Lessor’s Calculation of Lease payments

Amount to be recovered (fair value) $365,760 Less: Present value of the guaranteed residual value ($25,000 x .68301^*) (17,075)

Amount to be recovered through periodic lease payments $348,685

_____________________

Lease payments at the beginning 

of each of four years: ($348,685 ÷ 3.48685^**) $100,000

^* present value of $1: n=4, i=10%

^** present value of an annuity due of $1: n=4, i=10%

Requirement 2

The lessee’s incremental borrowing rate (12%) is more than the lessor’s implicit rate (10%). So, both parties’ calculations should be made using a 10% discount rate:

Problem 15-8 (continued)

Application of Classification Criteria

1 Does the agreement specify that ownership of the asset transfers to the lessee? NO 2 Does the agreement contain a bargain purchase option? NO 3 Is the lease term equal to 75% or more of the expected NO economic life of the asset? {4 yrs < 75% of 6 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the YES fair value of the asset? {$365,760^b>90% of $365,760}^b See calculation below.

Present Value of Minimum Lease Payments

Present value of periodic lease payments ($100,000 x 3.48685^**) $348,685

Plus: Present value of the lessee-guaranteed

residual value ($25,000 x .68301^*) 17,075

Present value of minimum lease payments $365,760

^* present value of $1: n=4, i=10%

^** present value of an annuity due of $1: n=4, i=10%

Problem 15-8 (continued)

(a) By Western Soya Co. (the lessee)

Since at least one criterion is met, this is a capital lease to the lessee. Western Soya records the present value of minimum lease payments as a leased asset and a lease liability.

(b) By Rhone-Metro (the lessor)

Since the fair value equals the lessor’s carrying value, there is no dealer’s profit, making this a direct financing lease.

Requirement 3

December 31, 2011

Western Soya Co. (Lessee) Leased equipment (calculated above) 365,760 Lease payable (calculated above) 365,760 Lease payable 100,000 Cash(lease payment) 100,000 Rhone-Metro (Lessor) Lease receivable (calculated above) 365,760

Inventory of equipment (lessor’s cost) 365,760 Cash(lease payment) 100,000 Lease receivable 100,000

Problem 15-8 (continued)

Requirement 4

Since both use the same discount rate and since the residual value is lessee-guaranteed, the same amortization schedule applies to both the lessee and lessor:

Lease Amortization Schedule

Effective Decrease Outstanding Dec. Payments Interest in Balance Balance 31 10% x Outstanding Balance

2011 365,760

2011 100,000 100,000 265,760

2012 100,000 .10 (265,760) = 26,576 73,424 192,336

2013 100,000 .10 (192,336) = 19,234 80,766 111,570

2014 100,000 .10 (111,570) = 11,157 88,843 22,727

2015 25,000 .10 (22,727) = 2,273 22,727 0

425,000 59,240 365,760

Requirement 5

December 31, 2012

Western Soya Co. (Lessee) Interest expense(10% x [$365,760 – 100,000]) 26,576 Lease payable (difference) 73,424 Cash(lease payment) 100,000 Depreciation expense ([$365,760 – 25,000] ÷ 4 years) 85,190 Accumulated depreciation 85,190 Rhone-Metro (Lessor) Cash(lease payment) 100,000 Lease receivable (difference) 73,424

Interest revenue(10% x [$365,760 – 100,000]) 26,576

Problem 15-8 (concluded)

Requirement 6

December 31, 2015

Western Soya Club (Lessee) Depreciation expense ([$365,760 – 25,000] ÷ 4 years) 85,190 Accumulated depreciation 85,190 Interest expense(10% x 22,727: from schedule) 2,273 Lease payable (difference: from schedule) 22,727 Accumulated depreciation ($365,760 – 25,000) 340,760 Loss on residual value guarantee($25,000 – 1,500) 23,500 Leased equipment(account balance) 365,760 Cash($25,000 – 1,500) 23,500 Rhone-Metro (Lessor) Inventory of equipment(actual residual value) 1,500 Cash ($25,000 – 1,500) 23,500 Lease receivable (account balance) 22,727 Interest revenue(10% x 22,727: from schedule) 2,273

Problem 15-9

Requirement 1