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CHAPTER 4

LEASES
4-1.

PROBLEMS
(Hope Manufacturing Company and Charity Co.)
(1)
Lessors Books (Hope Manufacturing Co.)
2012

Jan. 1
1

1
Dec. 31

2013

Jan. 1

Dec. 31

Machinery for lease


Cash
Cash
Rent revenue
Unearned rent revenue
2 M/5 =
400,000
2 M x 30% = 600,000
Machinery for lease
Cash
Depreciation
expense
Accumulated depreciation
Machine for lease
(2.2 M 200,000)/10 200,000
60,000 / 5 years
12,000
Total
212,000
Cash
Rent revenue
2,000,000 x
20%
Depreciation
expense
Accumulated depreciation
Machine for lease

2,200,000
2,200,000
600,000
400,000
200,000

60,000
60,000
212,000
200,000
12,000

400,000
400,000

212,000
200,000
12,000

Lessees Books (Charity Co.)


2010

Jan. 1

Rent expense
Prepaid rent
Cash

400,000
200,000

Rent expense
Cash

400,000

600,000

2011

Jan. 1
(b)

Statement of Comprehensive Income:


(In profit or loss section)
Rent revenue
Depreciation expense
Rent expense
Statement of Financial Position
Machine for lease, net of accum.
depreciation
Unearned rent revenue

400,00
Hope

Charity

400,000
212,000
Hope
2,048,000
200,000

400,000
Charity

Prepaid rent

200,000

Chapter 4 Leases

4-2.

(Blessed Realty)
(7,500 x 4) + (10,000 x 3) + (12,000 x 3) + (15,000 x
a.
2)
126,000
Total lease period
12 mos.
Monthly rent expense
10,500
No. of mos. From Sept. 1 Dec. 31, 2012
x4
Rent expense for 2012
42,000
b.

4-3.

Rent expense for 2012


Rent payments made during 2012
Rent payable at December 31, 2012

42,000
30,000
12,000

(Faith Company)
a.
Monthly rental payment
No. of payments (60-6 mos free)
Total payments
Rent expense for 2012 (540,000 x 4/60)
or
Monthly rental
Less lease bonus (60,000/60 mos)
Rent expense per month
Rent expense for 2012 (9,000 x 4)

10,000
x 54
540,000
36,000
10,000
(1,000)
9,000
36,000

Rent expense for 2013 (9,000 x 12)


(b)

108,000

Faith Company

2012

Dec. 31 Rent expense


Rent payable
2013

Mar. 1 -

36,000
36,000

9,000 x 4 = 36,000

Dec. 1 monthly entry


Rent expense
Cash

Dec. 31 Rent expense


Rent payable

10,000
10,000
8,000
8,000

Rent expense for 2012:


540,000 x 12/60 108,000
Payments in 2012 100,000
Increase in rent payable 8,000

Love Corporation
2012

Dec. 31 Rent receivable


Rent revenue
2013

Mar. 1 -

Dec. 1 monthly entry

36,000
36,000

Cash
Rent revenue

10,000
10,000

4
3

Chapter 4 Leases
Dec. 31

4-4.

8,000

960,000
50,000
25,000
1,035,000

Prepaid rent expenss (125,000 25,000)


Security deposit (discounted for 4 years at 10%)
150,000 x 0.6830

(Truth Corporation)
a.
Rent revenue (920,000 x 9/12)
Depreciation expense
3,500,000/6 = 583,333; 583,333 x 9/12
Maintenance and other related costs
Income before income tax
b.

4-6.

8,000

(Way Company)
a.
Fixed annual rental
Additional rent 5% x (6M-5M)
Amortization of lease bonus (125,000/5
years)
Rent expense for 2012
b.

4-5.

Rent receivable
Rent revenue

100,000
102,450

690,000
(437,500)
(50,000)
202,500

Rent expense (920,000 x 9/12)

690,000

(Provident Company)
Lessors Books
2012

July 1
Oct.
1
1
Nov.
1
Dec.
1
31

31

Equipment for lease


Cash

1,500,000
1,500,000

Cash
Rent revenue

54,000

Cash
Rent revenue

30,000

Cash
Rent revenue

30,000

Cash
Rent revenue

30,000

Rent revenue
Unearned rent revenue
54,000 x 33/36 = 49,500

49,500

Depreciation expense
Accumulated depreciation
(1,500,000 / 10) x 6/12

75,000

54,000
30,000
30,000
30,000
49,500

75,000

4
4

Chapter 4 Leases

Lessees Books
2012

Oct. 1
1
Nov. 1

Dec. 1
31

4-7.

Rent expense
Cash

54,000

Rent expense
Cash

30,000

Rent expense
Cash

30,000

Rent expense
Cash

30,000

Prepaid rent
Rent expense

49,500

(Generous, Inc.)
260,000 x 4.2397
200,000 x 0.6499
Total capitalized cost

(1)

54,000
30,000
30,000

30,000
49,500

1,102,32
2
129,980
1,232,30
2

Amortization Table
Total Annual
Interest
Date
Payment
Expense
01/01/12
01/01/12
260,000
01/01/13
260,000
87,507
01/01/14
260,000
71,983
01/01/15
260,000
55,061
01/01/16
260,000
36,617
12/31/16
200,000
16,530*
*Adjusted; difference is due to rounding off.

(b)

Reduction in
Principal
260,000
172,493
188,017
204,939
223,383
183,470

Lease
Obligation
1,232,302
972,302
799,809
611,792
406,853
183,470
-

2012

Jan. 1
1
Dec. 31
31

Leased automobile
Finance lease obligation
Finance lease obligation
Cash
Interest expense
Interest Payable

1,232,302
1,232,302
260,000
260,000
87,507
87,507

Depreciation expense
Accumulated depreciation
(1,232,302-200,000)/5

206,460

Finance lease obligation


Interest payable
Cash

172,493
87,507

206,460

2013

Jan. 1

Dec. 31
31

Interest expense
Interest payable
Depreciation expense
Accumulated depreciation

260,000
71,983
71,983
206,460
206,460

45

Chapter 4 Leases

(c)
Dec. 31 Accumulated
depreciation
Interest expense
Finance lease
obligation
Leased automobile

1,032,300
16,532*
183,470
1,232,302

*adjusted; balancing figure


(d)
Dec. 31

4-8.

Loss on finance lease


Accumulated
depreciation
Interest expense
Finance lease
obligation
Leased automobile
Cash

(Diana Corporation)
(a)
86,680 x 4.1699
(b)

50,000
1,032,300
16,532
183,470
1,232,302
50,000

=
361,447
Amortization
Table

Interes
t
Expens
Date
Payment
e
01/01/12
01/01/12
86,680
01/01/13
86,680
27,477
01/01/14
86,680
21,556
01/01/15
86,680
15,044
01/01/16
86,680
7,876*
*Adjusted; difference is due to rounding off.
Total Annual

Reduction in

Lease

Principal
86,680
59,203
65,124
71,636
78,804

Obligation
361,447
274,767
215,564
150,440
78,804
-

(c)
2012

Jan

1
1

Dec. 31
31
2013

Jan. 1

Dec. 31
31

Leased machine
Finance lease obligation

361,447
361,447

Finance Lease Obligation


Cash

86,680

Interest expense
Interest payable

27,477

Depreciation expense
Accumulated depreciation
361,447/5 years

72,289

Finance lease obligation


Interest payable
Cash

59,203
27,477

Interest expense
Interest payable

21,556

Depreciation expense
Accumulated depreciation

72,289

86,680
27,477
72,289

86,680
21,556
72,289

46

Chapter 4 Leases
(d)
Statement of Financial Position
Property, plant and equipment
Leased machine
Accumulated depreciation
Current liabilities:
Interest payable
Finance lease obligation

2012

Noncurrent liabilities:
Finance lease obligation
Income Statement
Interest expense
Depreciation expense
4-9.

2013

361,447
72,289

361,447
144,578

27,477
59,203

21,556
65,124

215,564

150,440

27,477
72,289

21,556
72,289

(Riza, Inc.)

(1)

1,011,840/135,000 = 7.4951 PV of an annuity due for 12


periods From Table VI across 12 periods, 7.4951 is under 10%
interest rate.

(b)
Date
12/31/12
12/31/12
12/31/13
12/31/14

(c)

Total Annual
Payment
135,000
135,000
135,000

Interest
Expense
87,684
82,952

Reduction in
Principal
135,000
47,316
52,048

(1,011,840 40,000) / 15 years

Lease
Obligation
1,011,840
876,840
829,524
777,476

P64,789

(d)
12/31/12

12/31/13

(5)

Leased
equipment
Finance lease obligation

1,011,840
1,011,840

Finance lease obligation


Cash

135,000

Finance lease obligation


Interest expense
Cash

47,316
87,684

Depreciation expense
Accumulated depreciation
(1,011,840 40,000) / 15

64,789

Lease obligation as of December 31, 2012:


Current portion
Noncurrent portion

4-10. (Shirley Corporation)


(a) 150,000 x 4.0373
240,000 x 0.5674
Total capitalized cost

135,000

135,000
64,789

P 47,316
829,524

605,595
136,176
741,771

47

Chapter 4 Leases

(b)

Date
01/01/12
01/01/12
01/01/13
01/01/14
01/01/15
01/01/16
12/31/16

Total Annual
Payment
150,000
150,000
150,000
150,000
150,000
240,000

Interest
Expense
71,013
61,534
50,918
39,028
25,736*

Reduction in
Principal
150,000
78,987
88,466
99,082
110,972
214,264

Lease
Obligation
741,771
591,771
512,784
424,318
325,236
214,264
-

*Adjusted; difference is due to rounding off.

(c)

741,771 / 15 years

P49,451

(d)
2012

Jan. 1
1
Dec. 31
31

Leased machinery
Finance lease obligation

741,771

Finance lease obligation


Cash

150,000

741,771
150,000

Interest expense
Interest payable

71,013

Depreciation expense
Accumulated depreciation

49,451

Finance lease obligation


Interest payable
Cash

78,987
71,013

Interest expense
Interest payable

61,534

Depreciation expense
Accumulated depreciation

49,451

71,013
49,451

2013

Jan. 1

Dec. 31
31
(e)
Dec. 31

(f)
Dec. 31

150,000
61,534
49,451

Interest expense
Finance lease obligation
Accumulated depreciation
Machinery
Leased machinery
Cash

25,736
214,264
247,255
494,516

Interest expense
Finance lease obligation
Accumulated depreciation
Loss on finance lease
Leased machinery

25,736
214,264
247,255
254,516

741,771
240,000

741,771

48

Chapter 4 Leases

4-11. (Sam Company)

(1)

Present value of minimum lease payments


700,000 x 6.3282
Annual depreciation
(4,429,740/10)

(b)

P4,429,740
P 442,974

(c)
2010

Buildin
g
Finance lease obligation

July 1

July 1

Taxes and insurance expense


Finance lease
obligation
Cash

Dec. 31

4,429,740
50,000
700,000
750,000

Interest expense
Interest payable
447,569 x
6/12

223,784

Depreciation expense-Building
Accum. Depreciation-Building

221,487

Prepaid taxes and insurance


Taxes and insurance expense

25,000

31
31

4,429,740

223,784

221,487
25,000

2011

July 1

Dec. 31

31

Date
July 1, 2012
July 1, 2012
July 1, 2013
July 1, 2014

Taxes and insurance expense


Interest payable
Interest expense
Finance lease
obligation
Cash

50,000
223,784
223,785

Interest expense
Interest payable
417,277 x
6/12

208,639

Depreciation expense
Accum. Depreciation-building

442,974

252,431
750,000
208,639

442,974

Amortization Table
Periodic
Applied to
Payment
Interest
Principal
P700,000
700,000
700,000

P447,569
417,277

P700,000
252,431
282,723

Balance of
Principal
P4,429,740
3,729,740
3,477,309
3,194,586

49

Chapter 4 Leases

4-12. (Joy Company)


a.
2012

Finance lease
receivable
Equipment for
lease
Unearned interest revenue

Aug. 1

1
1
Dec. 31

605,000
480,000
125,000

Unearned interest revenue


Cash

1,900

Cash
Finance lease receivable

100,000

1,900
100,000

Unearned interest revenue


Interest revenue
38,190 x 5/12

15,912
15,912

Partial Amortization
Table
Periodic
Payment

Date
08/01/12
08/01/12
08/01/13

(2)

Reduction in
Principal
100,000
61,810

Interest
38,190

100,000
100,000

Balance of
Principal
481,900
381,900
320,090

As of December 31, 2012:


Total
Finance lease
receivable
Unearned interest
revenue
Current portion:

P505,000
107,188
P397,812

Current
P100,00
0
22,278
P
77,722

Principal due in 2013


Accrued interest, 12/31/12 (38,190 x 5/12)
4-13. (Jackie Chan and Chris
Tucker)

Non-current
P405,00
0
84,910
P320,09
0
P
61,810
15,912

Annual Lease Payment:


Fair value of asset
PV of BPO = 40,000 x .6209
PV of periodic payment
PV factor (Annuity due for 5 years at 10%)
Periodic payment
Date
Jan. 1,
2012
Jan. 1,
2012
Jan. 1,
2013

Periodic
Payment

Interest

Reduction in
Principal

P600,00
0
24,836
P575,16
4
4.1699
P137,93
2
Balance of
Principal
P600,000

P137,932
137,932

P137,932
P46,207

91,725

462,068
370,343

Jan. 1,
2014

137,932

37,034

100,898

269,445

Depreciable cost = P600,000 P20,000 = P580,000


2012 Depreciation = P580,000 x 6/21 = P165,714
2013 Depreciation = P580,000 x 5/21 = 138,095

50

Chapter 4 Leases

(1)

Books of Chris Tucker

2012

Jan. 1 Leased equipment


Finance lease obligation
1

Finance lease obligation


Cash

Dec 31 Interest expense


Interest payable
31 Depreciation expense Leased equipment
Accum. depr. Leased
equipment

600,000
600,000
137,932
137,932
46,207
46,207
165,714
165,714

2013

Jan. 1

Finance lease obligation


Interest payable
Cash

Dec 31 Interest expense

91,725
46,207
137,932
37,034

37,03
4

Interest payable
Depreciation expense
Accum. depr. Leased
equipment

138,095
138,095

(b) Books of Jackie Chan


2012

Jan. 1

Finance lease receivable


Equipment for lease
Unearned interest revenue

729,660

Cash

137,932

600,000
129,660

Finance lease receivable


Dec 31 Unearned interest revenue

137,932
46,207
46,20
7

Interest revenue

2013

Jan. 1 Cash
Finance lease receivable
Dec 31 Unearned interest revenue
Interest revenue

137,932
137,932
37,034
37,03
4

4-14. (Ben Ten and Ironman)


(1)
Direct finance lease
(The cash price equals the carrying value of the asset; hence,
there is no gross profit).

(2)

The
rate
is
approximately
8%.
The
PV
factor
is
P539,730/80,000 = 6.7466; in line 9 (which is 8 annual
payments of P80,000 + 1 payment for guaranteed residual
value of same amount), the corresponding interest rate is 8%.

51

Chapter 4 Leases

(c)
Partial amortization table
Date
April 1, 2012
April 1, 2012
April 1, 2013
April 1, 2014

Periodic
Payment

Interest

Reduction in
Principal

80,000
80,000
80,000

36,778
33,321

80,000
43,222
46,679

Balance of
Principal
P539,730
459,730
416,508
369,829

Ironman
2012

Apr. 1
1
Dec. 31

31

Equipment
Finance lease obligation

539,730
539,730

Finance lease obligation


Cash

80,000

Interest expense
Interest payable
36,778 x 9/12

27,584

Depreciation expense
Accumulated depreciation
(539,730-80,000)/8 = 57,466
57,466 x 9/12 = 43,100

43,100

Interest expense (36,778-27,584)


Interest payable
Finance lease obligation
Cash

9,194
27,584
43,222

Interest expense
Interest payable
33,321 x 9/12

24,991

Depreciation expense
Accumulated depreciation
(539,730-80,000)/8 = 57,466

57,466

80,000
27,584

43,100

2013

Apr. 1

Dec. 31

31

80,000
24,991

57,466

52

Chapter 4 Leases

(d) Books of Ben Ten


2012

Apr. 1

Finance lease receivable


Unearned interest revenue
Equipment for lease
80,000x 8 = 640,000;
640,000 + 80,000 GRV =
720,000
Cash
Finance lease receivable

Dec. 31

Unearned interest revenue


Interest revenue

720,000
180,270
539,730

80,000
80,000
27,584
27,584

2011

Apr. 1
1

Cash
Finance lease receivable
Unearned interest revenue
Interest revenue

Dec. 31

Unearned interest revenue


Interest revenue
32,893 x 9/12

80,000
80,000
9,194
9,194
24,991
24,991

(5)

The asset shall be recorded at P496,512 which is 80,000 x


6.2064. Depreciation for 2012 = 496,512/8 x 9/12 = 46,548

(6)

No difference in journal entries. To the lessor, under the direct


finance lease, it does not matter whether the residual value is
guaranteed or unguaranteed.

4-15. (Prudent Company)


(a)

Sales price
Cost of machine
Gross profit

(b)

Gross investment (135,000 x 12)


Sales
Total financial revenue over the lease term

(3)

1,011,84
0
784,500
227,340
1,620,00
0
1,011,84
0
608,160

Interest revenue for 2012


(1,011,840 135,000) x 10% x 6/12

(d)

Finance lease receivable


Less Unearned interest revenue
Net finance lease receivable, December 31, 2012

43,84
2
1,485,00
0
564,31
8
920,68
2

53

Chapter 4 Leases

4-16. (Glad Manufacturing Company)


(a)
2012

Finance lease
receivable
Cost of sales
Unearned interest revenue
Sales
Finished goods inventory

Apr. 1

1,500,000
893,350
426,380
1,026,970
940,000

175,000 x 8 = 1,400,000
1,400,000 + 100,000 =
1,500,000
940,000(100,000 x0.4665)=893,350
175,000 x 5.8684 = 1,026,970
100,000 x 0.4665 = 46,650
1,026,970 + 46,650 =
1,073,620
1,500,000 1,073,620 =
426,380

1
Dec. 31
2013

Cash
Finance lease receivable
Unearned interest revenue
Interest revenue
89,862 x 9/12

Jan. 1

Dec. 31

175,000
67,397
67,397

Interest revenue
Unearned interest revenue

Apr. 1

175,000

Cash
Unearned interest revenue
Finance lease receivable
Interest revenue
Unearned interest revenue
Interest revenue

67,397
67,397
175,000
89,862
175,000
89,862
61,011
61,011

81,348 x 9/12

Partial amortization
table
Date
April 1, 2012
April 1, 2012
April 1, 2013
April 1, 2014

Periodic
Payment

Interest

Reduction in
Principal

175,000
175,000
175,000

89,862
81,348

175,000
85,138
93,652

*The compound entry may also be presented as follows:


Finance lease
Apr. 1
receivable
1,400,000
Sales
Unearned interest revenue
1
1

Cost of sales
Finished goods inventory
Finance lease
receivable
Cost of sales
Unearned interest revenue

Balance of
Principal
P1,073,620
898,620
813,482
719,830

1,026,970
373,030

940,000
940,000
100,000
46,650
53,350

54

Chapter 4 Leases
(b)

(i)

Sales
Cost of Sales (940,000 46,650)
Gross profit on sales
Interest Revenue for 2012 (see journal
entries)

(ii)
(c)

4-17

Sales (1,026,970 + 46,650)


Cost of sales (cost of the asset)

1,026,970
893,350
133,620
67,397
1,073,620
940,000

Ruby Company
1.
Manufacturers or dealers lease, because FV exceeds CV.
The difference represents gross profit, which characterizes
a dealers or manufacturers lease.
Present value of MLP = 850,365 x
4.6048
P3,914,080
Present value of residual value = 166,300 x .5066
84,248
Total present
value
P3,998,328
Carrying value of leased asset
3,200,000
Gross Profit
P 798,328
Lease arrangement cost
( 85,000)
Interest income 377,756 x 3/12
94,439
Total income in
2012
P 807,767
Amortization
Table

b.

c.

Date
Oct.
Oct.
Oct.
Oct.

1,
1,
1,
1,

2012
2012
2013
2014

Periodic
Payment

Interest

Reduction in
Principal

P850,365
850,365
850,365

P377,756
321,042

P850,365
472,609
529,323

Balance of
Principal
P3,998,32
8
3,147,963
2,675,354
2,146,031

2012

Oct.
1

Finance lease receivable (850,365 x 6) +


166,300
Cost of goods sold (3,200,000 84,248)
Inventory
Sales
Unearned interest revenue
1 Selling expense
Cash
1 Cash

5,268,490
3,115,752
3,200,000
3,914,080
1,270,162
85,000
85,000
850,365

Finance lease receivable


Dec. 31
2013

Oct.
1

Unearned interest revenue


Interest revenue

Cash

850,365
94,439
94,439
850,365

Finance lease receivable


Dec 31 Unearned interest revenue

850,365
363,578

Interest revenue
(377,756 94,439) + (321,042 x 3/12)

363,578

55

Chapter 4 Leases

4.

Amortization Table for Emerald


Date
Oct. 1, 2012
Oct. 1, 2012
Oct. 1, 2013
Oct. 1, 2014

Periodic
Payment

Interest

Reduction in
Principal

850,365
850,365
850,365

367,646
309,720

850,365
482,719
540,645

Balance of
Principal
P3,914,080
3,063,715
2,580,996
2,040,351

2012

Oct. 1

Dec 31 Interest
expense

31
Depreciatio
n expense

Leased
equipment
Finance
lease
obligati
on
Finance lease
obligation
Cash

3,914,080

3,914,080
850,365
850,365

91,912
Interest
payable
3
6
7,
6
4
6
x
3/
1
2
=
9
1,
9
1
2

91,912

163,087
Accumul
ated
deprecia
tion
3,
9
1
4,
0
8
0/
6
x
3/
1
2

163,087

2013

Oct. 1

Interest

91,912

Dec31

4-18

payable
Interest
expense
367,646
91,912
Finance lease
obligation
Cash
Interest
expense
Interest
payable
3
0
9,
7
2
0
x
3/
1
2
Depreciation
expense
Accumul
ated
deprecia
tion

275,734
482,719
850,365
77,430
77,430

652,347

652,347

(Metro Industries)

Correction to the problem: the equipments fair value is P368,606,


instead of P400,000.
(a)
Sales = (99,046 x 3.1699) + (80,000 x.6830) =
P368,606
(b)
Sales
P368,606
(300,000
Cost of equipment sold
)
( 15,000
Selling expense
)
Interest income (368,606 x 10%)
36,861
P
Total profit from lease
90,467
(3)
Depreciation expense recorded by Western
P
(368,606 80,000) / 4 =
72,152
4-19. (Legend Company)
Selling price of the machinery (150,000 x
(a)
4.0373)
Deferred gain on January 1, 2012 (605,595
(b)
411,750)
Depreciation expense for 2012 (605,595 / 5
(c)
years)
Interest expense for 2012 (605,595 150,000) x
(d)
12%
Gain on sale-leaseback for 2010 (193,845 / 5
(e)
years)

605,595
193,845
121,119
54,671
38,769

56

Chapter 4 Leases

4-20. (Honest Company)


(a)
2012

July

July
Dec. 31

1 Cash
Accumulated depreciation
Equipment
Gain on sale leaseback
1 Rent expense
Cash
Prepaid rent
Rent expense

540,000
350,000
800,000
90,000
80,000
80,000
40,000
40,000

(b)
2012

July

1 Cash
Accumulated depreciation
Equipment
Gain on sale leaseback
Unearned profit on sale
leaseback
1 Rent expense
Cash

Dec. 31

Prepaid rent
Rent expense
31 Unearned profit on sale leaseback
Profit on sale leaseback

540,000
350,000
800,000
50,000
40,000
80,000
80,000
40,000
40,000
5,000
5,000

(40,000/4) x 6/12
(c)
2012

July

1 Cash
Accumulated depreciation
Loss on sale leaseback
Equipment
1 Rent expense
Cash

Dec. 31

Prepaid rent
Rent expense

400,000
350,000
50,000
800,000
80,000
80,000
40,000
40,000

57

Chapter 4 Leases

(d)
2012

July

Cash
Accumulated depreciation
Deferred loss on sale leaseback
Equipment

1 Rent expense
Cash

800,000
80,000
80,000

Dec. 31 Prepaid rent


Rent expense

40,000
40,000

Rent expense/Loss on sale leaseback


Deferred loss on sale leaseback
100,000 x 6/48 = 12,500

12,500
12,500

MULTIPLE CHOICE QUESTIONS

Theor
y
MC1
MC2
MC3
MC4
MC5
MC6
MC7
MC8
MC9
MC10
MC11
MC12

350,000
350,000
100,000

B
A
C
D
D
D
A
C
C
A
C
A

MC13
MC14
MC15
MC16
MC17
MC18
MC19
MC20
MC21
MC22
MC23
MC24

B
B
A
C
C
A
C
C
B
A
A
C

Problems
MC25
MC26
MC27
MC28
MC29
MC30

C
C
D
D
C
B

MC31
MC32

B
D

MC33
MC34

A
B

MC35
MC36
MC37
MC38
MC39
MC40
MC41

B
D
D
C
A
D

MC42

900,000 + (500,000 / 5 yrs) = 1,000,000


40,000 + (125,000 x 4) = 540,000; 540,000 / 5 yrs = 108,000
This is an operating lease; thus, there is no interest expense involved.
240,000 x 6/12 = 120,000
3,600,000 / 3 yrs = 1,200,000
3,600,000 x 2/3 = 2,400,000; 600,000 + 900,000 = 1,500,000
2,400,000 1,500,000 = 900,000
500,000 x 4.61 = 2,305,000
2,305,000 500,000 283,400 = 1,521,600; 500,000 (12% x
1,805,000)=283,400
2,305,000 / 6 = 384,167
1,350,000-200,000=1,150,000; 1,150,000 x 10% = 115,000
200,000-115,000 = 85,000
400,000 x 5.95 = 2,380,000
(2,400,000 200,000) / 8 yrs = 275,000
(1,742,174 x 3.48685) + (1,200,000 x .68301) = 6,894,311
(6,894,311 1,200,000)/4 = 1,423,578
1,742,174 X 3.48685 = 6,074,699
6,074,699/4 = 1,518,675
CV = 6,245,450 [(6,245,450 80,000)/6 X 4 ] = 2,135,150
2,135,150 1,250,000 = 885,150
100,000 x 6 = 600,000

58

Chapter 4 Leases

MC43

MC44
MC45

C
A

MC46

MC47

MC48
MC49

A
D

MC50
MC51

C
D

MC52

MC53

MC54

MC55
MC56

A
B

MC57

MC58

MC59

MC60

100,000 x 4.8 = 480,000; 480,000 100,000 = 380,000


380,000 x 10% x 5/12 = 15,833
3,520,000 2,800,000 = 720,000
3,520,000 600,000 = 2,920,000; 2,920,000 x 10% x 6/12 = 146,000
400,00
0
300,000 15,000 + (400,000 X 10%) = 125,000
400,00
0
(108,951 40,000 interest) = 331,049
323,40 / 4.312 = 75,000; 75,000 x 5 = 375,000; 375,000 323,400 =
0
51,600
98,512 x 10% = 9,851; 30,000-9,851 =20,149; 98,512-20,149=78,363
78,363 x 10% = 7,836
(98,512-5,000) / 4 = 23,378
(30,000 x 2) + 5,000 = 65,000
Initial direct costs increase the net investment in lease recorded by the
lessor;
although an unguaranteed residual value is considered by the lessor and
not by
the lessee, the terms of the lease already indicated that the residual
value is
guaranteed.
This excess over the limited hours should be accrued by the end of 2013,
even if
payment would be made at January 1, 2013
550,00 400,000 =150,000 ; in the absence of any information, sales
0
price is
presumed to be at fair value.
4,800,000 3,600,000 = 1,200,000
1,200,000 /12 x 6/12 = 50,000
150,00
0
100,000 = 50,000; 50,000 x 9/10 = 45,000
800,00 710,000 = 90,000 deferred on Mar. 31; 710,000 650,000 =
0
60,000
immediate gain on Mar. 31; 60,000 + [(90,000/12) x 9/12] = 65,625
If selling price is at fair value, full amount of gain is recognized
immediately.
Additional information, lease term is 12 years out of total life of 25
years.
Deferred loss = 650,000 470,000; amortized loss = (180,000/12) x 9/12
=
11,250; 470,000 11,250 = 168,750

59

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