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

Problem 15-9 (continued)

Requirement 5

December 31, 2012

Western Soya Co. (Lessee) Depreciation expense ([$348,685] ÷ 4 years) 87,171 Accumulated depreciation 87,171 Operating expense(2012 expenses) 4,000 Prepaid operating expense(paid in 2011) 4,000 Interest expense(10% x [$348,685 – 100,000]) 24,869 Lease payable (difference) 75,131 Prepaid operating expense(2013 expenses) 4,000 Cash(lease payment) 104,000 Rhone-Metro (Lessor) Cash(lease payment) 104,000 Payable (maintenance, insurance, etc.) 4,000 Lease receivable (difference) 73,424

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

Problem 15-9 (concluded)

Requirement 6

December 31, 2015

Western Soya Co. (Lessee) Operating expense(2015 expenses) 4,000 Prepaid operating expense(paid in 2014) 4,000 Depreciation expense ([$348,685] ÷ 4 years) 87,171 Accumulated depreciation 87,171 Accumulated depreciation (account balance) 348,685 Leased equipment(account balance) 348,685 Rhone-Metro (Lessor) Inventory of equipment(actual residual value) 1,500 Loss on leased assets ($25,000 – 1,500) 23,500 Lease receivable (account balance) 22,727 Interest revenue(10% x 22,727: from schedule) 2,273

Problem 15-10

Requirement 1

Lessor’s Calculation of Lease payments

Amount to be recovered (fair value) $365,760 Less: Present value of the BPO price ($10,000 x .75131^*) (7,513)

Amount to be recovered through periodic lease payments $358,247

_____________________

Lease payments at the beginning 

of each of three years: ($358,247 ÷ 2.73554^**) $130,960

Plus: Executory costs 4,000

Lease payments including executory costs $134,960

^* present value of $1: n=3, i=10%

^** present value of an annuity due of $1: n=3, 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 15-10 (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? YES 3 Is the lease term equal to 75% or more of the expected NO economic life of the asset? {3 yrs^a< 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}

^a The lease term is considered to end at the date a BPO becomes exercisable.

^b See calculation below.