Problem 15-1

December 31, 2015

Rent expense ($10,000 + [$500 x 20 ÷ 2])* 15,000 Deferred rent expense payable (difference) 3,000 Cash($10,000 + [$500 x 4]) 12,000

December 31, 2025

Rent expense ($10,000 + [$500 x 20 ÷ 2])* 15,000 Deferred rent expense payable (difference) 2,000 Cash($10,000 + [$500 x 14]) 17,000

* This is the average rent over the 20-year period.

Also: ($10,000 + $20,000) ÷ 2

Beg. Rent Ending Rent

Problem 15-2

1. NIC’s lease liability at the inception of the lease

$172,501: [$192,501 – 20,000] (present value of minimum lease payments or initial lease balance minus first payment)

2. Leased asset

$192,501 (present value of minimum lease payments; initial lease balance)

3. Lease term in years

20 years

4. Asset’s residual value expected at the end of the lease term

$35,000

5. Residual value guaranteed by the lessee

$35,000 (would not be part of lessee’s minimum lease payments unless lessee-guaranteed)

6. Effective annual interest rate

10%: ($17,250 ÷ $172,501)

7. Total of minimum lease payments

$435,000: [$20,000 x 20 years] + $35,000

8. Total effective interest expense over the term of the lease

$242,499: [$435,000 – 192,501]

Problem 15-3

Requirement 1

Capital lease to lessee; Direct financing lease to lessor.

Since the present value of minimum lease payments (same for both the lessor and the lessee) is greater than 90% of the fair value of the asset, the 90% recovery criterion is met.

Calculation of the Present Value of Minimum Lease Payments

Present value of periodic lease payments

$130,516 x 15.32380^** = $2,000,000

(rounded)

^** present value of an annuity due of $1: n=20, i=3%

The 75% of useful life criterion is met also. Both additional lessor conditions are met for a capital lease. There is no dealer’s profit because the fair value equals the lessor’s cost.

Requirement 2

Mid-South Urologists Group (Lessee)

January 1, 2011

Leased equipment (calculated above) 2,000,000 Lease payable (calculated above) 2,000,000 Lease payable 130,516 Cash(lease payment) 130,516

April 1, 2011

Interest expense(3% x [$2 million – 130,516]) 56,085 Lease payable (difference) 74,431 Cash(lease payment) 130,516

Problem 15-3 (concluded)

Physicians’ Leasing (Lessor)

January 1, 2011

Lease receivable (present value calculated above) 2,000,000

Inventory of equipment (lessor’s cost) 2,000,000

Cash(lease payment) 130,516 Lease receivable 130,516

April 1, 2011

Cash(lease payment) 130,516 Lease receivable (difference) 74,431

Interest revenue(3% x [$2 million – 130,516]) 56,085

Requirement 3

Rand Medical (Lessor)

January 1, 2011

Lease receivable (present value calculated above) 2,000,000

Cost of goods sold (lessor’s cost) 1,700,000 Sales revenue (present value calculated above) 2,000,000 Inventory of equipment (lessor’s cost) 1,700,000

Cash(lease payment) 130,516 Lease receivable 130,516

April 1, 2011

Cash(lease payment) 130,516 Lease receivable (difference) 74,431

Interest revenue(3% x [$2 million – 130,516]) 56,085

Problem 15-4

[Note: This problem is the lease equivalent of Problem 14-14, which deals with a parallel situation in which the machine was acquired with an installment note.]