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 YES economic life of the asset? {4 yrs>75% of 5 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? {$42,382^a >90% of $45,114=$40,603}^a See schedule 2 below.

Schedule 2: Lessor’s Calculation of the Present Value of Minimum Lease Payments

Present value of periodic lease payments ($10,000 x 3.48685^**) $34,869

Plus: Present value of the guaranteed

residual value ($11,000^*** x .68301^*) 7,513

Present value of lessor’s minimum lease payments $42,382

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

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

^*** includes $6,000 guaranteed by the lessee and $5,000 guaranteed by a third-party guarantor

Problem 15-16 (continued)

Since the fair value exceeds the lessor’s carrying value, the asset is being “sold” at a profit, making this a sales-type lease:

Fair value $45,114

minus

Carrying value (40,000)

equals

Dealer’s profit $ 5,114

also:

Sales revenue $42,382 (Lessor’s PV of minimum lease

Minus payments per sch.2)

Cost of goods sold (37,268) ($40,000 – [$4,000^* x .68301])

equals

Dealer’s profit $ 5,114

* This is the unguaranteed residual value: $15,000 – 11,000.

Requirement 4

Lessor’s Calculation of Lease Payments

Amount to be recovered (fair value) $45,114 Less: Present value of the residual value ($15,000 x .68301^*) (10,245)

Amount to be recovered through periodic lease payments $34,869

_____________________

Lease payments at the beginning 

of each of the next four years: ($34,869 ÷ 3.48685^**) $10,000

Plus: Executory costs 1,000

Lease payments including executory costs $11,000

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

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

Problem 15-16 (continued)

Requirement 5

Present value of lessor’s minimum lease payments, calculated in Schedule 2 above: $42,382

Requirement 6

December 31, 2011

Yard Art Landscaping (Lessee) Leased equipment (calculated in requirement 1) 39,564 Lease payable (calculated requirement 1) 39,564 Lease payable (payment less executory costs) 10,000 Prepaid maintenance expense (2012 fee) 1,000 Cash(lease payment) 11,000 Branch Motors (Lessor) Lease receivable (to balance) 45,114 Cost of goods sold ($40,000 – [$4,000^ax .68301]) 37,268 Sales revenue (calculated in Schedule 2) 42,382 Inventory of equipment (lessor’s cost) 40,000 Cash(lease payment) 11,000 Maintenance fee payable [or prepaid maintenance*] 1,000 Lease receivable (payment less executory costs) 10,000

^a This is the unguaranteed residual value: $15,000 – 11,000.

* If paid previously.

Problem 15-16 (continued)

Requirement 7