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CHAPTER 4

LEASES

PROBLEMS

4-1. (Hope Manufacturing Company and Charity Co.)


(a) Lessor’s Books
2007
Jan. 1 Machinery For Lease 2,200,000
Cash 2,200,000

1 Cash 600,000
Rent Revenue 400,000
Unearned Rent Revenue 200,000
2 M/5 = 400,000
2 M x 30% = 600,000

1 Machinery For Lease 60,000


Cash 60,000

Dec. Depreciation Expense 212,000


3
1
Accumulated Depreciation 200,000
Machine for Lease 12,000
(2.2 M – 200,000)/10
200,000
60,000 / 5 years
12,000
Total
212,000
2008
Jan. 1 Cash 400,000
Rent Revenue 400,000
2,000,000 x 20%

Dec. Depreciation Expense 212,000


3
1
Accumulated Depreciation 200,000
Machine for Lease 12,000

Lessee’s Books
2007
Jan. 1 Rent Expense 400,000
Prepaid Rent 200,000
Cash 600,000
2008
Jan. 1 Rent Expense 400,000
Cash 400,00
(b)
Income Statement: Hope Charity
Rent Revenue 400,000
Chapter 4 – Leases

Depreciation Expense 212,000


Rent Expense 400,000
Balance Sheet: Hope Charity
Machine for Lease, net of Accum 2,048,000
Depreciation
Unearned Rent Revenue 200,000
Prepaid Rent 200,000

4-2. (Blessed Realty)


a. 7,500 x 4 mos. 30,000
10,000 x 3 mos. 30,000
12,000 x 3 mos. 36,000
15,000 x 2 mos. 30,000
Total 126,000
÷ 12 mos.
Monthly rent expense 10,500
No. of mos. From Sept. 1 – Dec. 31, 2005 x 4
Rent Expense for 2006 42,000

b. Rent Expense for 2006 42,000


Rent payments made during 2006 30,000
Rent Payable at December 31, 2006 12,000

4-3. (Faith Company)


(a) Monthly rental payment 10,000
No. of payments (60-6 mos free) x 54
Total payments 540,000
Rent Expense for 2007 (540,000 x 4/60)
36,000
or
Monthly rental 10,000
Less lease bonus (60,000/60 mos.)
(1,000)
Rent Expense per month 9,000
No. of months for Sept. 1- Dec. 31
x4
Rent Expense for 2007 36,000

(b) Faith Company


2007
Dec. Rent Expense 36,000
31
Rent Payable 36,000
2008
Mar. 1 Dec. 1 monthly entry
-
Rent Expense 10,000
Cash 10,000

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Chapter 4 – Leases

Dec. Rent Expense 8,000


31
Rent Payable 8,000
Rent expense for 2007:
540,000 x 12/60
108,000
Payments in 2007
100,000
Increase in rent payable
8,000

Love Corporation
2007
Dec. Rent Receivable 36,000
31
Rent Revenue 36,000

2008
Mar. 1 Dec. 1 monthly entry
-
Cash 10,000
Rent Revenue 10,000

Dec. Rent Receivable 8,000


31
Rent Revenue 8,000

4-4. (Way Company)


a. Fixed annual rental 960,000
Additional rent 5% (6 M – 5 M) 50,000
Amortization of lease bonus
125,000/10 yrs. 12,500
Rent Expense for 2007 1,022,500
b. Prepaid Rent Expense
125,000 – 12,500 112,500
Security Deposit
(discounted for 4 more years at 10%)
150,000 x .68301 = 102,452

4-5. (Truth Corporation)


a. Rent Revenue (920,000 x 9/12) 690,000
Depreciation Expense
3,500,000/6 = 583,333
583,333 x 9/12 (437,500)
Maintenance and other related costs
( 50,000)
Income before income tax
202,500
b. Rent Expense
690,000

4-6. (Provident Company)


Lessor’s Books
2007
July 1 Equipment For Lease 1,500,000
Cash 1,500,000

38
Chapter 4 – Leases

Oct. 1 Cash 54,000


Rent Revenue 54,000

1 Cash 20,000
Rent Revenue 20,000
Nov. 1 Cash 20,000
Rent Revenue 20,000

Dec. 1 Cash 20,000


Rent Revenue 20,000

31 Rent Revenue 49,500


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

31 Depreciation Expense 75,000


Accumulated Depreciation 75,000
(1,500,000 / 10) x 6/12

Lessee’s Books
2007
Oct. 1 Rent Expense 54,000
Cash 54,000
1 Rent Expense 20,000
Cash 20,000
Nov. 1 Rent Expense 20,000
Cash 20,000
Dec. 1 Rent Expense 20,000
Cash 20,000

31 Prepaid Rent 49,500


Rent Expense 49,500

4-7. (Generous, Inc.)


260,000 x 4.24 1,102,400
200,000 x 0.65 130,000
Total capitalized cost 1,232,400

(a) Amortization Table


Total Annual Reduction in
Date Payment Interest Principal Lease
Expense Obligation
01/01/07 - - 1,232,400
01/01/07 260,000 - 260,000 972,400
01/01/08 260,000 87,516 172.484 799,916
01/01/09 260,000 71,992 188,008 611,908
01/01/10 260,000 55,072 204,928 406,980
01/01/11 260,000 36,628 223,372 183,608

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Chapter 4 – Leases

12/31/11 200,000 16,392* 183,608 -


*Adjusted; difference is due to rounding off.
(b)
2007
Jan. 1 Leased Automobile 1,232,400
Finance Lease Obligation 1,232,400

1 Finance Lease Obligation 260,000


Cash 260,000

Dec. Interest Expense 87,516


3
1
Interest Payable 87,516

3 Depreciation Expense 206,480


1
Accumulated Depreciation 206,480
(1,232,400-200,000)/5
2008
Jan. 1 Finance Lease Obligation 172,484
Interest Payable 87,516
Cash 260,000

Dec. Interest Expense 71,992


3
1
Interest Payable 71,992

3 Depreciation Expense 206,480


1
Accumulated Depreciation 206,480

©
Dec. 31 Accumulated Depreciation 1,032,400
Interest Expense 16,392
Finance Lease Obligation 183,608
Leased Automobile 1,232,400
d.
Dec. 31 Loss on Finance Lease 50,000
Accumulated Depreciation 1,032,400
Interest Expense 16,392
Finance Lease Obligation 183,608
Leased Automobile 1,232,400
Cash 50,000

4-8. (Diana Corporation)


(a) 86,680 x 4.1699 =
61,447

(b) Amortization Table

40
Chapter 4 – Leases

Total Annual Reduction in Lease


Date Payment Interest Principal Obligation
Expense
01/01/07 - - 361,447
01/01/07 86,680 - 86,680 274,767
01/01/08 86,680 27,477 59,203 215,564
01/01/09 86,680 21,556 65,124 150,440
01/01/10 86,680 15,044 71,636 78,804
01/01/11 86,680 7,876* 78,804 -
*Adjusted; difference is due to rounding off.
(c)
2007
Jan Leased Machine 361,447
1
Finance Lease Obligation 361,447

Finance Lease Obligation 86,680


1
Cash 86,680

Dec. Interest Expense 27,477


3
1
Interest Payable 27,477

3 Depreciation Expense 72,289


1
Accumulated Depreciation 72,289
361,447/5 years

2008
Jan. 1 Finance Lease Obligation 59,203
Interest Payable 27,477
Cash 86,680

Dec. Interest Expense 21,556


3
1
Interest Payable 21,556

3 Depreciation Expense 72,289


1
Accumulated Depreciation 72,289

(d)
Balance Sheet 2006 2007
Property, Plant and Equipment
Leased Machine 361,447 361,447
Accumulated Depreciation 72,289 144,578
Current Liabilities:
Interest Payable 27,477 21,556
Finance Lease Obligation 59,203 65,124
Noncurrent Liabilities:
Finance Lease Obligation 215,564 150,440

Income Statement

41
Chapter 4 – Leases

Interest Expense 27,477 21,556


Depreciation Expense 72,289 72,289

4-9. (Riza, Inc.)


(a) 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)
Total Annual Reduction in Lease
Date Payment Interest Principal Obligation
Expense
12/31/07 - - 1,011,840
12/31/07 135,000 - 135,000 876,840
12/31/08 135,000 87,684 47,316 829,524
12/31/09 135,000 82,952 52,048 777,476

(c) (1,011,840 – 40,000) / 15 years = 64,789


(d)
12/31/07 Leased Equipment 1,011,840
Finance Lease Obligation 1,011,840
12/31/07 Finance Lease Obligation 135,000
Cash 135,000

12/31/08 Finance Lease Obligation 47,316


Interest Expense 87,684
Cash 135,000

12/31/08 Depreciation Expense 64,789


Accumulated Depreciation 64,789
(1,011,840 – 40,000) / 15
(e) Lease Obligation as of December 31, 2008:
Current portion 52,048
Noncurrent portion
777,476

4-10. (Shirley Corporation)


(a) 150,000 x 4.037 605,595
240,000 x 0.567 136,176
Total capitalized cost 741,771

(b)
Total Reduction Lease
Date Annual Interest in Principal Obligation
Payment Expense
01/01/07 - - 741,771

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Chapter 4 – Leases

01/01/07 150,000 - 150,000 591,771


01/01/08 150,000 71,013 78,987 512,784
01/01/09 150,000 61,534 88,466 424,318
01/01/10 150,000 50,918 99,082 325,236
01/01/11 150,000 39,028 110,972 214,264
12/31/11 240,000 25,736* 214,264 -
*Adjusted; difference is due to rounding off.
(c) 741,771 / 15 years = 49,451
(d)
2007
Jan. 1 Leased Machinery 741,771
Finance Lease Obligation 741,771
1 Finance Lease Obligation 150,000
Cash 150,000

Dec. Interest Expense 71,013


3
1
Interest Payable 71,013

Dec. Depreciation Expense 49,451


3
1
Accumulated Depreciation 49,451

2008
Jan. 1 Finance Lease Obligation 78,987
Interest Payable 71,013
Cash 150,000

Dec. Interest Expense 61,534


3
1
Interest Payable 61,534

3 Depreciation Expense 49,451


1
Accumulated Depreciation 49,451
(e)
Dec. Interest Expense 25,736
3
1
Finance Lease Obligation 214,264
Accumulated Depreciation 247,255
Machinery 494,516
Leased Machinery 741,771
Cash 240,000
(f)

43
Chapter 4 – Leases

Dec. Interest Expense 25,736


3
1
Finance Lease Obligation 214,264
Accumulated Depreciation 247,255
Loss on Finance Lease 254,516
Leased Machinery 741,771

4-11. (Joy Company)


a.
2007
Aug. 1 Finance Lease Receivable 605,000
Equipment for Lease 480,000
Unearned Interest Revenue 125,000

1 Unearned Interest Revenue 1,900


Cash 1,900

1 Cash 100,000
Finance Lease Receivable 100,000

Dec. Unearned Interest Revenue 15,912


3
1
Interest Revenue 15,912
38,190 x 5/12
Partial Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
08/01/07 - - 481,900
08/01/07 100,000 - 100,000 381,900
08/01/08 100,000 38,190 61,810 320,090
(b) As of December 31, 2007:
Total Current Non-
current
Finance Lease Receivable P505,000 P100,000
P405,000
Unearned Interest Revenue 107,188 22,278
84,910
P397,812 P 77,722 P320,090
Current portion:
Principal due in 2008 P
61,810
Accrued interest, 12/31/07
15,912
P 77,722
4-12. (Glad Manufacturing Company)
(a)

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Chapter 4 – Leases

2007
Apr. Finance Lease Receivable 1,500,000
1
*
Cost of Sales 893,350
Unearned Interest Revenue 426,380
Sales 1,026,970
Finished Goods Inventory 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
Cash 175,000
1
Finance Lease Receivable 175,000
Dec. Unearned Interest Revenue 67,397
3
1
Interest Revenue 67,397
(1,073,620-175,000) x 10% x
9/12
2008
Jan. 1 Interest Revenue 67,397
Unearned Interest Revenue 67,397

Apr. 1 Cash 175,000


Unearned Interest Revenue 89,862
Finance Lease Receivable 175,000
Interest Revenue 89,862
1,073,620-175,000=898,620
898,620 x 10% = 89,862

Dec. Unearned Interest Revenue 61,011


3
1
Interest Revenue 61,011
898,620-175,000+89,862
=813,482
813,482 x 10% x 9/12 = 61,011

*The compound entry may also be presented as follows:

45
Chapter 4 – Leases

Apr. 1 Finance Lease Receivable 1,400,000


Sales 1,026,970
Unearned Interest Revenue 373,030

1 Cost of Sales 940,000


Finished Goods Inventory 940,000

1 Finance Lease Receivable 100,000


Cost of Sales 46,650
Unearned Interest Revenue 53,350

(b) (i) Sales 1,026,970


Cost of Sales (940,000 – 46,650)
893,350
Gross Profit on Sales
133,620
(ii) Interest Revenue for 2006 (see journal entries)
67,397

(c) Sales (1,026,970 + 46,650) 1,073,620


Cost of Sales (cost of the asset) 940,000

4-13. (Prudent Company)


(a) Sales price 1,011,840
Cost of machine 784,500
Gross profit 227,340

(b) Gross investment (135,000 x 12)


1,620,000
Sales 1,011,840
Total financial revenue 608,160
(c) Interest Revenue for 2006
(1,011,840 – 135,000) x 10% x 6/12
43,842
(d) Finance Lease Receivable
1,485,000
Less Unearned Interest Revenue
564,318
Net Finance Lease Receivable, December 31, 2007 920,682

4-14. (Jackie Chan and Chris Tucker)

Annual Lease Payment:

Fair value of asset P600,000


PV of BPO = 40,000 x .6209
24,836
PV of periodic payment P575,164
PV factor (Annuity due for 5 years at 10%)
÷4.1699
Periodic payment P137,932

Periodic Reduction in Balance of

46
Chapter 4 – Leases

Date Payment Interest Principal Principal


Jan. 1, 2007 P600,000
Jan. 1, 2007 P137,932 P137,932 462,068
Jan. 1, 2008 137,932 P46,207 91,725 370,343
Jan. 1, 2009 137,932 37,034 100,898 269,445

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

2007 Depreciation = P580,000 x 6/21 = P165,714


2008 Depreciaiton = P580,000 x 5/21 = 138,095

(a) Books of Chris Tucker


2007
Jan. 1 Leased Equipment 600,000
Finance Lease Obligation 600,000

1 Finance Lease Obligation 137,932


Cash 137,932

Dec 31 Interest Expense 46,207


Interest Payable
46,207

31 Depreciation Expense – Leased Equipment 165,714


Accumulated Depreciation – Leased Equipment
165,714

2008
Jan. 1 Finance Lease Obligation 91,725
Interest Payable 46,207
Cash 137,932

Dec 31 Interest Expense 37,034


Interest Payable 37,034

Depreciation Expense 138,095


Accumulated Depreciation – Leased Equipment
138,095

(b) Books of Jackie Chan

2007
Jan. 1 Finance Lease Receivable 729,660
Equipment for Lease
600,000
Unearned Interest Revenue
129,660

Cash 137,932

47
Chapter 4 – Leases

Finance Lease Receivable


137,932

Dec 31 Unearned Interest Revenue


46,207
Interest Revenue 46,207

2008
Jan. 1 Cash 137,932
Finance Lease Receivable
137,932

Dec 31 Unearned Interest Revenue


37,034
Interest Revenue 37,034

4-15. Ruby Company

a. Manufacturer’s or dealer’s lease

b. Fair value/present value P4,000,000


Carrying value of leased asset 3,200,000
Gross Profit P 800,000
Lease arrangement cost (initial direct cost)
( 85,000)
Interest income 4,000,000 x 12% x 3/12
120,000
Total profit in 2007 P
835,000

c. Amortization Table

Periodic Reduction in Balance of


Date Payment Interest Principal Principal
Oct. 1, 2007 4,000,000
Oct. 1, 2007 P850,365 P850,365 3,149,635
Oct. 1, 2008 850,365 P377,956 472,409 2,677,226
Oct. 1, 2009 850,365 321,267 529,098 2,148,128

2007
Oct. 1 Finance Lease Receivable (850,365 x 6) + 166,300 5,268,490
Cost of Goods Sold (3,200,000 – 84,248) 3,115,752
Inventory 3,200,000
Sales 3,914,080
Unearned Interest Revenue
1,270,162

Oct. 1 Selling Expense 85,000


Cash 85,000

Oct. 1 Cash 850,365


Finance Lease Receivable
850,365

48
Chapter 4 – Leases

Dec. 31 Unearned Interest Revenue 94,489


Interest Revenue 94,489
377,956 x 3/12
2008
Oct. 1 Cash 850,365
Finance Lease Receivable
850,365

Dec 31 Unearned Interest Revenue 363,784


Interest Revenue 363,784
(377,956 – 94,489) + (321,267 x 3/12)

d. Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
Oct. 1, 2007 3,915,761
Oct. 1, 2007 850,365 850,365 3,065,396
Oct. 1, 2008 850,365 367,848 482,517 2,582,879
Oct. 1, 2009 850,365 309,945 540,420 2,042,459

2007
Oct. 1 Leased Equipment 3,915,761
Finance Lease Obligation 3,915,761

Finance Lease Obligation 850,365


Cash 850,365

Dec 31 Interest Expense 91,962


Interest Payable 91,962
367,848 x 3/12 = 91,962

31 Depreciation Expense 163,157


Accumulated Depreciation
163,157
3,915,761/6 x 3/12

2008
Oct. 1 Interest Payable 91,962
Interest Expense 367,848 – 91,962 275,886
Finance Lease Obligation 482,517
Cash 850,365

Dec31 Interest Expense 77,486


Interest Payable 77,486
309,945 x 3/12

Depreciation Expense 652,627


Accumulated Depreciation
652,627
3,915,761/6

4-16. (Legend Company)


(a) Selling price of the machinery (150,000 x 4.0373)
605,595

49
Chapter 4 – Leases

(b) Deferred gain on January 1, 2007 (605,595 – 411,750)


193,845
(c) Depreciation Expense for 2007 (605,595 / 5 years )
121,119
(d) Interest Expense for 2007 (605,595 – 150,000) x 12%
54,671
(e) Gain on sale-leaseback for 2007 (193,845 / 5 years)
38,769
4-17. (Honest Company)
(a)
2007
July Cash 540,000
1
Accumulated Depreciation 350,000
Equipment 800,000
Gain on Sale Leaseback 90,000

Rent Expense 80,000


1
Cash 80,000

Dec. Prepaid Rent 40,000


3
1
Rent Expense 40,000
(b)

50
Chapter 4 – Leases

2007
July Cash 540,000
1
Accumulated Depreciation 350,000
Equipment 800,000
Gain on Sale Leaseback 50,000
Unearned Profit on Sale 40,000
Leaseback

Rent Expense 80,000


1
Cash 80,000

Dec. Prepaid Rent 40,000


3
1
Rent Expense 40,000

3 Unearned Profit on Sale Leaseback 5,000


1
Profit on Sale Leaseback 5,000
(40,000/4) x 6/12
(c )
2
0
0
7
July Cash 400,000
1
Accumulated Depreciation 350,000
Loss on Sale Leaseback 50,000
Equipment 800,000

Rent Expense 80,000


1
Cash 80,000

Dec. Prepaid Rent 40,000


3
1
Rent Expense 40,000

2007
July Cash 350,000
1
Accumulated Depreciation 350,000
Deferred Loss on Sale Leaseback 100,000
Equipment 800,000

Rent Expense 80,000


1
Cash 80,000

Dec. Prepaid Rent 40,000


3
1

51
Chapter 4 – Leases

Rent Expense 40,000

Rent Expense 12,500


Deferred Loss on Sale Leaseback 12,500
100,000 x 6/48 = 12,500

52