Concept explainers
Lease concepts; sales-type leases; guaranteed and unguaranteed residual value
• LO15–2, LO15–6
Each of the four independent situations below describes a sales-type lease in which annual lease payments of $10,000 are payable at the beginning of each year. Each is a finance lease for the lessee. Determine the following amounts at the beginning of the lease.
- A. The lessor’s:
- 1. Lease payments
- 2. Gross investment in the lease
- 3. Net investment in the lease
- B. The lessee’s:
- 4. Lease payments
- 5. Right-of-use asset
- 6. Lease liability
(A)
Lessee guaranteed residual value
The lessee guaranteed residual value of leased asset is an estimation of the commercial value of the asset at the end of lease term. The present value is considered when determining the lease classification criteria (Criteria 4). Lessee guaranteed residual value is added to lease receivable and also added to sales revenue.
To Determine: the amounts at the beginning of lease for the lessor at each independent situation.
Explanation of Solution
Situation | ||||
1 | 2 | 3 | 4 | |
Lessor | ||||
Lease payments | (1) 40,000 | (2) 40,000 | (3) 40,000 | (4)33,000 |
Gross investment in the lease |
(5)40,000 | (6)44,000 | (7)44,000 | (8)33,000 |
Net investment in the lease |
(9)34,437 | (10)37,072 | (11)37,072 | (12)29,319 |
Table (1)
Working note:
The lease payment is calculated as follows:
The gross investment in lease is calculated as follows:
The net investment in the lease is calculated as follows:
(B)
Explanation of Solution
Situation | ||||
1 | 2 | 3 | 4 | |
Lessee | ||||
Lease payments | (13) 40,000 | (14) 40,000 | (15) 40,000 | (16)33,000 |
Right-of-use asset | (17)34,437 | (18) 34,437 | (19) 34,437 | (20)29,319 |
Lease payable | (17) 34,437 | (18) 34,437 | (19) 34,437 | (20) 29,319 |
Table (2)
The lease payment is calculated as follows:
The amount to be recorded as right-of-use asset and lease liability is calculated as follows:
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Chapter 15 Solutions
GEN CMB(LL)INTRM ACCTG
- Problem 15-9 (Algo) Lease concepts; sales-type leases; guaranteed and unguaranteed residual value [LO15-2, 15-6] Lease term (years) Asset's useful life (years) Lessor's implicit rate (known by lessee) Residual value: eaved Each of the four independent situations below describes a sales-type lease in which annual lease payments of $16,000 are payable at the beginning of each year. Each is a finance lease for the lessee. (FV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Guaranteed by lessee. Unguaranteed Purchase option: After (years) Exercise price. Reasonably certain? 1 4 4 11% e e none n/a n/a Situation 2 4 5 11% $ 6,400 0 www www 3 $8,200 no 3 4 5 11% $3,200 $3,200 $2,200 no Next 4 4 7 11% Save & Exit Submit 8 $.6,400 $4,200 yes Activate Windowsarrow_forwardPart 1: New Lease Accounting – IFRS 16 Leases Effect Analysis. What are the top three industries most affected by IFRS 16 as measured by the present value of future payments for off-balance-sheet leases to total assets? Which leased assets propel them to the top three? Also, discuss the extent that smaller firms would be affected by IFRS 16. Which payments are to be included in the measurement of lease assets and lease liabilities? Also, discuss the pros and cons of excluding the following payments from the measurement. Variable lease payments linked to future use or sales Optional payments relating to lease-extension option when a lessee is not reasonably certain to exercise the option. Discuss the effects of the new accounting on the following items and ratios of lessees. Provide reason(s) behind all effects. EBITDA, operating profit, and profit before tax Operating cash flow, financing cash flow, and total cash flow Debt to equity, current ratio, and return on total assetsarrow_forwardA lessee has developed the following information regarding a lease contract, with payments due at the beginning of the period. Use this information to determine the amount at which the lease obligation will initially be recorded. Description Amount Present value Present value of total of annuity due amount Annual lease $4,500 S16.528 S14,258 payment Discount rate 6% Number of periods 4 Purchase option $300 S238 Group of answer choices: 18,000 14,495 16,528 14,258 18,300 16,766arrow_forward
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