Problem 15-11

Required: Answers:
a. Initial Lease Liability A – 1,822,200
b. Cost of Right of Use Asset B – 739,980
c. Gain on Right Transferred to Buyer-Lessor C – 717,780
d. Annual Rental Income C – 270,728

Solution:
Initial Lease Liability = Annual Rental Payable x PV factor = 600,000 x 3.037 =
1,822,200

Cost of Right of Use Asset = [Initial Lease Liability – (Sale Price – Fair Value)] x
Carrying Amount / Fair Value = [1,822,200 – (9,000,000 – 8,000,000)] x 7,200,000 /
8,000,000 = 822,200 x 7,200,000 / 8,000,000 = 739,980

Right Transferred to Buyer-Lessor = Fair Value – [Initial Lease Liability – (Sale Price –
Fair Value)] = 8,000,000 – 822,200 = 7,177,800

Total Gain = Fair Value – Carrying Amount = 8,000,000 – 7,200,000 = 800,000

Gain on Right Transferred = Right Transferred to Buyer-Lessor / Fair Value x Total Gain
= 7,177,800 / 8,000,000 x 800,000 = 717,780

Annual Rental Income = [Initial Lease Liability – (Sale Price – Fair Value)] x Annual
Rental Payable / Initial Lease Liability = 822,200 x 600,000 / 1,822,200 = 270,728

Problem 15-12
Required: Answers:
a. Cost of Right of Use Asset B – 2,526,000
b. Loss on Right Transferred A – 579,000
c. Lease Liability at year-end C – 1,731,300
d. Annual Rental Income D – 250,000

Solution:
Cost of Right of Use Asset = Initial Lease Liability / Sale Price at Fair Value x Carrying
Amount = (500,000 x 4.21) / 5,000,000 x 6,000,000 = 2,105,000 / 5,000,000 x
6,000,000 = 2,526,000

Loss on Right Transferred = (Sale Price at Fair Value – Initial Lease Liability) / Sale
Price at Fair Value x (Sales Price at Fair Value – Carrying Amount) = 2,895,000 /
5,000,000 x 1,000,000 = 579,000

Lease Liability at year-end = Initial Lease Liability – [Annual Rental Payable – (Initial
Lease Liability x Implicit Interest Rate)] = 2,105,000 – (500,000 – 126,300) = 1,731,300
Annual Rental Income = Annual Rental Income – (Sale Price at Fair Value / Remaining
Life of Machine) = 500,000 – 250,000 = 250,000
Problem 15-13
Required: Answers:
a. Initial Lease Liability A – 2,536,000
b. Cost of Right of Use Asset A – 1,902,000
c. Gain on Right Transferred A – 866,000
d. Annual Depreciation of Lessee A – 475,500

Solution:
Initial Lease Liability = Annual Rental Payable x PV factor = 800,000 x 3.17 =
2,536,000

Cost of Right of Use Asset = Initial Lease Liability / Sale Price at Fair Value x Carrying
Amount = 2,536,000 / 6,000,000 x 4,500,000 = 1,902,000

Gain on Right Transferred = (Sale Price at Fair Value – Initial Lease Liability) / Sale
Price at Fair Value x (Sale Price at Fair Value – Carrying Amount) = (6,000,000 –
2,536,000) / 6,000,000 x (6,000,000 – 4,500,000) = 866,000

Annual Depreciation of Lessee = Cost of Right of Use Asset / Lease Term = 1,902,000 /
4 = 475,500

Problem 15-14
Required: Answers:
a. Initial Lease Liability A – 3,600,000
b. Cost of Right of Use Asset D – 6,720,000
c. Loss on Right Transferred B – 2,880,000
d. Interest Expense of seller-lessee D – 432,000
e. Annual Rent Income A – 400,000

Solution:
Initial Lease Liability = Annual Rental Payable x PV factor = 1,000,000 x 3.6 =
3,600,000

Cost of Right of Use Asset = [Initial Lease Liability + (Fair Value – Sale Price below Fair
Value)] / Fair Value x Carrying Amount = 5,600,000 + (20,000,000 – 18,000,000) /
20,000,000 x 24,000,000 = 6,720,000

Right Transferred to Buyer-lessor = {Fair Value – [Initial Lease Liability + (Fair Value –
Sale Price below Fair Value)]} / Fair Value x (Fair Value – Carrying Amount) =
(20,000,000 – 5,600,000) / 20,000,000 x 4,000,000 = 2,880,000

Interest Expense = Implicit Interest Rate x Initial Lease Liability = 432,000

Net Annual Rent Income = Annual Rent Payable – (Sale Price below Fair Value / Useful
Life) = 1,000,000 – (18,000,000 / 30) = 400,000