1 Annual lease payments 350,000 1,326,850

Residual value 100,000 62,100

1,388,950

a Lessee's entry to record acquisition

Equipment 1,388,950

Lease liability 1,388,950

b Equipment 1,388,950

Residual value (100,000)

Depreciable cost 1,288,950

Lease term (shorter) 5

Depreciation expense 257,790

Payment 10% interest Principal Present value

Jan 1 2014 1,388,950

On Dec 31, 2014 350,000 138,895 211,105 1,177,845

On Dec 31 2015 350,000 117,785 232,216 945,630

On Dec 31 2016 350,000 94,563 255,437 690,192

On Dec 31 2017 350,000 69,019 280,981 409,212

On Dec 31 2018 350,000 40,921 309,079 100,133

C Entry to record payment 12-31-15

Lease liability 232,216

Interest expense 117,785

Cash 350,000

D Lease liability 100,000

Accumulated depreciation 1,288,950

Equipment 1,388,950

Loss on Finance lease 20,000

Cash 20,000
 2 Initial direct cost 100,000

PV of MLP 5,868,000

A Cost of the leased asset 5,968,000

Lease liability 5,868,000

Payment on Jan. 1, 2012 (1,000,000)

Balance 4,868,000

Percent interest 0.10

B Interest expense 486,800

C Cost of the leased asset 5,968,000

Life of leased asset (shorter) 6

Annual depreciation 994,667

Cost of the leased asset 5,968,000

Depreciation for 2012 (994,667)

Carrying amount 4,973,333

esent value
 3 Operating lease; uneven payments

Apr 1 2012 - Mar 31 2013 1,000,000

Apr 1 2013 - Mar 31 2014 2,200,000

Apr 1 2014 - Mar 31 2015 2,420,000

Apr 1 2015 - Mar 31 2016 2,662,000

Apr 1 2016 - Mar 31 2017 2,928,200

Total payments 11,210,200

Divide by number of years 5

Average income per year 2,242,040

Apr 1 2012 - Dec 31 2012 1,681,530

Cash received 1,000,000

Rent payable 681,530

Atlas' entry

Rent expense 1,681,530

Cash 1,000,000

Rent payable 681,530

Pluto's entry

Cash 1,000,000

Rent receivable 681,530

Rent income 1,681,530

April 1, 2013 payment

Rent expense 2,242,040

Cash 2,200,000

Rent payable 42,040

Answers:

A Rent expense -2012 1,681,530

B Rent receivable -2012 681,530

C Atlas' entry
 Rent expense 2,242,040

Cash 2,200,000

Rent payable 42,040

4 Prepaid rent 350,000

A Rent expense 1,000,000

Security Deposit 500,000

Cash 1,850,000

B Annual rent 1,000,000

Amortization of lease bonus 35,000

Total rent income 1,035,000

C Jug Inc.

Statement of Financial Position

December 31, 2012

Current assets

Prepaid rent - current portion 35,000

Property, plant and equipment

Office furniture (movable partition 1,200,000

Accumulated depreciation (100,000)

Carrying amount 1,100,000

Leasehold improvements 2,800,000

Accumulated depreciation (280,000)

Carrying amount 2,520,000

Other Noncurrent assets

Prepaid rent, net of current portion

of P35,000 280,000 (35,000 amortized; 35,000 current)

Security deposit 500,000

 5 Annual lease payments 1,000,000 6.328 6,328,000

Bargain purchase option 300,000 0.322 96,600

Cost of leased asset 6,424,600

Farm equipment 6,424,600

Lease liability 6,424,600

Lease liability 1,000,000

Cash 1,000,000

Amortization table Payment 12% int Principal PV

Jan. 1, 2012 6,424,600

First payment 1,000,000 1,000,000 5,424,600

Jan. 1, 2013 1,000,000 650,952 349,048 5,075,552

Jan. 1, 2014 1,000,000 609,066 390,934 4,684,618

Jan. 1, 2015 1,000,000 562,154 437,846 4,246,772

Jan. 1, 2016 1,000,000 509,613 490,387 3,756,385

Jan. 1, 2017 1,000,000 450,766 549,234 3,207,151

Jan. 1, 2018 1,000,000 384,858 615,142 2,592,009

Jan. 1, 2019 1,000,000 311,041 688,959 1,903,051

Jan. 1, 2020 1,000,000 228,366 771,634 1,131,417

Jan. 1, 2021 1,000,000 135,770 864,230 267,187

Jan. 1, 2022 300,000 32,062 267,938

B Statement of Financial Position, Dec. 31, 2013

Current lease liability 390,934

Noncurrent lease liability 4,684,618

C Cost of leased asset 6,424,600

Divide by life of asset 10

Annual depreciation 642,460

D Lease liability 267,187

Accrued interest payable 32,813

Cash 300,000

E Lease liability 300,000

Accumulated depreciation 6,124,600 Bonus

Farm equipment 6,424,600

Error in data: Useful life of leased asset should have been 12 years, not

10 years.

If the BPO is not exercised, the lessee should record a loss equal to

the difference between the lease liability and the carrying amount of

the leased asset.

6 A (LESSOR)

The lessor sets the interest rate.

7 B

8 C
 9 Acquisition cost 3,724,000

Initial direct cost 250,000

Net investment in the lease 3,974,000

PV factor, 8%, 4 years 3.312

1,199,879

Annual rental 1,199,879

Lease term 4

Lease receivable (Gross) 4,799,517

Net investment in the lease (3,974,000)

Unearned interest income 825,517

Payment Interest Principal PV

Jan. 1, 2013 3,974,000

Dec. 31, 2013 1,199,879 317,920 881,959 3,092,041

Dec. 31, 2014 1,199,879 247,363 952,516 2,139,525

Dec. 31, 2015 1,199,879 171,162 1,028,717 1,110,808

Dec. 31, 2016 1,199,879 88,865 1,111,015

C Interest income

Dec. 31, 2013 317,920

Dec. 31, 2014 247,363

10 Cost 4,565,000

Guaranteed residual value (325,000)

Net investment recoverable

from rentals 4,240,000

PV factor annuity 4.240

A Annual lease payments 1,000,000

Gross rentals 5,000,000

 Residual value 500,000

B Gross investment in the lease 5,500,000

Net investment in the lease (4,565,000)

C Unearned interest income 935,000

D Equipment 500,000

Lease receivable 500,000

E Cash 80,000

Equipment 420,000

Lease receivable 500,000

F Lessee's entry

Lease liability 458,676

Accrued interest payable 41,324

Accumulated depreciation 4,065,000

Equipment 4,565,000

Loss on finance lease 50,000

Cash 50,000

Payment Interest Principal Present Value

Jan. 1, 2013 4,565,000

First payment 1,000,000 0 1,000,000 3,565,000

Jan. 1, 2014 1,000,000 320,850 679,150 2,885,850

Jan. 1, 2015 1,000,000 259,727 740,274 2,145,577

Jan. 1, 2016 1,000,000 193,102 806,898 1,338,678

Jan. 1, 2017 1,000,000 120,481 879,519 459,159

Jan. 1, 2018 500,000 41,324 458,676

G Cost of equipment to Tora 4,565,000

Less residual value (500,000)

 Depreciable cost 4,065,000

Divide by lease term (shorter) 5

Annual depreciation 813,000

Cost of leased equipment 4,565,000

Less 2013 & 2014 accumulated

depreciaton (1,626,000)

Carrying amount 2,939,000

Selling price 3,189,000

G Equipment 3,189,000 3,189,000

Accumulated depreciation- Lsd ass 1,626,000 1,626,000

Lease liablity 2,145,576 2,885,850

Equipment- leased 4,565,000 4,565,000

Cash 2,395,576 3,135,850

Lease liability Jan 1 2013 4,565,000

Less 1st payment (1,000,000)

Balance 3,565,000

Jan. 1, 2014 payment 1,000,000

Interest expense 9% (320,850)

Applicable to principal (679,150)

Balance after Jan. 1, 2014 paymt 2,885,850

Jan. 1, 2015 payment 1,000,000

Interest expense 9% (259,727)

Applicable to principal (740,274)

Balance after Jan. 1, 2015 paymt 2,145,577

Assuming Assuming
sold after sold BEFORE
01-01-15 01-01-15
payment payment
 Lease liability, Jan. 1, 2013 4,565,000 4,565,000

Payments:

Jan. 1, 2013 1,000,000 1,000,000

Jan. 1, 2014 679,150 679,150

Jan. 1, 2015 740,274 2,419,424 1,679,150

Balance of lease liability 01-01-13 2,145,576 2,885,850

11 Gross rentals **Unguaranteed, asset reverts to lessor

700,000 x 4 2,800,000

Gross investment in the lease 2,800,000

Net investment in the lease

Cost of the equipment (2,503,900)

A Unearned interest income 296,100

Payment Interest Principal Principal Value

On Jan 1 2012 2,503,900

First payment 700,000 700,000 1,803,900

On Jan 1 2013 700,000 144,312 555,688 1,248,212

On Jan 1 2014 700,000 99,857 600,143 648,069

On Jan 1 2015 700,000 51,846 648,154 0

296,014

B Current lease liability 12-31-13 600,143

Noncurrent 648,069

Note: In this problem, the annual rental was arrived at by dividing cost of machinery (ignoring the res

value) by the PV factor; since the residual value was ignored, the conclusion should therefore be that

the leased asset remains with the lessee at the end of the lease term.

12 A (this is also equal to the net investment in the lease)

13 D
esent Value
d, asset reverts to lessor

incipal Value

chinery (ignoring the residual

should therefore be that