INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 15, Problem 15.15E

A)

To determine

Purchase option

Purchase option is provision of certain lease contracts which provides the lessee the option to purchase the leased asset during the period of lease or at the end of the lease term at a particular exercise price.

Capital Lease

This type of lease is a situation whereby the lessor (owner) transfers the ownership of leased asset to the lessee (user) on the maturity period of terms of lease. This is non-cancellable in nature and it extends to long term and can also be capitalized

To Determine: the amounts at the beginning of lease for the lessor at each independent situation.

A)

Expert Solution
Check Mark

Explanation of Solution

  Situation
  1 2 3 4
Lessor        
  Lease payments (1) 700,000 (2) 750,000 (3) 800,000 (4) 840,000
  Gross investment
  in the lease
(5) 700,000 (6) 750,000 (7) 850,000 (8) 900,000
  Net investment
  in the lease
(9) 548,592 (10) 547,137 (11) 610,168 (12) 596,764

Table (1)

Working note:

The lease payment is calculated as follows:

Lease payments (Situation 1) = (Annual lease payments×Number of fixed payments)=($100,000×7)=$700,000 (1)

Lease payments (Situation 2) = (Annual lease payments×Number of fixed payments)+(ResidualValueguaranteed bylessee)=($100,000×7)+($50,000)=$750,000 (2)

Lease payments (Situation 3) = (Annual lease payments×Number of fixed payments)=($100,000×8)=$800,000 (3)

Lease payments (Situation 4) = (Annual lease payments×Number of fixed payments)+(ResidualValueguaranteed bylessee)=($100,000×8)+($40,000)=$840,000 (4)

The gross investment in lease is calculated as follows:

Gross investment in lease(Situation 1) = [Lease payments + Guaranteed residual value+ Unguaranteed residual value]=[$700,000+$0+$0]=$700,000 (5)

Gross investment in lease(Situation 2) =[Lease payments + Guaranteed residual value+ Unguaranteed residual value]=[$700,000+$50,000+$0]=$750,000 (6)

Gross investment in lease(Situation 3) =[Lease payments + Guaranteed residual value+ Unguaranteed residual value]=[$800,000+$0+$50,000]=$850,000 (7)

Gross investment in lease(Situation 4) =[Lease payments + Guaranteed residual value+ Unguaranteed residual value]=[$800,000+$40,000+$60,000]=$900,000 (8)

The net investment in the lease is calculated as follows:

Net investment in lease(Situation 1) =[Annual lease payments×PVIFA(9%,7)]=[$100,000×5.48592]=$548,592 (9)

Net investment in lease(Situation 2) =[[Annual lease payments×PVIFA(11%,7)]+[Guaranteed lease payments×PVIF(11%,7)]]=[($100,000×5.23054)+($50,000×0.48166)]=$547,137 (10)

Net investment in lease(Situation 3) =[[Annual lease payments×PVIFA(10%,8)]+[Guaranteed lease payments×PVIF(10%,8)]]=[($100,000×5.86842)+($50,000×0.46651)]=$610,168 (11)

Net investment in lease(Situation 4) =[[Annual lease payments×PVIFA(12%,8)]+[Guaranteed lease payments×PVIF(12%,8)]]=[($100,000×5.56376)+($40,000×0.40388)+($60,000×0.40388)]=$596,764 (12)

(B)

To determine

the amounts at the beginning of lease for the lessee at each independent situation.

(B)

Expert Solution
Check Mark

Explanation of Solution

  Situation
  1 2 3 4
Lessor        
 Lease payments (13) 700,000 (14) 750,000 (15) 800,000 (16) 840,000
 Right-of-use asset (17) 548,592 (18) 547,137 (19) 586,842 (20) 572,531
 Lease payable (17) 548,592 (18) 547,137 (19) 586,842 (20) 572,531

Table (2)

The lease payment is calculated as follows:

Lease payments (Situation 1) = [(Annual lease payments×Number of fixed payments) +Excess lessee guaranteed residual value]=[($100,000×7)+$0]=$700,000 (13)

Lease payments (Situation 2) = (Annual lease payments×Number of fixed payments)+(ResidualValueguaranteed bylessee)=($100,000×7)+($50,000)=$750,000 (14)

Lease payments (Situation 3) = [(Annual lease payments×Number of fixed payments) +Excess lessee guaranteed residual value]=[($100,000×8)+$0]=$800,000 (15)

Lease payments (Situation 4) = (Annual lease payments×Number of fixed payments)+(ResidualValueguaranteed bylessee)=($100,000×8)+($40,000)=$840,000 (16)

The amount to be recorded as right-of-use asset and lease liability is calculated as follows:

Lessee's value of lease (Situation 1) =[Annual lease payments×PVIFA(9%,7)]=[$100,000×5.48592]=$548,592 (17)

Net investment in lease(Situation 2) =[[Annual lease payments×PVIFA(11%,7)]+[Guaranteed lease payments×PVIF(11%,7)]]=[($100,000×5.23054)+($50,000×0.48166)]=$547,137 (18)

Lessee's value of lease (Situation 3) =[Annual lease payments×PVIFA(10%,8)]=[$100,000×5.86842]=$586,842 (19)

Lessee's value of lease (Situation 4) =[[Annual lease payments×PVIFA(12%,8)]+[Excess lessee-guaranteed residual value×PVIF(12%,8)]]=[($100,000×5.56376)+($40,000×0.40388)]=$572,531 (20)

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Chapter 15 Solutions

INTERMEDIATE ACCOUNTING

Ch. 15 - The discount rate influences virtually every...Ch. 15 - A lease might specify that lease payments may be...Ch. 15 - The lessors initial direct costs often are...Ch. 15 - When are initial direct costs recognized in an...Ch. 15 - Q 15–15 What are the required lease disclosures...Ch. 15 - Prob. 15.16QCh. 15 - Prob. 15.17QCh. 15 - Prob. 15.18QCh. 15 - Prob. 15.19QCh. 15 - Prob. 15.20QCh. 15 - Prob. 15.21QCh. 15 - Prob. 15.22QCh. 15 - Prob. 15.23QCh. 15 - Operating lease LO154 (Note: Brief Exercises 8...Ch. 15 - Operating lease LO154 At the beginning of its...Ch. 15 - Prob. 15.3BECh. 15 - Prob. 15.4BECh. 15 - Prob. 15.5BECh. 15 - Prob. 15.6BECh. 15 - Prob. 15.7BECh. 15 - Finance lease; lessee; balance sheet effects ...Ch. 15 - Prob. 15.9BECh. 15 - Prob. 15.10BECh. 15 - Prob. 15.11BECh. 15 - Purchase option; lessor; sales-type lease LO152,...Ch. 15 - Prob. 15.13BECh. 15 - Prob. 15.14BECh. 15 - Prob. 15.1ECh. 15 - Prob. 15.2ECh. 15 - Prob. 15.3ECh. 15 - Prob. 15.4ECh. 15 - Prob. 15.5ECh. 15 - Prob. 15.6ECh. 15 - Prob. 15.7ECh. 15 - Prob. 15.8ECh. 15 - Prob. 15.9ECh. 15 - Prob. 15.10ECh. 15 - Prob. 15.11ECh. 15 - Prob. 15.12ECh. 15 - Prob. 15.13ECh. 15 - Prob. 15.14ECh. 15 - Prob. 15.15ECh. 15 - Prob. 15.16ECh. 15 - Prob. 15.17ECh. 15 - Prob. 15.18ECh. 15 - Prob. 15.19ECh. 15 - Prob. 15.22ECh. 15 - Prob. 15.23ECh. 15 - Prob. 15.24ECh. 15 - Prob. 15.25ECh. 15 - Prob. 15.26ECh. 15 - Prob. 15.27ECh. 15 - Prob. 15.28ECh. 15 - Prob. 15.29ECh. 15 - Prob. 15.30ECh. 15 - Prob. 15.31ECh. 15 - Prob. 15.32ECh. 15 - Prob. 1CPACh. 15 - Prob. 2CPACh. 15 - Prob. 3CPACh. 15 - Prob. 4CPACh. 15 - Prob. 5CPACh. 15 - Prob. 6CPACh. 15 - Prob. 7CPACh. 15 - Prob. 8CPACh. 15 - Prob. 9CPACh. 15 - Prob. 10CPACh. 15 - Prob. 11CPACh. 15 - Prob. 1CMACh. 15 - Prob. 2CMACh. 15 - Prob. 3CMACh. 15 - Prob. 15.1PCh. 15 - Prob. 15.2PCh. 15 - Prob. 15.3PCh. 15 - Prob. 15.4PCh. 15 - Prob. 15.5PCh. 15 - Prob. 15.6PCh. 15 - Prob. 15.7PCh. 15 - Prob. 15.8PCh. 15 - Prob. 15.9PCh. 15 - Prob. 15.10PCh. 15 - P 15–11 Operating lease to lessee—capital lease to...Ch. 15 - Prob. 15.12PCh. 15 - Prob. 15.13PCh. 15 - Prob. 15.14PCh. 15 - Prob. 15.15PCh. 15 - Prob. 15.16PCh. 15 - P 15–17 Integrating problem; bonds; note;...Ch. 15 - Prob. 15.18PCh. 15 - Prob. 15.19PCh. 15 - Prob. 15.20PCh. 15 - Prob. 15.21PCh. 15 - Prob. 15.22PCh. 15 - Research Case 151 FASB codification; locate and...Ch. 15 - Ethics Case 153 Leasehold improvements LO153...Ch. 15 - Prob. 15.5BYPCh. 15 - Prob. 15.6BYPCh. 15 - Prob. 15.7BYPCh. 15 - Prob. 15.9BYPCh. 15 - Prob. 15.1AFKC
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