Acct. 414 Fall 2008Solutionprof. T. Gordon

Acct. 414 – Fall 2008SOLUTIONProf. T. Gordon

Lease Example #10

On May 1, 2012, SlumberJay, Inc. and Omaha Oscillators, Inc. sign a lease with the following terms:

1.Term: 4 years / 2.Payments of $82,434
3.Implicit interest rate (NOT known to lessee) 10% / 4.Lessor retains ownership of asset at end of lease
5.Fair value of asset $270,000 / 6.Cost of asset $250,000
7.Incremental borrowing rate: 12% / 8.First payment due 5/1/12
9.Estimated useful life of asset: 4 years / 10.There are collection uncertainties for lessor
10.Est. fair value of asset at end of lease: $0 / 11.The payments include $5,000 for insurance to be paid by the lessor
12.Initial direct costs incurred by lessor $1,000

FIND PRESENT VALUE OF MINIMUM LEASE PAYMENTS:

Type of lease for

Lessor / Lessee
US GAAP
IFRS
Date / Lease Payment / Interest / Principal / Balance
05/01/12 / 270,000
0 / 05/01/12 / 77,434 / 0 / 77,434 / 192,566
1 / 05/01/13 / 77,434 / 19,257 / 58,177 / 134,389
2 / 05/01/14 / 77,434 / 13,439 / 63,995 / 70,394
3 / 05/01/15 / 77,434 / 7,040 / 70,394 / 0
Lessor – Omaha Oscillators, Inc. / Debit / Credit
05/01/12 / Initial direct costs – deferred
Cash
05/01/12 / Cash / 82,434
Unearned rental income
Prepaid Insurance
12/31/12 / Rental costs
Initial direct costs - deferred
Insurance expense
Prepaid insurance
Unearned rental income
Rental income
Depreciation expense
Accumulated Depreciation
Lessor – Omaha Oscillators, Inc. / Debit / Credit
05/01/13 / Cash / 82,434
Unearned rental income
Prepaid Insurance
12/31/13 / Rental costs
Initial direct costs - deferred
Insurance expense
Prepaid insurance
Unearned rental income
Rental income
Depreciation expense
Accumulated Depreciation

Lease Example #10 - Lessee

Date / Lease Payment / Interest / Principal / Balance
05/01/12 / 263,417
0 / 05/01/12 / 77,434 / 0 / 77,434 / 185,983
1 / 05/01/13 / 77,434 / 22,318 / 55,116 / 130,867
2 / 05/01/14 / 77,434 / 15,704 / 61,730 / 69,137
3 / 05/01/15 / 77,434 / 8,296 / 69,138 / 0
SlumberJay, Inc. - Lessee / debit / credit
05/01/12 / Leased Asset
Prepaid Insurance
Lease Obligation
Cash / 82,434
12/31/12 / Depreciation Expense
Accumulated Depreciation
Insurance expense
Prepaid insurance
Interest Expense
Interest Payable
05/01/13 / Lease Obligation
Interest Payable
Insurance expense
Cash / 82,434
12/31/13 / Depreciation Expense
Accumulated Depreciation
Insurance expense
Prepaid insurance
Interest Expense
Interest Payable
01/01/14 / Lease Obligation
Interest Payable
Prepaid Insurance
Cash / 82,434

LEASE EXAMPLE #10

Lease with Executory Cost (No BPO, RV) (LT = 100% Eco Life)

Lease / Lessee / Lessor
10 / Capital / LT / 12% / Partial year accruals
Executory costs / Operating / 10% / Executory costs, initial direct costs
n / Lease 10
FMV = / 270,000
243,000 / 90% FMV
4 / Lease Term
4 / Economic Life
100.00% / LT as % Eco. Life
MLP Lessee / Comments
0 / 77,434 / Less executory
1 / 77,434 / costs of
2 / 77,434 / 5,000
3 / 77,434
4
5
6
12.00% / Lessee's discount rate
A / Lessee's PVMLP:
263,417 / Annuity Due
Lease 10
B / FOR LESSEE: / Why?
Capital / LT > 75% Eco. Life
Lessor Cash Flows / Comments
0 / (192,566) / FV - first payment 77,434
1 / 77,434 / Subtracts cost of
2 / 77,434 / Insurance
3 / 77,434 / 5,000
4
5
6
10.00% / Guess
C / 10.000% / Implicit Rate
MLP Lessor / Comments
0 / 77,434
1 / 77,434
2 / 77,434
3 / 77,434
4
5
6
D / Lessor's PVMLP =
270,000 / Annuity Due
Lease 10
E / FOR LESSOR: / Why?
Operating / LT > 75% Eco Life
But collection uncertainties

Example 10#

Lessor: - operating lease because of undertainties

Date / Lease Payment / Interest / Principal / Balance
05/01/02 / 270,000
0 / 05/01/02 / 77,434 / 0 / 77,434 / 192,566
1 / 05/01/03 / 77,434 / 19,257 / 58,177 / 134,389
2 / 05/01/04 / 77,434 / 13,439 / 63,995 / 70,394
3 / 05/01/05 / 77,434 / 7,040 / 70,394 / 0

LESSOR - Lessor – Omaha Oscillagtors, Inc.

05/01/12
Initial direct costs – deferred 1,000
Cash 1,000

Cash 82,434
Unearned rental income 77,434
Prepaid Insurance 5,000

12/31/12
Rental costs ($1,000/4 * 8/12) 167
Initial direct costs - deferred 167

Unearned rental income 51,623

Rental Income (8/12) 51,623
8/12 of the portion of the payment related to the use of the asset
rather than insurance provided by the lessor or 8/12 * $77,434

Insurance expense 3,333
Prepaid insurance 3,333
8/12 of the annual $5,000 amount

Depreciation expense 41,667
Accumulated depreciation 41,667
$250,000 cost divided by 4 yr life *8/12

05/01/13
Cash 82,434
Unearned rental income 77,434
Prepaid Insurance 5,000

12/31/13
Unearned rental income 77,434
Rental income (77,434 divided by 12 * 12 months) 77,434
Rental costs 250
Initial direct costs - deferred 250
$1,000 divided by 4 years
Depreciation expense 62,500
Acc’d depreciation 62,500
$250,000 cost divided by 4 year life
Prepaid insurance 5,000

Insurance expense 5,000
12/12 of annual amount

Lease Example 10# solution continued:

LESSEE – capital lease with executory cost

Date / Lease Payment / Interest / Principal / Balance
05/01/02 / 263,417
0 / 05/01/02 / 77,434 / 0 / 77,434 / 185,983
1 / 05/01/03 / 77,434 / 22,318 / 55,116 / 130,867
2 / 05/01/04 / 77,434 / 15,704 / 61,730 / 69,137
3 / 05/01/05 / 77,434 / 8,296 / 69,138 / 0

5/1/12

Leased Asset $263,417
Prepaid Insurance 5,000
Cash $ 82,434
Lease Liability. 185,983

12/31/12

Depreciation Expense($263,417/4 yrs * 8/12) $ 43,901
Acc'd. Depreciation $ 43,901

Interest Expense(8/12 * 22,318) $ 14,879
Interest payable $ 14,879

Insurance expense(8/12 * $5,000) 3,333

Prepaid insurance 3,333

5/1/13

Interest payable (from 12/31/12 entry) $ 14,879

Interest expense($22,318 from table – payable 14,879) 7,439
Lease Liability(from table) 55,116
Prepaid insurance 5,000
Cash $82,434

12/31/13

Depreciation Expense(using 4 year life – full 12 months) $ 65,854
Acc'd. Depreciation $ 65,854

Interest Expense (8/12 * 15,704 from table) 11,778
Interest payable. 11,778

Insurance expense($5,000 times 12/12 months) 5,000

Prepaid insurance 5,000