Lease Amortization Schedule

Lease Effective Decrease Outstanding Payments Interest in Balance Balance 2% x Outstanding Balance

112,080

1 15,000 15,000 97,080

2 15,000 .02 (97,080) = 1,942 13,058 84,022

3 15,000 .02 (84,022) = 1,680 13,320 70,702

4 15,000 .02 (70,702) = 1,414 13,586 57,116

5 15,000 .02 (57,116) = 1,142 13,858 43,258

6 15,000 .02 (43,258) = 865 14,135 29,123

7 15,000 .02 (29,123) = 582 14,418 14,705

8 15,000 .02 (14,705) = 295* 14,705 0

120,000 7,920 112,080

* adjusted for rounding of other numbers in the schedule

January 1, 2011

Lease receivable (fair value) 112,080

Inventory of equipment (lessor’s cost) 112,080

Cash(lease payment) 15,000 Lease receivable 15,000

April 1, 2011

Cash(lease payment) 15,000 Lease receivable (difference) 13,058

Interest revenue(2% x [$112,080 – 15,000]) 1,942

July 1, 2011

Cash(lease payment) 15,000 Lease receivable (difference) 13,320

Interest revenue(2% x $84,022: from schedule) 1,680

Exercise 15-4 (concluded)

October 1, 2011

Cash(lease payment) 15,000 Lease receivable (difference) 13,586

Interest revenue(2% x $70,702: from schedule) 1,414

December 31, 2011

Interest receivable 1,142 Interest revenue(2% x $57,116: from schedule) 1,142

January 1, 2012

Cash(lease payment) 15,000 Lease receivable (difference) 13,858

Interest receivable (from adjusting entry) 1,142

Exercise 15-5

Requirement 1

Lessor’s Calculation of Lease Payments

Amount to be recovered (fair value) $112,080

__________________

Lease payments at the beginning 

of each of eight quarters: ($112,080 ÷ 7.47199^**) $15,000

^** present value of an annuity due of $1: n=8, i=2%

Requirement 2

January 1, 2011

Lease receivable (fair value / present value) 112,080 Cost of goods sold (lessor’s cost) 85,000 Sales revenue (fair value / present value) 112,080 Inventory of equipment (lessor’s cost) 85,000

Cash(lease payment) 15,000 Lease receivable 15,000

April 1, 2011

Cash(lease payment) 15,000 Lease receivable (difference) 13,058

Interest revenue(2% x [$112,080 – 15,000]) 1,942

Exercise 15-6

Situation 1

Since none of the criteria is met, this is an operating lease to the lessee:

Lessee’s 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 NO economic life of the asset? {4 yrs<75% of 6 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the NO fair value of the asset? {$37,233¹<90% of $44,000 = $39,600} ¹$10,000 x 3.72325^*= $37,233

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

Exercise 15-6 (continued)

Situation 2

Since at least one (two in this case: #2 and #3) classification criterion is met, this is a capital lease.