Homework Problem 31

1
Homework Problem 3-1

• Situation 1

2
Type of LeaseLessee
3
Capital Lease - Lesseeif one or more of
following criteria met

• Lease transfers ownership of property to lessee
• Lease contains a bargain purchase option
• Lease term equals 75 or more of economic life of
  property
• Present value of lease payments equals or exceeds
  90 of fair value of property

• Lease does not transfer ownership of property to
  lessee
• Lease does not contain a bargain purchase option
• 4 year lease is less than 75 of economic life of
  property 4/(43) 57
• Does present value of lease payments equal or
  exceeds 90 of fair value of property?

4
Rate of Interest

• Lessors Implicit Interest Rate
• Lessees Incremental Interest Rate

5
Lessees Rate of Interest

• In general, use lessors implicit rate of
  interest, when known
• interest rate usually not known by lessee
• If implicit rate significantly larger than
  incremental rate, incremental rate should be used

6
Interest Rate

• Lessors Implicit Interest Rate
• 15
• Lessees Incremental Interest Rate
• 18
• Use Lessees Incremental Interest Rate
• Implicit rate does not exceeds incremental rate

7
2,400
2,400
2,400
2,400
2,000
x1
x2
x3
x4

• PV 2,400 2,400(PV of Annuity, n 3, i 15)
  
• 2,000(PV of 1, n 4, i 15)
• 2,400 2,400(2.28) 2,000(0.57)
• 2,400 5,472 1,140
• 9,012

8
2,400
2,400
2,400
2,400
2,000
x1
x2
x3
x4
Excel
9
Lessees Valuation ofLeased Asset

• According to FASB 13
• Cost of asset should be no more than its fair
  value, if known

10
2,400
2,400
2,400
2,400
2,000
x1
x2
x3
x4

• PV 2,400 2,400(PV of Annuity, n 3, i 15)
  
• 2,000(PV of 1, n 4, i 15)
• 2,400 2,400(2.28) 2,000(0.57)
• 2,400 5,472 1,140
• 9,012
• Use FMV of 9,000 (which approximates 9,012)

11
Lessee

• 01/01/x2
• Leased Automobile 9,000
• Lease Obligation 9,000

12
Lessee

• 01/01/x2
• Leased Automobile 9,000
• Lease Obligation 9,000
• Lease Obligation 2,400
• Cash in Bank 2,400

13
Lessee
12/31/x2 Depreciation Expense Accum. Depr. -
Lsd. Auto
14
Depreciation Expense

• (9,000 - 2,000)/4 years 1,750

15
Lessee
12/31/x2 Depreciation Expense 1,750 Accum.
Depr. - Lsd. Auto 1,750
16
Lessee
12/31/x2 Depreciation Expense 1,750 Accum.
Depr. - Lsd. Auto 1,750 Interest
Expense Interest Payable
17
Interest Expense

• Interest Principal x Rate x Time
• (9,000 - 2,400) x 15 x 1 year
• 6,600 x 15 x 1
• 990

18
Debt Amortization Table15 Interest Rate

• Year Pymt. Interest Princ Red Net Debt
• 1 2,400 0.00 2,400.00 6,600.00
• 2 2,400 990.00 1,410.00 5,190.00
• 3 2,400 778.50 1,621.50 3,568.50
• 4 2,400 535.28 1,864.73 1,703.78
• 5 2,000 255.57 1,744.43 ( 40.66)

19
Lessee
12/31/x2 Depreciation Expense 1,750 Accum.
Depr. - Lsd. Auto 1,750 Interest Expense
990 Interest Payable 990
20
(No Transcript)
21

• Accounting for Lessor

22
Accounting for Lessors

• Lessee
• Operating
• Capital

• Lessor
• Operating
• Direct Financing
• Sales-Type

23
Group I Requirements

• Lease transfers ownership of property to lessee
• Lease contains a bargain purchase option
• Lease term equals 75 or more of economic life of
  property
• Present value of lease payments equals or exceeds
  90 of fair value of property

24
Group II Requirements

• Collectibility of the payments from lessee
  reasonably predictable
• No important uncertainties surround commitments
  by lessor

25
Accounting for Lessors

• Lessee
• Operating
• Capital

• Lessor
• Operating
• Direct Financing
• Sales-Type

26
Direct Financing Lease

• Lessor agrees to purchase asset and lease it to
  lessee
• Normally represents financing arrangement by
  lessor
• Normally lessor not involved in direct sale of
  leased asset

27
Direct Financing LeaseAdditional Requirement

• The fair market value (FMV) of the leased asset
  at inception of the lease is approximately equal
  to the cost (or carrying amount) of the asset

28
Direct Financing vs. Sales-Type

• Direct Financing Lease
• The fair market value (FMV) of the leased asset
  at inception of the lease is approximately equal
  to the cost (or carrying amount) of the asset
• Sales-Type Lease
• Fair market value (FMV) of minimum lease payments
  plus the unguaranteed residual value is greater
  than the cost or carrying amount of leased asset
• Manufacturer or dealer leases an asset that might
  otherwise be sold for a profit

29
Lessor Sales-Type Lease
01/01/x2 Lease Pymts. Rec. Cost of Goods
Sold Sales Inventory Unearned Int Inc -
Leases
30
Lessor Sales-Type Lease
01/01/x2 Lease Pymts. Rec. Cost of Goods
Sold Sales Inventory Unearned Int Inc -
Leases
(2,400 x 4) 9,600
31
Lessor Sales-Type Lease
01/01/x2 Lease Pymts. Rec. Cost of Goods
Sold Sales Inventory Unearned Int Inc -
Leases
(2,400 x 4) 2,000 9,600 2,000 11,600
32
Lessor Sales-Type Lease
01/01/x2 Lease Pymts. Rec. 11,600 Cost of
Goods Sold Sales Inventory Unearned Int
Inc - Leases
(2,400 x 4) 2,000 9,600 2,000 11,600
33
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 11,600
• Cost of Goods Sold 6,500
• Sales
• Inventory 6,500
• Unearned Int Inc - Leases

34
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 11,600
• Cost of Goods Sold 6,500
• Sales 9,000
• Inventory 6,500
• Unearned Int Inc - Leases

35
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 11,600
• Cost of Goods Sold 6,500
• Sales 9,000
• Inventory 6,500
• Unearned Int Inc - Leases 2,600

36
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 11,600
• Cost of Goods Sold 6,500
• Sales 9,000
• Inventory 6,500
• Unearned Int Inc - Leases 2,600
• Cash in Bank 2,400
• Lease Pymts. Rec. 2,400

37
Lessor
12/31/x2 Unearn Int Inc - Leases Interest
Income
38
Interest Income

• Lease Payments Receivable 11,600
• Less Initial Payment 2,400
• Lease Payments Receivable 9,200
• Unearned Interest Income - Leases 2,600
• Net Receivable 6,600
• Interest Rate 15
• Interest Income 990

39
Lessor
12/31/x2 Unearn Int Inc - Leases
990 Interest Income 990
40
Journal Entries20x3
41
Lessee

• 01/01/x3
• Lease Obligation
• Interest Payable
• Cash in Bank

42
Lessee

• 01/01/x3
• Lease Obligation 1,410
• Interest Payable 990
• Cash in Bank 2,400

43
Lessor

• 01/01/x3
• Cash in Bank
• Lease Pymts Rec

44
Lessor

• 01/01/x3
• Cash in Bank 2,400
• Lease Pymts Rec 2,400

45
Lessee
12/31/x3 Depreciation Expense Accum. Depr. -
Lsd. Auto
46
Lessee
12/31/x3 Depreciation Expense 1,750 Accum.
Depr. - Lsd. Auto 1,750 Interest
Expense Interest Payable
47
Debt Amortization Table15 Interest Rate

• Year Pymt. Interest Princ Red Net Debt
• 1 2,400 0.00 2,400.00 6,600.00
• 2 2,400 990.00 1,410.00 5,190.00
• 3 2,400 778.50 1,621.50 3,568.50
• 4 2,400 535.28 1,864.73 1,703.78
• 5 2,000 255.57 1,744.43 ( 40.66)

48
Lessee
12/31/x3 Depreciation Expense 1,750 Accum.
Depr. - Lsd. Auto 1,750 Interest Expense
779 Interest Payable 779
49
Lessor
12/31/x3 Unearned Int Inc Interest
Income
Lease Unearned Net Payment Pymts
Rec Interest Int Income Lease Rec. 11,600 2,600
9,000 2,400 9,200 2,600 6,600 2,400 6,800 990
1,610 5,190
50
Lessor
12/31/x3 Unearned Int Inc Interest
Income
Lease Unearned Net Payment Pymts
Rec Interest Int Income Lease Rec. 11,600 2,600
9,000 2,400 9,200 2,600 6,600 2,400 6,800 990
1,610 5,190
5,190 x 15 779
51
Lessor
12/31/x3 Unearned Int Inc 779 Interest
Income 779
5,190 x 15 779

52
End-of-Lease Entries
53
LesseeIf Property FMV 2,000

• Lease Obligation
• Interest Payable
• Accum. Depr - Lsd. Auto
• Leased Auto

54
LesseeIf Property FMV 2,000

• Lease Obligation
• Interest Payable
• Accum. Depr - Lsd. Auto
• Leased Auto 9,000

55
LesseeIf Property FMV 2,000

• Lease Obligation
• Interest Payable
• Accum. Depr - Lsd. Auto
• Leased Auto 9,000

(9,000 - 2,000)/4 years 1,750 4 x 1,750
7,000
56
LesseeIf Property FMV 2,000

• Lease Obligation
• Interest Payable
• Accum. Depr - Lsd. Auto 7,000
• Leased Auto 9,000

(9,000 - 2,000)/4 years 1,750 4 x 1,750
7,000
57
Debt Amortization Table15 Interest Rate

• Year Pymt. Interest Princ Red Net Debt
• 1 2,400 0.00 2,400.00 6,600.00
• 2 2,400 990.00 1,410.00 5,190.00
• 3 2,400 778.50 1,621.50 3,568.50
• 4 2,400 535.28 1,864.73 1,703.78
• 5 2,000 255.57 1,744.43 ( 40.66)
• Rev 5 2,000 296.22 1,703.78 0.00

58
LesseeIf Property FMV 2,000

• Lease Obligation 1,704
• Interest Expense 296
• Accum. Depr - Lsd. Auto 7,000
• Leased Auto 9,000

59
LessorIf Property FMV 2,000

• Inventory 2,000
• Lease Payments Receivable 2,000
• Unearned Interest Income 296
• Interest Income 296

60
LesseeIf Property FMV lt 2,000

• Lease Obligation 1,704
• Interest Expense 296
• Accum. Depr - Lsd. Auto 7,000
• Loss on Disposal of Lsd. Asset 750
• Leased Auto 9,000
• Cash in Bank 750

61
LessorIf Property FMV lt 2,000

• Inventory 1,250
• Cash in Bank 750
• Lease Payments Receivable 2,000
• Unearned Interest Income 296
• Interest Income 296

62
(No Transcript)
63
Homework Problem 3-1
Situation 2
64
Capital Lease - Lesseeif one or more of
following criteria met

• Lease transfers ownership of property to lessee
• Lease contains a bargain purchase option
• Lease term equals 75 or more of economic life of
  property
• Present value of lease payments equals or exceeds
  90 of fair value of property

• Lease does not transfer ownership of property to
  lessee
• Lease does not contain a bargain purchase option
• 4 year lease is less than 75 of economic life of
  property 4/10 40
• Does present value of lease payments equal or
  exceeds 90 of fair value of property?

65
205,000
205,000
205,000
205,000
x1
x2
x3
x4

• PV 205,000 205,000(PV of Annuity, n 3, i
  10)
• 205,000 205,000(2.49)
• 205,000 510,450
• 715,450
• 715,450 lt 90(1,000,000) ??Operating Lease

66
205,000
205,000
205,000
205,000
x1
x2
x3
x4

• 715,450 lt 90(1,000,000) ??Operating Lease

67
Lessee

• 01/01/x2
• Rent Expense 205,000
• Cash in Bank 205,000

68
Lessee

• 01/01/x2
• Rent Expense 205,000
• Cash in Bank 205,000
• 01/01/x3
• Rent Expense 205,000
• Cash in Bank 205,000

69
(No Transcript)
70
Accounting for Lessors

• Lessee
• Operating
• Capital

• Lessor
• Operating
• Direct Financing
• Sales-Type

71
Lessor Operating Lease

• 01/01/x2
• Cash in Bank 205,000
• Rental Income 205,000

72
Lessor Operating Lease

• 01/01/x2
• Cash in Bank 205,000
• Rental Income 205,000
• 12/31/x2
• Depreciation Expense
• Accum. Depr. - Mach.

73
Lessor Operating Lease

• 01/01/x2
• Cash in Bank 205,000
• Rental Income 205,000
• 12/31/x2
• Depreciation Expense 100,000
• Accum. Depr. - Mach. 100,000

1,000,000 10 years 100,000 per year
74
Lessor Operating Lease

• 01/01/x3
• Cash in Bank 205,000
• Rental Income 205,000
• 12/31/x3
• Depreciation Expense 100,000
• Accum. Depr. - Mach. 100,000

75
(No Transcript)
76
Homework Problem 3-1

• Situation 3

77
Capital Lease - Lesseeif one or more of
following criteria met

• Lease transfers ownership of property to lessee
• Lease contains a bargain purchase option
• Lease term equals 75 or more of economic life of
  property
• Present value of lease payments equals or exceeds
  90 of fair value of property

• Lease does not transfer ownership of property to
  lessee
• Lease does not contain a bargain purchase option
• 5 year lease is more than 75 of economic life of
  property 5/6 83
• ??Capital Lease

78
Capital Lease - Lesseeif one or more of
following criteria met

• Lease transfers ownership of property to lessee
• Lease contains a bargain purchase option
• Lease term equals 75 or more of economic life of
  property
• Present value of lease payments equals or exceeds
  90 of fair value of property

• Lease does not transfer ownership of property to
  lessee
• Lease does not contain a bargain purchase option
• 5 year lease is more than 75 of economic life of
  property 5/6 83
• Does present value of lease payments equal or
  exceeds 90 of fair value of property?

79
12,000
12,000
12,000
12,000
12,000
x2
x3
x5
x4
x6

• PV 12,000 12,000(PV of Annuity, n 4, i
  10)
• 12,000 12,000(3.17)
• 12,000 38,040
• 50,040

80
12,000
12,000
12,000
12,000
12,000
x2
x3
x5
x4
x6

• PV 12,000 12,000(PV of Annuity, n 4, i
  10)
• 12,000 12,000(3.17)
• 12,000 38,040
• 50,040
• 50,040 ? 50,660

81
12,000
12,000
12,000
12,000
12,000
x2
x3
x5
x4
x6

• PV 12,000 12,000(PV of Annuity, n 4, i
  10)
• 12,000 12,000(3.17)
• 12,000 38,040
• 50,040
• 50,040 ? 50,660
• 50,660
• - 50,040
• 620

82
12,000
12,000
12,000
12,000
12,000
1,000
x2
x3
x5
x4
x6

• PV 1,000(PV of 1, n 5, i 10)
• 1,000(0.62)
• 620

83
12,000
12,000
12,000
12,000
12,000
1,000
x2
x3
x5
x4
x6

• PV 1,000(PV of 1, n 5, i 10)
• 1,000(0.62)
• 620
• 50,040 ? 50,660
• 50,660
• - 50,040
• 620

84
12,000
12,000
12,000
12,000
12,000
1,000
x2
x3
x5
x4
x6

• 50,040 ? 50,660
• 50,660
• - 50,040
• 620

85
Lessee

• 01/01/x2
• Leased Computer 50,040
• Lease Obligation 50,040
• Lease Obligation 12,000
• Cash in Bank 12,000

86
Lessee
12/31/x2 Depreciation Expense Accum. Depr. -
Lsd. Cmp
87
Lessee
12/31/x2 Depreciation Expense Accum. Depr. -
Lsd. Cmp
50,040 5 years 10,008
88
Lessee
12/31/x2 Depreciation Expense 10,008 Accum.
Depr. - Lsd. Cmp 10,008 Interest
Expense Interest Payable
89
Interest Expense

• Initial liability 50,040
• Payment 12,000
• Present liability 38,040
• Interest rate 10
• Interest expense 3,804

90
Lessee
12/31/x2 Depreciation Expense 10,008 Accum.
Depr. - Lsd. Cmp 10,008 Interest Expense
3,804 Interest Payable 3,804
91
(No Transcript)
92

• Accounting for Lessor

93
Accounting for Lessors

• Lessee
• Operating
• Capital

• Lessor
• Operating
• Direct Financing
• Sales-Type

94
Accounting for Lessors

• Lessee
• Operating
• Capital

• Lessor
• Operating
• Direct Financing
• Sales-Type

95
Direct Financing vs. Sales-Type

• Direct Financing Lease
• The fair market value (FMV) of the leased asset
  at inception of the lease is approximately equal
  to the cost (or carrying amount) of the asset
• Sales-Type Lease
• Fair market value (FMV) of minimum lease payments
  plus the unguaranteed residual value is greater
  than the cost or carrying amount of leased asset
• Manufacturer or dealer leases an asset that might
  otherwise be sold for a profit

96
Lessor Sales-Type Lease
01/01/x2 Lease Pymts. Rec. Cost of Goods
Sold Sales Inventory Unearned Int Inc -
Leases
97
Lessor Sales-Type Lease
01/01/x2 Lease Pymts. Rec. Cost of Goods
Sold Sales Inventory Unearned Int Inc -
Leases
(12,000 x 5) 60,000
98
Lessor Sales-Type Lease
01/01/x2 Lease Pymts. Rec. Cost of Goods
Sold Sales Inventory Unearned Int Inc -
Leases
(12,000 x 5) 1,000 60,000 1,000 61,000
99
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 61,000
• Cost of Goods Sold
• Sales
• Inventory
• Unearned Int Inc - Leases

(12,000 x 5) 1,000 60,000 1,000 61,000
100
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 61,000
• Cost of Goods Sold 39,380
• Sales
• Inventory 40,000
• Unearned Int Inc - Leases

40,000 - 620 39,380
101
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 61,000
• Cost of Goods Sold 39,380
• Sales 50,040
• Inventory 40,000
• Unearned Int Inc - Leases

50,660 - 620 50,040
102
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 61,000
• Cost of Goods Sold 39,380
• Sales 50,040
• Inventory 40,000
• Unearned Int Inc - Leases 10,340

103
Lessor Sales-Type Lease

• 01/01/x2
• Lease Pymts. Rec. 61,000
• Cost of Goods Sold 39,380
• Sales 50,040
• Inventory 40,000
• Unearned Int Inc - Leases 10,340
• Cash in Bank 12,000
• Lease Pymts. Rec. 12,000

104
Lessor
12/31/x2 Unearn Int Inc - Leases Interest
Income
105
Interest Income

• Lease Payments Receivable 61,000
• Less Payment 12,000
• Lease Payments Receivable 49,000
• Unearned Interest Income - Leases 10,340
• Net Receivable 38,660
• Interest Rate 10
• Interest Income 3,866

106
Lessor
12/31/x2 Unearn Int Inc - Leases
3,866 Interest Income 3,866
107
(No Transcript)
108
Journal Entries20x3
109
Lessee

• 01/01/x3
• Lease Obligation
• Interest Payable
• Cash in Bank

110
Lessee

• 01/01/x3
• Lease Obligation 8,196
• Interest Payable 3,804
• Cash in Bank 12,000

111
Lessor

• 01/01/x3
• Cash in Bank
• Lease Pymts Rec

112
Lessor

• 01/01/x3
• Cash in Bank 12,000
• Lease Pymts Rec 12,000

113
(No Transcript)
114
Lessee
12/31/x3 Depreciation Expense Accum. Depr. -
Lsd. Cmp
115
Lessee
12/31/x3 Depreciation Expense 10,008 Accum.
Depr. - Lsd. Cmp 10,008
116
Lessee
12/31/x3 Depreciation Expense 10,008 Accum.
Depr. - Lsd. Cmp 10,008 Interest
Expense Interest Payable
117
Interest Expense

• Last liability 38,040
• 1/1 Liab reduction 8,196
• 29,844
• Interest rate 10
• Interest expense 2,984

118
Lessee
12/31/x3 Depreciation Expense 10,008 Accum.
Depr. - Lsd. Cmp 10,008 Interest Expense
2,984 Interest Payable 2,984
119
(No Transcript)
120
Lessor
12/31/x3 Unearned Int Inc Interest
Income
121
Interest Income

• Prior Net Lease Pymts Rec 38,660
• Less Payment 12,000
• Lease Payments Receivable 26,660
• Unearned Interest Income - Leases 3,866
• Net Receivable 30,526
• Interest Rate 10
• Interest Income 3,053

122
Lessor
12/31/x3 Unearned Int Inc 3,053 Interest
Income 3,053
123
(No Transcript)
124
End-of-Lease Entries
125
LesseeIf Property FMV ? 1,000

• ?

126
LesseeIf Property FMV ? 1,000

• Lease Obligation x
• Interest Expense x
• Accum. Depr - Lsd. Auto x
• Leased Computer 50,040

127
LessorIf Property FMV 1,000

• Inventory 1,000
• Lease Payments Receivable 1,000
• Unearned Interest Income xxx
• Interest Income xxx

128
LessorIf Property FMV ? 1,000

• Inventory XXX
• Loss or Gain xx xx
• Lease Payments Receivable 1,000
• Unearned Interest Income xxx
• Interest Income xxx

129
(No Transcript)
130
Homework Problem 3-1

• Situation 4

131
Capital Lease - Lesseeif one or more of
following criteria met

• Lease transfers ownership of property to lessee
• Lease contains a bargain purchase option
• Lease term equals 75 or more of economic life of
  property
• Present value of lease payments equals or exceeds
  90 of fair value of property

• Lease does not transfer ownership of property to
  lessee
• Lease does contain a bargain purchase option
• FMV at end of lease 4,000
• Option price 2,500
• ??Capital Lease

132
3,711 3,711 3,711 3,711 3,711 3,711 3,711
3,711 2,500
x2
x3
x5
x4

• PV 3,711 3,711(PV of Annuity, n 7, i 6)
  
• 2,500 (PV of 1, n8, i 6)
• 3,711 3,711(5.58) 2,500(.63)
• 3,711 20,707 1,575
• 25,993 which approximates 26,000

133
3,711 3,711 3,711 3,711 3,711 3,711 3,711
3,711 2,500
x2
x3
x5
x4

• 25,996 which approximates 26,000

134
Lessee

• 01/01/x2
• Leased Off. Eq. 26,000
• Lease Obligation 26,000
• Lease Obligation 3,711
• Cash in Bank 3,711

135
Lessee
07/01/x2 Lease Obligation Interest
Expense Cash in Bank 3,711
136
Interest Expense

• Original liability 26,000
• Payment 3,711
• Present liability 22,289
• Interest rate 6
• Interest expense 1,337

137
Lessee
07/01/x2 Lease Obligation 2,374 Interest
Expense 1,337 Cash in Bank 3,711
138
Lessee
07/01/x2 Lease Obligation 2,374 Interest
Expense 1,337 Cash in Bank
3,711 Maint. Expense 500 Cash in
Bank 500
139
(No Transcript)
140
Lessee
12/31/x2 Depreciation Expense Accum. Depr. -
Lsd. Cmp
141
Depreciation Expense

• (26,000 - Salvage) Life

142
Depreciation Expense

• (26,000 - Salvage) Life
• 4,000 salvage value at end of lease
• 0 salvage value at end of economic life

143
Depreciation Expense

• (26,000 - 0) Life

144
Depreciation Expense

• (26,000 - 0) Life
• four year lease
• seven year useful life of equipment

145
Depreciation Expense

• (26,000 - 0) 7

146
Depreciation Expense

• (26,000 - 0) 7 3,714

147
Lessee
12/31/x2 Depreciation Expense 3,714 Acc.
Depr. - Lsd. Off. Eq. 3,714
148
Lessee
12/31/x2 Depreciation Expense 3,714 Acc.
Depr. - Lsd. Off. Eq. 3,714 Interest
Expense Interest Payable
149
Interest Expense

• Prior liability 22,289
• Reduct in liab. 2,374
• Present liability 19,915
• Interest rate 6
• Interest expense 1,195

150
Lessee
12/31/x2 Depreciation Expense 3,714 Acc.
Depr. - Lsd. Off. Eq. 3,714 Interest
Expense 1,195 Interest Payable
1,195
151
Lessee
12/31/x2 Maintenance Expense
500 Maintenance Payable 500
152
(No Transcript)
153

• Accounting for Lessor

154
Accounting for Lessors

• Lessee
• Operating
• Capital

• Lessor
• Operating
• Direct Financing
• Sales-Type

155
Accounting for Lessors

• Lessee
• Operating
• Capital

• Lessor
• Operating
• Direct Financing
• Sales-Type

156
Direct Financing vs. Sales-Type

• Direct Financing Lease
• The fair market value (FMV) of the leased asset
  at inception of the lease is approximately equal
  to the cost (or carrying amount) of the asset
• Sales-Type Lease
• Fair market value (FMV) of minimum lease payments
  plus the unguaranteed residual value is greater
  than the cost or carrying amount of leased asset
• Manufacturer or dealer leases an asset that might
  otherwise be sold for a profit

157
Lessor Direct Financing Lease
01/01/x2 Lease Pymts. Rec. Office
Equipment Unearned Int Inc - Leases
158
Lessor Direct Financing Lease
01/01/x2 Lease Pymts. Rec. Office
Equipment Unearned Int Inc - Leases
(3,711 x 8) 2,500 29,688 2,500 32,188
159
Lessor Direct Financing Lease
01/01/x2 Lease Pymts. Rec. 32,188 Office
Equipment Unearned Int Inc - Leases
(3,711 x 8) 2,500 29,688 2,500 32,188
160
Lessor Direct Financing Lease
01/01/x2 Lease Pymts. Rec. 32,188 Office
Equipment 26,000 Unearned Int Inc -
Leases
161
Lessor Direct Financing Lease
01/01/x2 Lease Pymts. Rec. 32,188 Office
Equipment 26,000 Unearned Int Inc - Leases
6,188
162
Lessor Direct Financing Lease
01/01/x2 Lease Pymts. Rec. 32,188 Office
Equipment 26,000 Unearned Int Inc - Leases
6,188 Cash in Bank Lease Pymts.
Rec.
163
Lessor Direct Financing Lease
01/01/x2 Lease Pymts. Rec. 32,188 Office
Equipment 26,000 Unearned Int Inc - Leases
6,188 Cash in Bank 3,711 Lease Pymts.
Rec. 3,711
164
Lessor Direct Financing Lease
07/01/x2 Cash in Bank Lease Pymts. Rec.
165
Lessor Direct Financing Lease
07/01/x2 Cash in Bank 3,711 Lease Pymts.
Rec. 3,711
166
Lessor Direct Financing Lease
07/01/x2 Cash in Bank 3,711 Lease Pymts.
Rec. 3,711 Unearned Int Inc - Leases Int.
Income - Leases
167
Interest Income

• Lease Payments Receivable 32,188
• Less Payment 3,711
• Lease Payments Receivable 28,477
• Unearned Interest Income - Leases 6,188
• Net Receivable 22,289
• Interest Rate (12/yr 6/half yr) 6
• Interest Income 1,337

168
Lessor Direct Financing Lease
07/01/x2 Cash in Bank 3,711 Lease Pymts.
Rec. 3,711 Unearned Int Inc -
Leases 1,337 Int. Income - Leases 1,337
169
Lessor Direct Financing Lease
12/31/x2 Unearned Int Inc - Leases Int.
Income - Leases
170
Interest Income

• Prior Lease Pymts Rec 28,477
• Less Payment 3,711
• Lease Payments Receivable 24,766
• Unearned Interest Income - Leases
• (6,188 - 1,337) 4,851
• Net Receivable 19,915
• Interest Rate (12/yr 6/half yr) 6
• Interest Income 1,195

171
Lessor Direct Financing Lease
12/31/x2 Unearned Int Inc - Leases 1,195 Int.
Income - Leases 1,195
172
(No Transcript)
173
Journal Entries20x3
174
Lessee

• 01/01/x3
• Lease Obligation
• Interest Payable
• Cash in Bank

175
Lessee

• 01/01/x3
• Lease Obligation 2,516
• Interest Payable 1,195
• Cash in Bank 3,711

176
Lessee

• 01/01/x3
• Maintenance Payable 500
• Cash in Bank 500

177
Lessor

• 01/01/x3
• Cash in Bank
• Lease Pymts Rec

178
Lessor

• 01/01/x3
• Cash in Bank 3,711
• Lease Pymts Rec 3,711

179
(No Transcript)
180
Lessee

• 07/01/x3
• Lease Obligation
• Interest Expense
• Cash in Bank

181
Lessee

• 07/01/x3
• Lease Obligation
• Interest Expense
• Cash in Bank 3,711

182
Interest Expense

• Prior liability 19,915
• Reduct in liab. 2,516
• Present liability 17,399
• Interest rate 6
• Interest expense 1,044

183
Lessee

• 07/01/x3
• Lease Obligation 2,667
• Interest Expense 1,044
• Cash in Bank 3,711

184
Lessee

• 07/01/x3
• Maintenance Expense 500
• Cash in Bank 500

185
Lessor Direct Financing Lease
07/01/x3 Cash in Bank Lease Pymts.
Rec.
186
Lessor Direct Financing Lease
07/01/x3 Cash in Bank 3,711 Lease Pymts.
Rec. 3,711
187
Lessor Direct Financing Lease
07/01/x3 Cash in Bank 3,711 Lease Pymts.
Rec. 3,711 Unearned Int Inc -
Leases Int. Income - Leases
188
Interest Income

• Prior Lease Pymts Rec 24,766
• Less Payment 3,711
• Lease Payments Receivable 21,055
• Unearned Interest Income - Leases
• (4,851 - 1,195) 3,656
• Net Receivable 17,399
• Interest Rate (12/yr 6/half yr) 6
• Interest Income 1,044

189
Lessor Direct Financing Lease
07/01/x3 Cash in Bank 3,711 Lease Pymts.
Rec. 3,711 Unearned Int Inc -
Leases 1,044 Int. Income - Leases 1,044
190
(No Transcript)
191
Lessee
12/31/x3 Depreciation Expense Acc. Depr. -
Lsd. Of Eq
192
Lessee
12/31/x3 Depreciation Expense 3,714 Acc.
Depr. - Lsd. Of Eq 3,714
193
Lessee
12/31/x3 Depreciation Expense 3,714 Acc.
Depr. - Lsd. Of Eq 3,714 Interest
Expense Interest Payable
194
Interest Expense

• Last liability 17,399
• 7/1 Liab reduction 2,667
• 14,732
• Interest rate 6
• Interest expense 884

195
Lessee
12/31/x3 Depreciation Expense 3,714 Acc.
Depr. - Lsd. Of Eq 3,714 Interest Expense
884 Interest Payable 884
196
Lessee
12/31/x3 Maintenance Expense
500 Maintenance Payable 500
197
(No Transcript)
198
Lessor
12/31/x3 Unearned Int Inc Interest
Income
199
Interest Income

• Prior Net Lease Pymts Rec 21,055
• Less Payment 3,711
• Lease Payments Receivable 17,344
• Unearned Interest Income - Leases 2,612
• Net Receivable 14,732
• Interest Rate 6
• Interest Income 884

200
Lessor
12/31/x3 Unearned Int Inc 884 Interest
Income 884
201
(No Transcript)
202
The End

• Homework Problems Leases

203
Minimum Lease Payments

• Rental payments, excluding executory costs
• Bargain purchase price (if any)
• Guaranteed residual value (if any)
• Penalty for failure to renew (if any)