15 Alt Sol 6e

Chapter 15
Leases
EXERCISE
S
(a) Gothic Corporation

(Lessee)
June 30, 2011
Rent expense...................
Exercise
40,000
Cash ............................
......................................... 40,000
December 31, 2011

Rent expense...................................
Cash ............................................
15-1
40,000
40,000
(b) HardWhere (Lessor)

June 30, 2011
Cash................................................
Rent revenue...............................
40,000
December 31, 2011

Cash................................................
Rent revenue...............................
40,000
40,000
40,000
Depreciation expense ($350,000 5 years) 70,000

Accumulated depreciation..........
70,000
Alternate Exercise and Problem Solutions
The McGraw-Hill Companies, Inc., 2011

15-1
Exercise 15-2
PresentValueofMinimumLeasePayments:
($10,000 x 10.78685*) = $107,866
lease
present
payments
value
* present value of an annuity due of $1: n=12, i=2%
[i = 2% (8% 4) because the lease
calls for quarterly payments]
LeaseAmortizationSchedule
Lease
Payments
1 10,000
2 10,000
3 10,000
4 10,000
5 10,000
6 10,000
7 10,000
8 10,000
9 10,000
1010,000
1110,000
1210,000
Effective
Interest
2% x Outstanding Balance
.02 (97,886) = 1,957

.02 (89,823) = 1,796
.02 (81,619) = 1,632
.02 (73,251) = 1,465
.02 (64,716) = 1,294
.02 (56,010) = 1,120
.02 (47,130) =
.02 (38,073) =
.02 (28,834) =
.02 (19,411) =
.02 (9,799) =
120,000

15-2
943
761
577
388
201*
12,134
Decrease
in Balance
10,000
8,043
8,204
8,368
8,535
8,706
8,880
9,057
9,239
9,423
9,612
9,799
Outstanding
Balance
107,866
97,886
89,823
81,619
73,251
64,716
56,010
47,130
38,073
28,834
19,411
9,799
0
107,866
Intermediate Accounting, 6e
* adjusted for rounding of other numbers in the schedule

15-3
Exercise 15-2 (concluded)

January 1, 2011
Leased equipment (calculated above).....................
Lease payable (calculated above)........................
Lease payable .....................................................
Cash (lease payment)..........................................
107,866
107,866
10,000
10,000
April 1, 2011
Interest expense (2% x [$107,866 10,000])..............
Lease payable (difference).....................................
1,957
8,043
July 1, 2011
Interest expense (2% x $89,823: from schedule).........
1,796
8,204
October 1, 2011
1,632
8368
December 31, 2011

Interest payable ..............................................
1,465
Depreciation expense ($107,866 3 years)...............

Accumulated depreciation...............................
10,000
10,000
10,000
1,465
35,955
35,955
January 1, 2012

15-4
Interest payable (from adjusting entry).......................

Exercise 15-3
Lease
Payments
1 10,000
2 10,000
3 10,000
4 10,000
5 10,000
6 10,000
7 10,000
8 10,000
9 10,000
1010,000
1110,000
1210,000
1,465
8,535
10,000
Effective
Interest
.02 (97,886) = 1,957

.02 (89,823) = 1,796
.02 (81,619) = 1,632
.02 (73,251) = 1,465
.02 (64,716) = 1,294
.02 (56,010) = 1,120
.02 (47,130) =
.02 (38,073) =
.02 (28,834) =
.02 (19,411) =
.02 (9,799) =
120,000
943
761
577
388
201*
12,134
Decrease
in Balance
10,000
8,043
8,204
8,368
8,535
8,706
8,880
9,057
9,239
9,423
9,612
9,799
Outstanding
Balance
107,866
97,886
89,823
81,619
73,251
64,716
56,010
47,130
38,073
28,834
19,411
9,799
0
107,866
* adjusted for rounding of other numbers in the schedule

15-5
Exercise 15-3 (concluded)

January 1, 2011
Lease receivable (present value of lease payments)...
Inventory of equipment (lessors cost)...............
Cash (lease payment)..............................................
Lease receivable .............................................
April 1, 2011
Lease receivable (to balance) ............................
Interest revenue (2% x [$107,866 10,000]).........
July 1, 2011
Lease receivable (to balance).............................
Interest revenue (2% x $89,826: from schedule)....
October 1, 2011
December 31, 2011
Interest receivable ..............................................
January 1, 2012
Interest receivable (from adjusting entry)............
107,866
107,866
10,000
10,000
10,000
8,043
1,957
10,000
8,204
1,796
10,000
8,368
1,632
1,465
1,465
10,000
8,535
1,465
Exercise 15-4Requirement 1
15-6
LessorsCalculationofLeasePayments
Amount to be recovered (fair value)
Lease payments at the beginning
of each of eight quarters:
$107,866
__________________
($107,866 10.7866**)
$10,000
** present value of an annuity due of $1: n=12, i=2%
Requirement 2
January 1, 2011
Lease receivable (fair value)..................................
Cost of goods sold (lessors cost)...........................
Sales revenue (fair value)..................................
Inventory of equipment (lessors cost)...............
April 1, 2011
Interest revenue (2% x [$107,866 10,000])........
Exercise 15-5
107,866
90,000
107,866
90,000
10,000
10,000
10,000
8,043
1,957
Present value of periodic lease payments*

($205,542
7.49236**)
$1,540,000

15-7
The lease meets at least one (actually 3 of 4 in this case) criteria for classification
as a capital lease.
January 1, 2011
Cash (given)......................................................................
Helicopter (carrying value).............................................
Deferred gain on sale-leaseback (difference)................
1,540,000
Leased helicopter (present value of lease payments)................

Lease payable (present value of lease payments)...............
1,540,000
Lease payable .................................................................

Cash............................................................................
205,542
1,240,000
300,000
1,540,000
205,542
December 31, 2011

Interest expense (11% x [$1,540,000 205,542])....................
Interest payable ..........................................................
146,790
Depreciation expense ($1,540,000 15 years*)..................

Accumulated depreciation..........................................
102,267
Deferred gain on sale-leaseback ($300,000 20 years).......

Depreciation expense .................................................
15,000
146,790
102,267
15,000
* The helicopter is depreciated over its remaining useful life rather than the lease term
because title transfers to the lessee.

15-8
PROBLEM
S
Requirement 1
Capital lease to lessee;
lessor.
Direct financing lease to
Since the present value of minimum lease payments (same

for both the lessor and the lessee) is equal to (>90%) the
fair value of the asset, the 90% recovery criterion is met.
Problem 15-1
CalculationofthePresentValueofMinimumLeasePayments
Present value of periodic lease payments
$32,629 x 15.32380**
$500,000
(rounded)
The 75% of useful life criterion is met also. Both additional lessor conditions are
met for a capital lease. There is no dealers profit because the fair value equals the
lessors cost.
Requirement 2
Pal Learning Systems (Lessee)
January 1, 2011
Leased equipment (calculated above).................................
Lease payable (calculated above)....................................
500,000
Lease payable .................................................................

Cash (lease payment)......................................................
32,629
500,000
32,629

15-9
April 1, 2011
Interest expense (3% x [$500,000 32,629])...........................
Lease payable (difference).................................................
Problem 15-1 (concluded)
14,021
18,609
32,629
Star Leasing (Lessor)

January 1, 2011
Lease receivable (present value)........................................

Inventory of equipment (lessors cost)...........................
652,580
Cash (lease payment)..........................................................

Lease receivable .........................................................
32,629
500,000
32,629
April 1, 2011
Interest revenue (3% x [$500,000 32,629]).......................

15-10
32,629
18,608
14,021
Requirement 3
Star Leasing (Lessor)
January 1, 2011
Lease receivable (present value)........................................
Cost of goods sold (lessors cost)......................................
Sales revenue (fair value)..............................................
500,000
450,000

32,629
500,000
450,000
32,629
April 1, 2011
Interest revenue (3% x [$500,000 32,629]).......................
32,629
18,608
14,021

15-11
Problem 15-2Requirement 1
Lessors Calculation of Lease Payments
Amount to be recovered (fair value)
$1,097,280
Less: Present value of the guaranteed

residual value ($75,000 x .68301*)
(51,225)
Amount to be recovered through periodic lease payments

$1,046,055
_____________________
Lease payments at the beginning
of each of four years:

*
($1,046,055 3.48685**)
$300,000
present value of $1: n=4, i=10%
Requirement 2
The lessees incremental borrowing rate (12%) is more than the lessors implicit
rate (10%). So, both parties calculations should be made using a 10% discount rate:

15-12
Problem 15-2 (continued)
Application of Classification Criteria
Does the agreement specify that
ownership of the asset transfers

to the lessee?
NO
Does the agreement contain a
bargain purchase option?
NO
Is the lease term equal to 75%
or more of the expected

economic life of the asset?
NO
{4 yrs < 75% of 6 yrs}
Is the present value of the
minimum lease payments equal

to or greater than 90% of the
fair value of the asset?
YES
{$1,046,055b > 90% of $1,046,055}
b See calculation below.
Present Value of Minimum Lease Payments

Present value of periodic lease payments
($300,000 x 3.48685**)
$1,046,055
Plus: Present value of the lessee-guaranteed

residual value ($75,000 x .68301*)
Present value of minimum lease payments
*
51,225
$1,097,280
present value of $1: n=4, i=10%

15-13
(a) By Blair Co. (the lessee)
Since at least one criterion is met, this is a capital lease to the lessee. Blair
records the present value of minimum lease payments as a leased asset and a lease
liability.
(b) By HHH (the lessor)

Since the fair value equals the lessors carrying value, there is no dealers profit,
making this a direct financing lease.
Requirement 3
December 31, 2011
Blair Co. (Lessee)

Leased equipment (calculated above).................................
Lease payable (calculated above)....................................
Lease payable..................................................................
HHH (Lessor)
Lease receivable (calculated above)....................................

15-14
1,097,280
1,097,280
300,000
300,000
1,097,280

Lease receivable..........................................................
1,097,280
300,000
300,000

15-15
Requirement 4
Since both use the same discount rate and since the residual value is lesseeguaranteed, the same amortization schedule applies to both the lessee and lessor:
Dec. Payments
31
2011
2011300,000
2012300,000
2011300,000
2012300,000
2013 75,000
1,275,000
Effective
Interest
.10 (797,280) = 79,728

.10 (577,008) = 57,701
.10 (334,709) = 33,471
.10 (68,180) =
6,820*
177,720
Decrease
in Balance
300,000
220,272
242,299
266,529
68,180
1,097,280
Outstanding
Balance
1,097,280
797,280
577,008
334,709
68,180
0
Requirement 5
December 31, 2012

15-16
Blair Co. (Lessee)

Interest expense (10% x [$1,097,280 - 300,000]).....................
Lease payable (difference).................................................
Depreciation expense ([$1,097,280 - 75,000] 4 years).........
HHH (Lessor)
Lease receivable..........................................................
Interest revenue (10% x [$1,097,280 - 300,000]).................
79,728
220,272
300,000
255,570
255,570
300,000
220,272
79,728

15-17
Problem 15-2 (concluded)
Requirement 6
December 31, 2013

Blair Co. (Lessee)
Depreciation expense ([$1,097,280 - 75,000] 4 years).........
Interest expense (10% x 68,180: from schedule as rounded)....
Lease payable (difference : from schedule)..........................
Accumulated depreciation ($1,097,280 - 75,000)...............
Loss on residual value guarantee ($75,000 - 4,500).............
Leased equipment (account balance)..............................
Cash ($75,000 - 4,500)............................................................
HHH (Lessor)
Inventory of equipment (actual residual value)...................
Cash ($75,000 - 4,500).................................................................
Lease receivable (account balance)................................
Interest revenue (10% x 68,180: from schedule as rounded)

15-18
255,570
255,570
6,820
68,180
1,022,280
71,500
1,097,280
71,500
4,500
71,500
69,180
6,820

15 Alt Sol 6e

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15 Alt Sol 6e

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Chapter 15

(a) Gothic Corporation

December 31, 2011

(b) HardWhere (Lessor)

December 31, 2011

Depreciation expense ($350,000 5 years) 70,000

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

.02 (97,886) = 1,957

The McGraw-Hill Companies, Inc., 2011

* adjusted for rounding of other numbers in the schedule

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

Exercise 15-2 (concluded)

December 31, 2011

Depreciation expense ($107,866 3 years)...............

The McGraw-Hill Companies, Inc., 2011

Interest payable (from adjusting entry).......................

.02 (97,886) = 1,957

* adjusted for rounding of other numbers in the schedule

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

Exercise 15-3 (concluded)

** present value of an annuity due of $1: n=12, i=2%

Present value of periodic lease payments*

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

Leased helicopter (present value of lease payments)................

Lease payable .................................................................

December 31, 2011

Depreciation expense ($1,540,000 15 years*)..................

Deferred gain on sale-leaseback ($300,000 20 years).......

The McGraw-Hill Companies, Inc., 2011

Direct financing lease to

Since the present value of minimum lease payments (same

** present value of an annuity due of $1: n=20, i=3%

Lease payable .................................................................

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

Problem 15-1 (concluded)

Star Leasing (Lessor)

Lease receivable (present value)........................................

Cash (lease payment)..........................................................

The McGraw-Hill Companies, Inc., 2011

Cash (lease payment)..........................................................

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

Less: Present value of the guaranteed

Amount to be recovered through periodic lease payments

of each of four years:

present value of $1: n=4, i=10%

** present value of an annuity due of $1: n=4, i=10%

The McGraw-Hill Companies, Inc., 2011

Problem 15-2 (continued)

Application of Classification Criteria

Does the agreement specify that

ownership of the asset transfers

Does the agreement contain a

bargain purchase option?

Is the lease term equal to 75%

or more of the expected

Is the present value of the