Present Value of Minimum Lease Payments

Present value of periodic lease payments excluding executory costs of $4,000 ($130,960 x 2.73554^**) $358,247***

Plus: Present value of the BPO price ($10,000 x .75131^*) 7,513

Present value of minimum lease payments $365,760

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

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

^*** rounded

Note: The BPO price is included in both the lessor’s and the lessee’s minimum lease payments. Also the lease term ends for accounting purposes after 3 years, when the BPO becomes exercisable.

Problem 15-10 (continued)

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

Since at least one (two in this case) classification 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 exceeds the lessor’s carrying value, the equipment is being “sold” at a profit, making this a sales-type lease:

Fair value $365,760

minus

Carrying value (300,000)

equals

Dealer’s profit $ 65,760

Requirement 3

December 31, 2011

Western Soya Co. (Lessee) Leased equipment (calculated above) 365,760 Lease payable (calculated above) 365,760 Lease payable 130,960 Prepaid maintenance expense (2012 executory costs) 4,000 Cash(lease payment) 134,960 Rhone-Metro (Lessor) Lease receivable (present value of minimum lease payments) 365,760 Cost of goods sold (lessor’s cost) 300,000 Sales revenue (present value of minimum lease payments) 365,760 Inventory of equipment (lessor’s cost) 300,000 Cash(lease payment) 134,960 Payable (maintenance, insurance, etc.) 4,000 Lease receivable 130,960

Problem 15-10 (continued)

Requirement 4

Lessee and lessor (BPO included):

Since both use the same discount rate and since the bargain purchase option is included as an additional payment for both, the same amortization schedule applies to both the lessee and lessor. The lease term ends for accounting purposes after 3 lease payments, because the BPO becomes exercisable before the fourth:

Lease Amortization Schedule

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

2011 365,760

2011 130,960 130,960 234,800

2012 130,960 .10 (234,800) = 23,480 107,480 127,320

2013 130,960 .10 (127,320) = 12,732 118,228 9,092

2014 10,000 .10 (9,092) = 908* 9,092 0

402,880 37,120 365,760

* adjusted for rounding of other numbers in the schedule

Problem 15-10 (continued)

Requirement 5

December 31, 2012

Western Soya Co. (Lessee) Depreciation expense ($365,760 ÷ 6 years*) 60,960 Accumulated depreciation 60,960 Maintenance expense (2012 executory costs) 4,000 Prepaid maintenance expense (paid in 2011) 4,000 Interest expense(10% x [$365,760 – 130,960]) 23,480 Lease payable (to balance) 107,480 Prepaid maintenance expense (2013 executory costs) 4,000 Cash(lease payment) 134,960 Rhone-Metro (Lessor) Cash(lease payment) 134,960 Payable (maintenance) 4,000 Lease receivable (to balance) 107,480

Interest revenue(10% x [$365,760 – 130,960]) 23,480

* If ownership transfers (a) by contract or (b) by the expected exercise of a bargain purchase option, the asset should be depreciated over the asset's useful life. This reflects the fact that the lessee anticipates using the leased asset for its full useful life. In this case, the equipment is expected to be useful for 6 years.

Problem 15-10 (concluded)

Requirement 6

December 31, 2014

Western Soya Club (Lessee) Depreciation expense ($365,760 ÷ 6 years) 60,960 Accumulated depreciation 60,960 Interest expense(10% x $9,092: from schedule[rounded]) 908 Lease payable (from schedule) 9,092 Cash(BPO price) 10,000 Maintenance expense (2014 executory costs) 4,000 Prepaid maintenance expense (paid in 2013) 4,000 Prepaid maintenance expense (2015 executory costs)* 4,000 Cash (paid to lessor or supplier of services) 4,000 Equipment 365,760 Leased equipment 365,760 Rhone-Metro (Lessor) Cash(BPO price) 10,000 Lease receivable(difference) 9,092 Interest revenue(10% x $9,092: from schedule[rounded]) 908 Cash(assuming executory costs continue to be paid by lessor) 4,000 Payable (maintenance) 4,000

* If paid to suppliers of services, the payments and this entry may occur in 2015.

Problem 15-11

Requirement 1