Chapter – Leases CHAPTER LEASES PROBLEMS 4-1 (Hope Manufacturing Company and Charity Co.) (a) Lessor’s Books 2009 Jan Machinery For Lease 2,200,000 Cash 1 Dec Cash Rent Revenue Unearned Rent Revenue M/5 = 400,000 M x 30% = 600,000 Machinery For Lease Cash 2010 Jan Dec Depreciation Expense 2,200,000 600,000 400,000 200,000 60,000 60,000 212,000 Accumulated Depreciation Machinery for Lease (2.2 M – 200,000)/10 200,000 60,000 / years 12,000 Total 212,000 200,000 12,000 Cash Rent Revenue 2,000,000 x 20% 400,000 Depreciation Expense 212,000 400,000 Accumulated Depreciation Machinery for Lease 200,000 12,000 Lessee’s Books 2009 Jan 2010 Jan (b) Rent Expense Prepaid Rent Cash 400,000 200,000 Rent Expense Cash 400,000 600,000 400,00 36 Chapter – Leases Income Statement: Rent Revenue Depreciation Expense Rent Expense Statement of Financial Position Machinery for Lease, net of Accum Depreciation Unearned Rent Revenue Prepaid Rent 4-2 (Blessed Realty) a 7,500 x 10,000 x 12,000 x 15,000 x Total b mos mos mos mos Hope 400,000 212,000 Charity 400,000 Charity Hope 2,048,000 200,000 200,000 30,000 30,000 36,000 30,000 126,000 ÷ 12 mos Monthly rent expense No of mos From Sept – Dec 31, 2005 Rent Expense for 2006 10,500 Rent Expense for 2006 Rent payments made during 2006 Rent Payable at December 31, 2006 42,000 30,000 12,000 4-3 (Faith Company) (a) Monthly rental payment No of payments (60-6 mos free) Total payments Rent Expense for 2009 (540,000 x 4/60) 36,000 or Monthly rental Less lease bonus (60,000/60 mos.) (1,000) Rent Expense per month No of months for Sept 1- Dec 31 x4 Rent Expense for 2009 x 42,000 10,000 x 54 540,000 10,000 9,000 36,000 Rent Expense for 2010 (9,000 x 12) 108,000 (b) Faith Company 2009 Dec 31 Rent Expense 36,000 Rent Payable 2010 Mar - 36,000 Dec monthly entry Rent Expense Cash 10,000 10,000 37 Chapter – Leases Dec 31 Rent Expense 8,000 Rent Payable 8,000 Rent expense for 2009: 540,000 x 12/60 108,000 Payments in 2007 100,000 Increase in rent payable 8,000 Love Corporation 2009 Dec 31 Rent Receivable 36,000 Rent Revenue 36,000 2010 Mar - Dec monthly entry Cash Rent Revenue Dec 31 Rent Receivable 10,000 8,000 Rent Revenue 4-4 (Way Company) a Fixed annual rental Additional rent 5% (6 M – M) Amortization of lease bonus 125,000/10 yrs Rent Expense for 2007 b Prepaid Rent Expense 125,000 – 12,500 Security Deposit (discounted for more years at 10%) 150,000 x 68301 = (Truth Corporation) a Rent Revenue (920,000 x 9/12) Depreciation Expense 3,500,000/6 = 583,333 583,333 x 9/12 Maintenance and other related costs ( 50,000) Income before income tax 202,500 b Rent Expense 690,000 10,000 8,000 960,000 50,000 12,500 1,022,500 112,500 102,452 4-5 4-6 690,000 (437,500) (Provident Company) Lessor’s Books 2009 July Equipment For Lease Cash 1,500,000 1,500,000 38 Chapter – Leases Oct 1 Nov Dec 31 31 Cash Rent Revenue 54,000 Cash Rent Revenue 20,000 Cash Rent Revenue 20,000 Cash Rent Revenue 20,000 Rent Revenue Unearned Rent Revenue 54,000 x 33/36 = 49,500 49,500 Depreciation Expense Accumulated Depreciation (1,500,000 / 10) x 6/12 75,000 54,000 20,000 20,000 20,000 49,500 75,000 Lessee’s Books 2009 Oct 1 Nov Dec 31 4-7 Rent Expense Cash 54,000 Rent Expense Cash 20,000 Rent Expense Cash Rent Expense Cash 20,000 Prepaid Rent Rent Expense 49,500 (Generous, Inc.) 260,000 x 4.24 1,102,400 200,000 x 0.65 Total capitalized cost (a) 54,000 20,000 20,000 20,000 20,000 49,500 130,000 1,232,400 Amortization Table Date Total Annual Payment 01/01/09 01/01/09 01/01/10 01/01/11 01/01/12 260,000 260,000 260,000 260,000 Interest Expense 87,516 71,992 55,072 39 Reduction in Principal 260,000 172.484 188,008 204,928 Lease Obligation 1,232,400 972,400 799,916 611,908 406,980 Chapter – Leases 01/01/13 260,000 36,628 223,372 12/31/14 200,000 16,392* 183,608 *Adjusted; difference is due to rounding off 183,608 - (b) 2009 Jan 1 Dec Leased Automobile Finance Lease Obligation 1,232,400 Finance Lease Obligation Cash 1,232,400 260,000 260,000 Interest Expense 87,516 Interest Payable 87,516 Depreciation Expense 206,480 Accumulated Depreciation (1,232,400-200,000)/5 206,480 2010 Jan Dec Finance Lease Obligation Interest Payable Cash 172,484 87,516 260,000 Interest Expense 71,992 Interest Payable 71,992 Depreciation Expense 206,480 Accumulated Depreciation 206,480 (c) Dec 31 Accumulated Depreciation Interest Expense Finance Lease Obligation Leased Automobile 1,032,400 16,392 183,608 Loss on Finance Lease Accumulated Depreciation Interest Expense Finance Lease Obligation Leased Automobile Cash 50,000 1,032,400 16,392 183,608 1,232,400 d Dec 31 4-8 (Diana Corporation) (a) 86,680 x 4.1699 = 40 1,232,400 50,000 361,447 361,456 Chapter – Leases (b) Amortization Table Total Annual Payment Interest Date Expense 01/01/09 01/01/09 86,680 01/01/10 86,680 27,477 01/01/11 86,680 21,556 01/01/12 86,680 15,044 01/01/13 86,680 7,876* *Adjusted; difference is due to rounding off Reduction in Principal 86,680 59,203 65,124 71,636 78,804 Lease Obligation 361,447 274,767 215,564 150,440 78,804 - (c) 2009 Jan Leased Machine 361,447 Finance Lease Obligation Finance Lease Obligation 361,447 86,680 Cash Dec 86,680 Interest Expense 27,477 Interest Payable 27,477 Depreciation Expense 72,289 Accumulated Depreciation 361,447/5 years 2010 Jan Dec 72,289 Finance Lease Obligation Interest Payable Cash 59,203 27,477 Interest Expense 21,556 86,680 Interest Payable 21,556 Depreciation Expense 72,289 Accumulated Depreciation (d) Statement of Financial Position Property, Plant and Equipment Leased Machine Accumulated Depreciation Current Liabilities: Interest Payable Finance Lease Obligation Noncurrent Liabilities: 41 72,289 2009 2010 361,447 72,289 361,447 144,578 27,477 59,203 21,556 65,124 Chapter – Leases Finance Lease Obligation 215,564 150,440 27,477 72,289 21,556 72,289 Income Statement Interest Expense Depreciation Expense 4-9 (Riza, Inc.) (a) 1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods From Table VI across 12 periods, 7.4951 is under 10% interest rate (b) Date Total Annual Payment 12/31/09 12/31/09 12/31/10 12/31/11 135,000 135,000 135,000 Interest Expense 87,684 82,952 (c) (1,011,840 – 40,000) / 15 years (d) 12/31/09 Leased Equipment Finance Lease Obligation 12/31/09 12/31/10 Reduction in Principal Lease Obligation 135,000 47,316 52,048 1,011,840 876,840 829,524 777,476 = 64,789 1,011,840 1,011,840 Finance Lease Obligation Cash 135,000 Finance Lease Obligation Interest Expense Cash 47,316 87,684 135,000 135,000 12/31/10 (e) Depreciation Expense 64,789 Accumulated Depreciation 64,789 (1,011,840 – 40,000) / 15 Lease Obligation as of December 31, 2010: Current portion 52,048 Noncurrent portion 777,476 4-10 (Shirley Corporation) (a) 150,000 x 4.037 240,000 x 0.567 Total capitalized cost 605,550 136,080 741,630 (b) Date 01/01/09 01/01/09 01/01/10 01/01/11 01/01/12 01/01/13 Total Annual Payment 150,000 150,000 150,000 150,000 150,000 Interest Expense Reduction in Principal Lease Obligation 70,996 61,515 50,897 39,005 150,000 79,004 88,485 99,103 110,995 741,630 591,630 512,626 424,141 325,038 214,043 42 Chapter – Leases 12/31/13 240,000 25,957* 214,043 *Adjusted; difference is due to rounding off (c) 741,630 / 15 years = - 49,442 (d) 2009 Jan 1 Dec Dec Leased Machinery Finance Lease Obligation 741,630 Finance Lease Obligation Cash 150,000 Interest Expense 741,630 150,000 70,996 Interest Payable 70,996 Depreciation Expense 49,442 Accumulated Depreciation 2010 Jan Dec 49,442 Finance Lease Obligation Interest Payable Cash 79,004 70,996 Interest Expense 61,515 150,000 Interest Payable (e) Dec 61,515 Depreciation Expense 49,442 Accumulated Depreciation Interest Expense 49,442 25,957 (f)2013 Dec Finance Lease Obligation Accumulated Depreciation Machinery Leased Machinery Cash Interest Expense 214,043 247,210 494,420 741,630 240,000 25,957 Finance Lease Obligation Accumulated Depreciation Loss on Finance Lease Leased Machinery 43 214,043 247,210 254,420 741,630 Chapter – Leases 4-11 (Joy Company-lESSOR) a 2009 Aug Dec Finance Lease Receivable Equipment for Lease Unearned Interest Revenue Unearned Interest Revenue Cash Cash Finance Lease Receivable 605,000 1,900 480,000 125,000 1,900 100,000 100,000 Unearned Interest Revenue 15,913 Interest Revenue 38,192 x 5/12 15,913 Partial Amortization Table Date 08/01/09 08/01/09 08/01/10 (b) Periodic Payment 100,000 100,000 Interest 38,192 As of December 31, 2009: current Total Reduction in Principal 100,000 61,808 Current Balance of Principal 481,920 381,920 320,112 Non- Finance Lease Receivable P505,000 P100,000 P405,000 Unearned Interest Revenue 107,187 22,279 84,908 P397,813 P 77,721 P320,092 Current portion: Principal due in 2010 P 61,808 Accrued interest, 12/31/09 15,913 P 77,721 4-12 (Glad Manufacturing Company) (a) 44 Chapter – Leases 2009 Apr Finance Lease Receivable Cost of Sales Unearned Interest Revenue Sales Finished Goods Inventory 1,500,000 893,350 175,000 x = 1,400,000 1,400,000 + 100,000 = 1,500,000 940,000–(100,000 x0.4665)=893,350 175,000 x 5.8684 = 1,026,970 100,000 x 0.4665 = 46,650 1,026,970 + 46,650 = 1,073,620 1,500,000 – 1,073,620 = 426,380 Cash Dec 426,380 1,026,970 940,000 175,000 Finance Lease Receivable Unearned Interest Revenue 175,000 67,397 Interest Revenue (1,073,620-175,000) x 10% x 9/12 67,397 2010 Jan Interest Revenue Unearned Interest Revenue Apr Cash Unearned Interest Revenue Finance Lease Receivable Interest Revenue 67,397 175,000 89,862 1,073,620-175,000=898,620 898,620 x 10% = 89,862 Dec Unearned Interest Revenue 61,011 898,620-175,000+89,862 =813,482 813,482 x 10% x 9/12 = 61,011 1,400,000 Cost of Sales Finished Goods Inventory 940,000 Finance Lease Receivable Cost of Sales Unearned Interest Revenue 100,000 45 175,000 89,862 61,011 Interest Revenue *The compound entry may also be presented as follows: Apr Finance Lease Receivable Sales Unearned Interest Revenue 67,397 1,026,970 373,030 940,000 46,650 53,350 Chapter – Leases (b) (i) 893,350 (ii) (c) 940,000 1,026,970 Gross Profit on Sales 133,620 67,397 Sales Cost of Sales (940,000 – 46,650) Interest Revenue for 2006 (see journal entries) Sales (1,026,970 + 46,650) Cost of Sales (cost of the asset) 1,073,620 4-13 (Prudent Company) (a) Sales price Cost of machine Gross profit 1,011,840 784,500 227,340 (b) Gross investment (135,000 x 12) 1,620,000 Sales Total financial revenue (c) 43,842 1,011,840 608,160 Interest Revenue for 2009 (1,011,840 – 135,000) x 10% x 6/12 (d) Finance Lease Receivable 1,485,000 Less Unearned Interest Revenue 564,318 Net Finance Lease Receivable, December 31, 2009 4-14 (Jackie Chan and Chris Tucker) 920,682 Annual Lease Payment: 24,836 ÷4.1699 Fair value of asset PV of BPO = 40,000 x 6209 P600,000 PV of periodic payment PV factor (Annuity due for years at 10%) P575,164 Periodic payment P137,932 Date Jan 1, 2009 Jan 1, 2009 Jan 1, 2010 Jan 1, 2011 Periodic Payment Interest P137,932 137,932 137,932 P46,207 37,034 Reduction in Principal P137,932 91,725 100,898 Depreciable cost = P600,000 – P20,000 = P580,000 2009 Depreciation = P580,000 x 6/21 = P165,714 2010 Depreciaiton = P580,000 x 5/21 = 138,095 46 Balance of Principal P600,000 462,068 370,343 269,445 Chapter – Leases (a) Books of Chris Tucker 2009 Jan Leased Equipment Finance Lease Obligation Finance Lease Obligation Cash Dec 31 46,207 Interest Expense Interest Payable 600,000 600,000 137,932 137,932 46,207 31 Depreciation Expense – Leased Equipment 165,714 Accumulated Depreciation – Leased Equipment 165,714 2010 Jan Finance Lease Obligation Interest Payable Cash Dec 31 Interest Expense Interest Payable 91,725 46,207 137,932 37,034 37,034 Depreciation Expense 138,095 Accumulated Depreciation – Leased Equipment 138,095 (b) Books of Jackie Chan 2009 Jan Finance Lease Receivable Equipment for Lease 600,000 Unearned Interest Revenue 129,660 Cash 729,660 137,932 Finance Lease Receivable 137,932 Dec 31 46,207 Unearned Interest Revenue Interest Revenue 46,207 2010 Jan Cash 137,932 47 Chapter – Leases Finance Lease Receivable 137,932 Dec 31 37,034 Unearned Interest Revenue Interest Revenue 4.15 37,034 Ruby Company a Manufacturer’s or dealer’s lease b Present value of MLP = 850,365 x 4.6048 P3,914,080 Present value of Residual value = 166,300 x 5066 84,248 Total present value P3,998,328 Carrying value of leased asset 3,200,000 Gross Profit P 798,328 Lease arrangement cost (initial direct cost) ( 85,000) Interest income 3,998,328 x 12% x 3/12 119,950 Total profit in 2009 P 833,278 c Amortization Table Date Oct 1, 2009 Oct 1, 2009 Oct 1, 2010 Oct 1, 2011 Periodic Payment Interest P850,365 850,365 850,365 P377,756 321,042 Reduction in Principal P850,365 472,609 529,323 2009 Oct Finance Lease Receivable (850,365 x 6) + 166,300 Cost of Goods Sold (3,200,000 – 84,248) Inventory Sales Unearned Interest Revenue 1,270,162 Oct Selling Expense Cash Oct Cash Balance of Principal P3,998,328 3,147,963 2,675,354 2,146,031 5,268,490 3,115,752 3,200,000 3,914,080 85,000 Finance Lease Receivable 85,000 850,365 850,365 Dec 31 Unearned Interest Revenue Interest Revenue 2010 Oct Cash 94,349 94,349 850,365 48 Chapter – Leases Finance Lease Receivable 850,365 Dec 31 d Unearned Interest Revenue Interest Revenue (377,756 – 94,439) + (321,042 x 3/12) Amortization Table Date Oct 1, 2009 Oct 1, 2009 Oct 1, 2010 Oct 1, 2011 Periodic Payment 850,365 850,365 850,365 Interest 367,646 309,720 2009 Oct Leased Equipment Finance Lease Obligation Finance Lease Obligation Cash Reduction in Principal Balance of Principal P3,914,080 3,063,715 2,580,996 2,040,351 850,365 482,719 540,645 3,914,080 3,914,080 850,365 Dec 31 Interest Expense Interest Payable 367,646 x 3/12 = 91,912 31 Depreciation Expense Accumulated Depreciation 163,087 3,914,080/6 x 3/12 2010 Oct Interest Payable Interest Expense 367,646 – 91,912 Finance Lease Obligation Cash Dec31 363,578 363,578 Interest Expense Interest Payable 309,720 x 3/12 91,912 91,912 163,087 91,912 275,734 482,719 850,365 77,430 Depreciation Expense Accumulated Depreciation 652,347 850,365 77,430 652,347 4-16 (Legend Company) (a) Selling price of the machinery (150,000 x 4.0373) 605,595 (b) Deferred gain on January 1, 2009 605,595 – 411,750 193,845 (c) Depreciation Expense for 2009 49 Chapter – Leases 605,595 / years 121,119 (d) Interest Expense for 2009 (605,595 – 150,000) x 12% (e) Gain on sale-leaseback for 2009 193,845 / years 38,769 54,671 4-17 (Honest Company) (a) 2009 July Cash 540,000 Accumulated Depreciation Equipment Gain on Sale Leaseback 350,000 Rent Expense 800,000 90,000 80,000 Cash Dec 80,000 Prepaid Rent 40,000 Rent Expense 40,000 (b) 50 Chapter – Leases 2009 July Cash 540,000 Accumulated Depreciation Equipment Gain on Sale Leaseback Unearned Profit on Sale Leaseback 350,000 Rent Expense 800,000 50,000 40,000 80,000 Cash Dec 80,000 Prepaid Rent 40,000 Rent Expense 40,000 Unearned Profit on Sale Leaseback 5,000 Profit on Sale Leaseback 5,000 (40,000/4) x 6/12 (c) 2009 July Cash 400,000 Accumulated Depreciation Loss on Sale Leaseback Equipment 350,000 50,000 Rent Expense Dec 800,000 80,000 Cash 80,000 Prepaid Rent 40,000 Rent Expense 40,000 51 Chapter – Leases (d) 2009 July 1 Cash 350,000 Accumulated Depreciation Deferred Loss on Sale Leaseback Equipment 350,000 100,000 Rent Expense 800,000 80,000 Cash Dec 80,000 Prepaid Rent 40,000 Rent Expense 40,000 Rent Expense Deferred Loss on Sale Leaseback 100,000 x 6/48 = 12,500 Theory MC1 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 MC11 MC12 12,500 12,500 MULTIPLE CHOICE QUESTIONS B A C D D D A C C A C A MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 MC21 MC22 MC23 MC24 B B A C C A C C C A A C Problems MC25 MC26 MC27 MC28 MC29 MC30 C C D D C B MC31 MC32 B D MC33 MC34 A B MC35 MC36 MC37 MC38 B D A D MC39 MC40 C A 900,000 + (500,000 / yrs) = 1,000,000 40,000 + (125,000 x 4) = 540,000; 540,000 / yrs = 108,000 This is an operating lease; thus, there is no interest expense involved 240,000 x 6/12 = 120,000 3,600,000 / yrs = 1,200,000 3,600,000 x 2/3 = 2,400,000; 600,000 + 900,000 = 1,500,000 2,400,000 – 1,500,000 = 900,000 500,000 x 4.61 = 2,305,000 2,305,000 – 500,000 – 283,400 = 1,521,600; 500,000 – (12% x 1,805,000)=283,400 2,305,000 / = 384,167 1,350,000-200,000=1,150,000; 1,150,000 x 10% = 115,000 200,000-115,000 = 85,000 400,000 x 5.95 = 2,380,000 (2,400,000 – 200,000) / yrs = 275,000 100,000 x = 600,000 100,000 x 4.8 = 480,000; 480,000 – 100,000 = 380,000 380,000 x 10% x 5/12 = 15,833 3,520,000 – 2,800,000 = 720,000 3,520,000 – 600,000 = 2,920,000; 2,920,000 x 10% x 6/12 = 146,000 52 Chapter – Leases MC41 A In the absence of any statement, the sales price is assumed to be at fair value 323,400 / 4.312 = 75,000; 75,000 x = 375,000; 375,000 – 323,400 = 51,600 4,800,000 – 3,600,000 = 1,200,000 1,200,000 /12 x 6/12 = 50,000 150,000 – 100,000 = 50,000; 50,000 x 9/10 = 45,000 98,512 x 10% = 9,851; 30,000-9,851 =20,149; 98,512-20,149=78,363 78,363 x 10% = 7,836 (98,512-5,000) / = 23,378 (30,000 x 2) + 5,000 = 65,000 MC42 A MC43 MC44 MC45 MC46 A B B D MC47 MC48 MC49 MC50 Theory: C D C A 24 + = 28 + 22 x = 44 +28 = 72 +3 = 75 53 ... Noncurrent Liabilities: 41 72, 289 20 09 2 010 3 61, 44 7 72, 289 3 61, 44 7 14 4,578 27 ,47 7 59 ,20 3 21 , 556 65 , 12 4 Chapter – Leases Finance Lease Obligation 21 5 ,5 64 15 0 ,44 0 27 ,47 7 72, 289 21 , 556 72, 289 Income Statement... 87, 516 71, 9 92 55,0 72 39 Reduction in Principal 26 0,000 17 2 .48 4 18 8,008 2 04, 928 Lease Obligation 1, 23 2 ,40 0 9 72 ,40 0 799, 916 611 ,908 40 6,980 Chapter – Leases 01/ 01/ 13 26 0,000 36, 628 22 3,3 72 12 / 31/ 14. .. 2 14 , 043 24 7 , 21 0 49 4 , 42 0 7 41 , 630 24 0 ,000 25 ,957 Finance Lease Obligation Accumulated Depreciation Loss on Finance Lease Leased Machinery 43 2 14 , 043 24 7 , 21 0 2 54, 420 7 41 , 630 Chapter – Leases 4 -1 1