Brief Exercise 15-6

In direct financing leases, the lessor records a receivable for the present value of the lease payments to be received ($2,500,000 for Sonic). The difference between the total of the lease payments ($3,292,000 for Sonic) and the present value of the lease payments to be received over the term of the lease represents interest. Over the term of the leases, Sonic will report this amount ($3,292,000 minus $2,500,000 = $792,000) as interest revenue, determined as the effective interest rate times the outstanding balance (net investment) each period.

Brief Exercise 15-7

The amount of interest expense the lessee would record in conjunction with the second quarterly payment at October 1 is $2,892:

Initial balance, July 1 (given) $150,000

Reduction for first payment, January 1 (5,376)

Balance $144,624

Interest expense October 1: 2% x $144,624 = $2,892

Journal entries (not required):

July 1

Leased asset (given) 150,000 Lease payable 150,000 Lease payable 5,376 Cash(lease payment) 5,376

Oct. 1

Interest expense(2% x [$150,000 – 5,376]) 2,892 Lease payable (difference) 2,484 Cash(lease payment) 5,376

The amount of interest revenue the lessor would record in conjunction with the second quarterly payment at October 1 also is $2,892, determined in the same manner.

Brief Exercise 15-8

The lease liability in the balance sheet will be $113,731:

Initial balance, January 1 (calculated below) $140,000

Reduction for first payment, January 1 (26,269)

December 31, net liability $113,731

$26,269 x 5.32948^ = $140,000

(rounded)

^ present value of an annuity due of $1: n=6, i=5%

The liability for interest on the lease liability in the balance sheet will be $5,687:

Interest expense (5% x [$140,000 – 26,269]) 5,687 Interest payable 5,687

Brief Exercise 15-9

Pretax earnings will be reduced by $29,020 as calculated below:

January 1 interest expense $ 0

Dec. 31, interest expense (5% x [$140,000* – 26,269]) 5,687

Interest expense for the year $ 5,687

Depreciation expense ($140,000* / 6 years) 23,333

Total expenses $29,020

*$26,269 x 5.32948^ = $140,000

(rounded)

^ present value of an annuity due of $1: n=6, i=5%

Brief Exercise 15-10

The price at which the lessor is “selling” the asset being leased is the present value of the lease payments:

*$26,269 x 5.32948^ = $140,000

(rounded)

^ present value of an annuity due of $1: n=6, i=5%

Pretax earnings will be increased by $20,687 as calculated below:

January 1, interest revenue $ 0

Dec. 31, interest revenue (5% x [$140,000* – 26,269]) 5,687

Interest revenue for the year $ 5,687

Sales revenue* 140,000

Cost of goods sold (125,000)

Income effect $ 20,687

Journal entry (not required):

Lease receivable (present value) 140,000 Cost of goods sold (lessor’s cost) 125,000

Sales revenue (present value) 140,000

Inventory of equipment (lessor’s cost) 125,000

Brief Exercise 15-11

$100,000 ÷ 16.67846^** = $5,996 fair lease value payments

^** present value of an annuity due of $1: n=20, i=2%

Brief Exercise 15-12

Amount to be recovered (fair value) $600,000 Less: Present value of the BPO price ($100,000 x .74726^*) (74,726)

Amount to be recovered through periodic lease payments $525,274

_____________________

Lease payments at the beginning 

of each of the next 5 years: ($525,274 ÷ 4.46511^**) $117,640

^* present value of $1: n=5, i=6%

^** present value of an annuity due of $1: n=5, i=6%

Brief Exercise 15-13

Amount to be recovered (fair value) $700,000 Less: Present value of the residual value ($100,000 x .82270^*) (82,270)

Amount to be recovered through periodic lease payments $617,730

_______________________

Lease payments at the end 

of each of the next 4 years: ($617,730 ÷ 3.54595^**) $174,207

^* present value of $1: n=4, i=5%

^** present value of an ordinary annuity of $1: n=4, i=5%