Lease Amortization Schedule

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

2011 659,805

2011 200,000 200,000 459,805

2012 200,000 .10 (459,805) = 45,981 154,019 305,786

2013 200,000 .10 (305,786) = 30,579 169,421 136,365

2014 150,000 .10 (136,365) = 13,635* 136,365 0

750,000 90,195 659,805

* rounded

Problem 15-11 (continued)

Requirement 5

December 31, 2012

Poole (Lessee) Rent expense 200,000 Prepaid rent(2011 payment; 2012 expense) 200,000 Prepaid rent 200,000 Cash(2012 payment; 2013 expense) 200,000 Allied (Lessor) Cash(lease payment) 200,000 Lease receivable (difference) 154,019

Interest revenue(10% x [$659,805 – 200,000]) 45,981

December 31, 2013

Poole (Lessee) Rent expense 200,000 Prepaid rent(2012 payment; 2013 expense) 200,000 Prepaid rent 200,000 Cash(2013 payment; 2014 expense) 200,000 Allied (Lessor) Cash(lease payment) 200,000 Lease receivable 169,421 Interest revenue(10% x 305,786: from schedule) 30,579

Problem 15-11 (concluded)

December 31, 2014

Poole (Lessee) Rent expense 200,000 Prepaid rent(2013 payment; 2014 expense) 200,000 Allied (Lessor) Inventory of equipment(actual residual value) 105,000 Cash ($150,000 – 105,000: from 3rd party guarantor) 45,000 Lease receivable (account balance) 136,365 Interest revenue(10% x 136,365: from schedule) 13,635

Problem 15-12

Situation

1 2 3 4

A. The lessor’s:

1. Minimum lease payments¹ $40,000 $44,000 $44,000 $40,000

2. Gross investment in the lease² 40,000 44,000 44,000 44,000

3. Net investment in the lease³ 34,437 37,072 37,072 37,072

B. The lessee’s:

4. Minimum lease payments⁴ 40,000 44,000 40,000 40,000

5. Leased asset⁵ 34,437 37,072 34,437 34,437

6. Lease liability⁶ 34,437 37,072 34,437 34,437

¹ ($10,000 x number of payments) + Residual value guaranteed by lessee and/or by third party.

² Minimum lease payments plus unguaranteed residual value.

³ Present value of gross investment.

⁴ ($10,000 x number of payments) + Residual value guaranteed by lessee.

⁵ Present value of minimum lease payments; should not exceed fair value.

⁶ Present value of minimum lease payments; should not exceed fair value.

Problem 15-13

Situation

1 2 3 4

A. The lessor’s:

1. Minimum lease payments¹ $400,000 $553,000 $640,000 $510,000

2. Gross investment in the lease² $430,000 553,000 675,000 550,000

3. Net investment in the lease³ 369,175 433,809 533,685 451,137

4. Sales revenue⁴ N/A N/A 512,816 423,817

5. Cost of goods sold⁵ N/A N/A 479,131 372,680

6. Dealer’s profit⁶ N/A N/A 33,685 51,137

B. The lessee’s:

7. Minimum lease payments⁷ $400,000 553,000 640,000 460,000

8. Leased asset⁸ 353,129 449,896 512,816 389,666

9. Lease liability⁹ 353,129 449,896 512,816 389,666

Note:Since executory costs are excluded from minimum lease payments, they have no effect on any of the calculated amounts.

¹ ($100,000 x Number of payments) + Residual value guaranteed by lessee and/or by third party; for situation 4: ($100,000 x 4) + ($60,000 + 50,000)

² Minimum lease payments plus unguaranteed residual value; for situation 4: ($510,000 + $40,000)

³Present value of gross investment (discounted at lessor’s rate); for situation 4: ($100,000 x 3.48685) + ($150,000 x .68301)

⁴Present value of minimum lease payments; also, Net investment – Present value of unguaranteed residual value; for situation 4: ($100,000 x 3.48685) + ($110,000 x .68301); also, $451,137 – 27,320 ($40,000 x .68301)

⁵Lessor’s cost – Present value of unguaranteed residual value; for situation 4: ($400,000 – 40,000 x .68301)

⁶Sales revenue – cost of goods sold; also, Net investment – Lessor’s cost ; for situation 4: ($423,817 – 372,680); also, ($451,137 – 400,000)

⁷ ($100,000 x number of payments) + Residual value guaranteed bylessee; for situation 4: ($100,000 x 4) + $60,000

⁸Present value of minimum lease payments (discounted at lower of lessor’s rate and lessee’s incremental borrowing rate); should not exceed fair value; for situation 4: ($100,000 x 3.48685) + ($60,000 x .68301)

⁹Present value of minimum lease payments (discounted at lower of lessor’s rate and lessee’s incremental borrowing rate); should not exceed fair value; for situation 4: ($100,000 x 3.48685) + ($60,000 x .68301)

Problem 15-14

Requirement 1

Branson Construction (Lessee) Interest expense(10% x [$936,500 – 100,000]) 83,650 Lease payable (difference) 16,350 Cash(lease payment) 100,000 Maintenance expense 3,000 Cash (2012 expenses as incurred) 3,000 Depreciation expense ($936,500 ÷ 20 years) 46,825 Accumulated depreciation 46,825 Branif Leasing (Lessor) Cash(lease payment) 100,000 Lease receivable (difference) 16,350

Interest revenue(10% x [$936,500 – 100,000]) 83,650

Requirement 2

Branson Construction (Lessee) Interest expense(10% x [$936,500 – 100,000]) 83,650 Lease payable (to balance) 16,350 Maintenance expense (annual fee)* 3,000 Cash(lease payment) 103,000 Depreciation expense ($936,500 ÷ 20 years) 46,825 Accumulated depreciation 46,825

* This debit to maintenance expense is the net effect of (a) expensing the current year’s costs that were prepaid with the first lease payment the last day of 2011 and (b) prepaying next year’s expense with the 2012 payment:

Maintenance expense (2012 costs) 3,000 Prepaid maintenance expense (paid in 2011) 3,000 Interest expense (10% x [$936,500 – 100,000]) 83,650 Lease payable (difference) 16,350 Prepaid maintenance expense (2013 costs) 3,000 Cash (lease payment) 103,000

Problem 15-14 (concluded)

Branif Leasing (Lessor) Cash(lease payment) 103,000 Lease receivable (to balance) 16,350 Maintenance fee payable [or cash] 3,000 Interest revenue(10% x [$936,500 – 100,000]) 83,650

Requirement 3

Branson Construction (Lessee) Interest expense(10% x [$936,500 – 100,000]) 83,650 Lease payable (to balance) 16,350 Maintenance expense (annual fee)* 3,300 Cash(lease payment) 103,300 Depreciation expense ($936,500 ÷ 20 years) 46,825 Accumulated depreciation 46,825

* This debit to maintenance expense is the net effect of (a) expensing the current year’s costs that were prepaid with the first lease payment the last day of 2011 and (b) prepaying next year’s expense with the 2012 payment:

Maintenance expense (2012 costs) 3,300 Prepaid maintenance expense (paid in 2011) 3,300 Interest expense (10% x [$936,500 – 100,000]) 83,650 Lease payable (difference) 16,350 Prepaid maintenance expense (2013 costs) 3,300 Cash (lease payment) 103,300

Branif Leasing (Lessor) Cash(lease payment) 103,300 Maintenance fee payable [or cash] 3,000 Miscellaneous revenue 300 Lease receivable (to balance) 16,350 Interest revenue(10% x [$936,500 – 100,000]) 83,650

Problem 15-15

Requirement 1

Note:

Because exercise of the option appears at the inception of the lease to be reasonably assured, payment of the option price ($6,000) is expected to occur when the option becomes exercisable (at the end of the eighth quarter). Also, the lease contract specifies that the BPO becomes exercisable before the designated lease term ends. Since a BPO is expected to be exercised, the lease term ends for accounting purposes when the option becomes exercisable (after two years of the three-year lease term).

Present value of quarterly lease payments ($3,000 x 7.23028^**) $21,691

Plus: Present value of the BPO price ($6,000 x .78941^*) 4,736

Present value of minimum lease payments $26,427

^* present value of $1: n=8, i=3%

^** present value of an annuity due of $1: n=8, i=3%

“Selling price” $26,427

minus

Truck’s cost (25,000)

equals

Dealer’s profit $ 1,427

Problem 15-15 (continued)

Not required in the problem, but helpful to see that the present value calculation is precisely the reverse of the lessor’s calculation of quarterly payments:

Amount to be recovered (fair value) $26,427 Less: Present value of the BPO price ($6,000 x .78941^*) (4,736)

Amount to be recovered through quarterly lease payments $21,691

_____________________

Lease payments at the beginning 

each of the next eight quarters: ($21,691 ÷ 7.23028^**) $3,000

^* present value of $1: n=8, i=3%

^** present value of an annuity due of $1: n=8, i=3%

Requirement 2

September 30, 2011

Anything Grows (Lessee) Leased equipment 26,427 Lease payable (present value of minimum lease payments) 26,427 Lease payable 3,000 Cash(lease payment) 3,000

Mid-South Auto Leasing (Lessor) Lease receivable (calculated above) 26,427 Cost of goods sold (lessor’s cost) 25,000 Sales revenue (calculated above) 26,427 Inventory of equipment (lessor’s cost) 25,000 Cash(lease payment) 3,000 Lease receivable 3,000

Problem 15-15 (continued)

Requirement 3

Since both use the same discount rate, the amortization schedule for the lessee and lessor is the same: