Desiree Company is in the business of leasing new sophisticated equipment.

The lessor expects a 12%

return on net investment.

All leases are classified as direct financing lease.

At the end of the lease term, the equipment will revert to the lessor.

At the beginning of current year, an equipment is lease to a lessee with the following information:

Cost of equipment to the lessor; 5,000,000

Residual value - unguaranteed; 600,000
Annual rental payable at the beginning of each year; 900,000
Initial direct cost incurred by the lessor; 250,000
Useful life and lease term; 8 years
Implicit interest rate; 12%

1. What is the gross investment in the leases?

900,000x8years= 7,200,000

7200000+600000(residual value) = 7,800,000

2. What is the net investment in the lease?

5,000,000 + 250,000 = 5,250,000

3. What is the total interest income over the lease term?

7,800,000-5,250,000 = 2,550,000

4. What is the interest income for the current year?

5,250,000x.12= 630,000

900,000x.12= 108,000

630,000-108,000 = 522,000

This study source was downloaded by 100000849608280 from CourseHero.com on 07-07-2022 23:41:13 GMT -05:00

https://www.coursehero.com/file/77553773/Direct-financing-lease-problem-example-with-answerdocx/
 At the beginning of the current year, CC leased an equipment from a lessor with the following pertinent
information.
Annual rental payable at the end of each year
500,000
Lease term 8 years
Useful life of equipment 10 years
Implicit Interest Rate 10%
PV of an ordinary annuity of 1 for 8 periods at 10% 5.33
Present Value of 1 for 8 periods at 10% 0.47
The entity has the option to purchase the equipment on the expiration of the lease term by paying
P500,000.
There is reasonable certainty that the entity shall exercise the option. The entity incurred initial direct
cost of P200,000.

1. What is the initial cost of the right of use asset?

PV annual rental (500,000x5.33) 2,665,000

PV of purchase optional(500,000x.47) 235,000
Lease liability 2,900,000
Initial direct cost 200,000
Initial cost of the right of use asset 3,100,000

2. What is the interest expense for current year?

Lease liability 2,900,000 x .10 = 290,000

3. What is the lease liability at year-end?

Lease liability 2,900,000

Interest expense 290,000
Lease payment (500,000)
the lease liability at year-end 2,690,000

4. What is the depreciation for current year?

Cost of right of use (3,100,000/ 10 useful life) = 310,000

This study source was downloaded by 100000849608280 from CourseHero.com on 07-07-2022 23:41:13 GMT -05:00

https://www.coursehero.com/file/77553773/Direct-financing-lease-problem-example-with-answerdocx/
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