986 PV of annuity due of 1 for n = 5, i = 10% $78,516.34 PV of periodic rental payments
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EXERCISE 21-8 (Continued)
$ 4,000.00 Bargain-purchase option X .62092 PV of 1 for n = 5, i = 10% $ 2,483.68 PV of bargain purchase option
$78,516.34 PV of periodic rental payments + 2,483.68 PV of bargain-purchase option $81,000.00* Lease liability
*rounded
GILL COMPANY (Lessee) Lease Amortization Schedule
Date
Annual Lease Payment Plus
BPO
Interest (10%) on Liability
Reduction of Lease Liability
Lease Liability
5/1/12 $81,000.00 5/1/12 $18,829.49 $18,829.49 62,170.51 5/1/13 18,829.49 *$ 6,217.05 12,612.44 49,558.07 5/1/14 18,829.49 4,955.81 13,873.68 35,684.39 5/1/15 18,829.49 3,568.44 15,261.05 20,423.34 5/1/16 18,829.49 2,042.33 16,787.16 3,636.18 4/30/17 4,000.00 * 363.82* 3,636.18 0
$98,147.45 $17,147.45 $81,000.00
*Rounding error is 20 cents.
(d) 5/1/12 Leased Equipment............................... 81,000.00 Lease Liability............................... 81,000.00
Lease Liability...................................... 18,829.49 Cash............................................... 18,829.49
12/31/12 Interest Expense.................................. 4,144.70 Interest Payable ($6,217.05 X 8/12 = $4,144.70).... 4,144.70
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EXERCISE 21-8 (Continued)
Depreciation Expense...................... 5,400 Accumulated Depreciation— Capital Leases....................... 5,400 ($81,000.00 ÷ 10 = ($8,100.00; $8,100.00 X (8/12 = $5,400)
1/1/13 Interest Payable................................ 4,144.70 Interest Expense....................... 4,144.70
5/1/13 Interest Expense............................... 6,217.05 Lease Liability................................... 12,612.44
Cash........................................... 18,829.49
12/31/13 Interest Expense............................... 3,303.87 Interest Payable........................ 3,303.87 ($4,955.81 X 8/12 = ($3,303.87)
12/31/13 Depreciation Expense...................... 8,100.00 Accumulated Depreciation— Capital Leases....................... 8,100.00 ($81,000.00 ÷ 10 years = ($8,100.00)
(Note to instructor: Because a bargain-purchase option was involved, the leased asset is depreciated over its economic life rather than over the lease term.)
EXERCISE 21-9 (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.
Due to the fact that the amount of the sale (which in this case equals the present value of the minimum lease payments, $81,000) exceeds the lessor’s cost ($65,000), the lease is a sales-type lease.
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EXERCISE 21-9 (Continued)
The minimum lease payments associated with this lease are the periodic annual rents plus the bargain-purchase option. There is no residual value relevant to the lessor’s accounting in this lease.
(a) The lease receivable is computed as follows:
$18,829.49 Annual rental payment X 4.16986 PV of annuity due of 1 for n = 5, i = 10% $78,516.34 PV of periodic rental payments
$ 4,000.00 Bargain purchase option X .62092 PV of 1 for n = 5, i = 10% $ 2,483.68 PV of bargain-purchase option
$78,516.34 PV of periodic rental payments + 2,483.68 PV of bargain-purchase option $81,000.00* Lease receivable at inception
*Rounded
(b) LENNOX LEASING COMPANY (Lessor) Lease Amortization Schedule
Date
Annual Lease Payment Plus
BPO
Interest (10%) on Lease
Receivable