CHAPTER LEASES 4-1 PROBLEMS (Hope Manufacturing Company and Charity Co.) (a) Lessor’s Books (Hope Manufacturing Co.) 2012 Jan 1 Dec 31 Machinery for lease Cash Cash Rent revenue Unearned rent revenue M/5 = 400,000 M x 30% = 600,000 Machinery for lease Cash 2,200,000 2,200,000 600,000 400,000 200,000 60,000 60,000 Depreciation expense Accumulated depreciation Machine for lease (2.2 M – 200,000)/10 200,000 60,000 / years 12,000 Total 212,000 212,000 Cash Rent revenue 2,000,000 x 20% 400,000 Depreciation expense Accumulated depreciation Machine for lease 212,000 200,000 12,000 2013 Jan Dec 31 400,000 200,000 12,000 Lessee’s Books (Charity Co.) 2010 Jan Rent expense Prepaid rent Cash 400,000 200,000 Rent expense Cash 400,000 600,000 2011 Jan 400,00 (b) Statement of Comprehensive Income: (In profit or loss section) Rent revenue Depreciation expense Rent expense Statement of Financial Position Machine for lease, net of accum depreciation Unearned rent revenue Prepaid rent Hope Charity 400,000 212,000 Hope 400,000 Charity 2,048,000 200,000 200,000 Chapter – Leases 4-2 (Blessed Realty) a (7,500 x 4) + (10,000 x 3) + (12,000 x 3) + (15,000 x 2) Total lease period Monthly rent expense No of mos From Sept – Dec 31, 2012 Rent expense for 2012 b 4-3 Rent expense for 2012 Rent payments made during 2012 Rent payable at December 31, 2012 42,000 30,000 12,000 (Faith Company) a Monthly rental payment No of payments (60-6 mos free) Total payments Rent expense for 2012 (540,000 x 4/60) or Monthly rental Less lease bonus (60,000/60 mos) Rent expense per month Rent expense for 2012 (9,000 x 4) 10,000 x 54 540,000 36,000 10,000 (1,000) 9,000 36,000 Rent expense for 2013 (9,000 x 12) (b) 126,000 ÷ 12 mos 10,500 x4 42,000 108,000 Faith Company 2012 Dec 31 2013 Mar - Dec 31 Rent expense Rent payable 36,000 36,000 9,000 x = 36,000 Dec monthly entry Rent expense Cash 10,000 10,000 Rent expense Rent payable 8,000 8,000 Rent expense for 2012: 540,000 x 12/60 108,000 Payments in 2012 100,000 Increase in rent payable 8,000 Love Corporation 2012 Dec 31 Rent receivable Rent revenue 36,000 36,000 2013 Mar - Dec monthly entry Cash Rent revenue 10,000 10,000 43 Chapter – Leases Dec 31 4-4 8,000 960,000 50,000 25,000 1,035,000 Prepaid rent expenss (125,000 – 25,000) Security deposit (discounted for years at 10%) 150,000 x 0.6830 100,000 102,450 (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 Income before income tax b 4-6 8,000 (Way Company) a Fixed annual rental Additional rent 5% x (6M-5M) Amortization of lease bonus (125,000/5 years) Rent expense for 2012 b 4-5 Rent receivable Rent revenue 690,000 (437,500) (50,000) 202,500 Rent expense (920,000 x 9/12) 690,000 (Provident Company) Lessor’s Books 2012 July Oct 1 Nov Dec 31 31 Equipment for lease Cash 1,500,000 1,500,000 Cash Rent revenue 54,000 Cash Rent revenue 30,000 Cash Rent revenue 30,000 Cash Rent revenue 30,000 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 30,000 30,000 30,000 44 49,500 75,000 Chapter – Leases Lessee’s Books 2012 Oct 1 Nov Dec 31 4-7 Rent expense Cash 54,000 Rent expense Cash 30,000 Rent expense Cash 30,000 Rent expense Cash 30,000 Prepaid rent Rent expense 49,500 54,000 30,000 30,000 30,000 49,500 (Generous, Inc.) 260,000 x 4.2397 200,000 x 0.6499 Total capitalized cost (a) 1,102,322 129,980 1,232,302 Amortization Table Total Annual Interest Date Payment Expense 01/01/12 01/01/12 260,000 01/01/13 260,000 87,507 01/01/14 260,000 71,983 01/01/15 260,000 55,061 01/01/16 260,000 36,617 12/31/16 200,000 16,530* *Adjusted; difference is due to rounding off Reduction in Principal 260,000 172,493 188,017 204,939 223,383 183,470 Lease Obligation 1,232,302 972,302 799,809 611,792 406,853 183,470 - (b) 2012 Jan 1 Dec 31 31 Leased automobile Finance lease obligation Finance lease obligation Cash Interest expense Interest Payable 1,232,302 1,232,302 260,000 260,000 87,507 87,507 Depreciation expense Accumulated depreciation (1,232,302-200,000)/5 206,460 Finance lease obligation Interest payable Cash 172,493 87,507 206,460 2013 Jan Dec 31 31 Interest expense Interest payable 260,000 71,983 71,983 Depreciation expense Accumulated depreciation 45 206,460 206,460 Chapter – Leases (c) Dec 31 Accumulated depreciation Interest expense Finance lease obligation Leased automobile 1,032,300 16,532* 183,470 1,232,302 *adjusted; balancing figure (d) Dec 31 4-8 Loss on finance lease Accumulated depreciation Interest expense Finance lease obligation Leased automobile Cash 50,000 1,032,300 16,532 183,470 1,232,302 50,000 (Diana Corporation) (a) 86,680 x 4.1699 (b) = 361,447 Amortization Table Total Annual Payment Interest Date Expense 01/01/12 01/01/12 86,680 01/01/13 86,680 27,477 01/01/14 86,680 21,556 01/01/15 86,680 15,044 01/01/16 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) 2012 Jan 1 Dec 31 31 Leased machine Finance lease obligation 361,447 361,447 Finance Lease Obligation Cash 86,680 Interest expense Interest payable 27,477 Depreciation expense Accumulated depreciation 361,447/5 years 72,289 Finance lease obligation Interest payable Cash 59,203 27,477 Interest expense Interest payable 21,556 Depreciation expense Accumulated depreciation 72,289 86,680 27,477 72,289 2013 Jan Dec 31 31 86,680 21,556 46 72,289 Chapter – Leases (d) Statement of Financial Position Property, plant and equipment Leased machine Accumulated depreciation Current liabilities: Interest payable Finance lease obligation Noncurrent liabilities: Finance lease obligation Income Statement Interest expense Depreciation expense 4-9 2012 2013 361,447 72,289 361,447 144,578 27,477 59,203 21,556 65,124 215,564 150,440 27,477 72,289 21,556 72,289 (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 12/31/12 12/31/12 12/31/13 12/31/14 (c) 135,000 135,000 135,000 Interest Expense 87,684 82,952 Reduction in Principal 135,000 47,316 52,048 (1,011,840 – 40,000) / 15 years (d) 12/31/12 12/31/13 (e) Total Annual Payment Leased equipment Finance lease obligation P64,789 1,011,840 1,011,840 Finance lease obligation Cash 135,000 Finance lease obligation Interest expense Cash 47,316 87,684 Depreciation expense Accumulated depreciation (1,011,840 – 40,000) / 15 64,789 Lease obligation as of December 31, 2012: Current portion Noncurrent portion 4-10 (Shirley Corporation) (a) 150,000 x 4.0373 240,000 x 0.5674 Total capitalized cost 605,595 136,176 741,771 47 Lease Obligation 1,011,840 876,840 829,524 777,476 135,000 135,000 64,789 P 47,316 829,524 Chapter – Leases (b) Date 01/01/12 01/01/12 01/01/13 01/01/14 01/01/15 01/01/16 12/31/16 Total Annual Payment 150,000 150,000 150,000 150,000 150,000 240,000 Interest Expense 71,013 61,534 50,918 39,028 25,736* Reduction in Principal 150,000 78,987 88,466 99,082 110,972 214,264 Lease Obligation 741,771 591,771 512,784 424,318 325,236 214,264 - *Adjusted; difference is due to rounding off (c) 741,771 / 15 years P49,451 (d) 2012 Jan 1 Dec 31 31 Leased machinery Finance lease obligation 741,771 Finance lease obligation Cash 150,000 741,771 150,000 Interest expense Interest payable 71,013 Depreciation expense Accumulated depreciation 49,451 Finance lease obligation Interest payable Cash 78,987 71,013 Interest expense Interest payable 61,534 Depreciation expense Accumulated depreciation 49,451 71,013 49,451 2013 Jan Dec 31 31 (e) Dec 31 (f) Dec 31 150,000 61,534 49,451 Interest expense Finance lease obligation Accumulated depreciation Machinery Leased machinery Cash 25,736 214,264 247,255 494,516 Interest expense Finance lease obligation Accumulated depreciation Loss on finance lease Leased machinery 25,736 214,264 247,255 254,516 48 741,771 240,000 741,771 Chapter – Leases 4-11 (Sam Company) (a) (b) Present value of minimum lease payments 700,000 x 6.3282 P4,429,740 Annual depreciation (4,429,740/10) P 442,974 (c) 2010 July July Dec 31 31 31 Building Finance lease obligation 4,429,740 4,429,740 Taxes and insurance expense Finance lease obligation Cash 50,000 700,000 Interest expense Interest payable 447,569 x 6/12 223,784 Depreciation expense-Building Accum Depreciation-Building 221,487 Prepaid taxes and insurance Taxes and insurance expense 25,000 750,000 223,784 221,487 25,000 2011 July Dec 31 31 Taxes and insurance expense Interest payable Interest expense Finance lease obligation Cash 50,000 223,784 223,785 252,431 Interest expense Interest payable 417,277 x 6/12 208,639 Depreciation expense Accum Depreciation-building 442,974 Date July 1, 2012 July 1, 2012 July 1, 2013 July 1, 2014 750,000 208,639 442,974 Amortization Table Periodic Applied to Payment Interest Principal P700,000 700,000 700,000 P447,569 417,277 49 P700,000 252,431 282,723 Balance of Principal P4,429,740 3,729,740 3,477,309 3,194,586 Chapter – Leases 4-12 (Joy Company) a 2012 Aug 1 Dec 31 Finance lease receivable Equipment for lease Unearned interest revenue 605,000 480,000 125,000 Unearned interest revenue Cash 1,900 Cash Finance lease receivable 100,000 Unearned interest revenue Interest revenue 38,190 x 5/12 15,912 1,900 100,000 15,912 Partial Amortization Table Date 08/01/12 08/01/12 08/01/13 (b) Periodic Payment 100,000 100,000 Interest 38,190 Reduction in Principal 100,000 61,810 As of December 31, 2012: Total Current Finance lease receivable P505,000 P100,000 Unearned interest revenue 107,188 22,278 P397,812 P 77,722 Current portion: Principal due in 2013 Accrued interest, 12/31/12 (38,190 x 5/12) 4-13 Balance of Principal 481,900 381,900 320,090 Non-current P405,000 84,910 P320,090 P 61,810 15,912 (Jackie Chan and Chris Tucker) Annual Lease Payment: Fair value of asset PV of BPO = 40,000 x 6209 PV of periodic payment PV factor (Annuity due for years at 10%) Periodic payment Date Jan 1, 2012 Jan 1, 2012 Jan 1, 2013 Jan 1, 2014 P600,000 24,836 P575,164 ÷4.1699 P137,932 Periodic Payment Interest Reduction in Principal P137,932 137,932 137,932 P46,207 37,034 P137,932 91,725 100,898 Depreciable cost = P600,000 – P20,000 = P580,000 2012 Depreciation = P580,000 x 6/21 = P165,714 2013 Depreciation = P580,000 x 5/21 = 138,095 50 Balance of Principal P600,000 462,068 370,343 269,445 Chapter – Leases (a) Books of Chris Tucker 2012 Jan Leased equipment Finance lease obligation Finance lease obligation Cash 600,000 600,000 137,932 137,932 Dec 31 Interest expense Interest payable 46,207 46,207 31 Depreciation expense – Leased equipment Accum depr – Leased equipment 165,714 165,714 2013 Jan Finance lease obligation Interest payable Cash 91,725 46,207 Dec 31 Interest expense Interest payable 37,034 137,932 37,034 Depreciation expense Accum depr.– Leased equipment 138,095 138,095 (b) Books of Jackie Chan 2012 Jan Finance lease receivable Equipment for lease Unearned interest revenue Cash 729,660 600,000 129,660 137,932 Finance lease receivable Dec 31 Unearned interest revenue Interest revenue 137,932 46,207 46,207 2013 Jan Cash 137,932 Finance lease receivable Dec 31 Unearned interest revenue Interest revenue 137,932 37,034 37,034 4-14 (Ben Ten and Ironman) (a) Direct finance lease (The cash price equals the carrying value of the asset; hence, there is no gross profit) (b) The rate is approximately 8% The PV factor is P539,730/80,000 = 6.7466; in line (which is annual payments of P80,000 + payment for guaranteed residual value of same amount), the corresponding interest rate is 8% 51 Chapter – Leases (c) Partial amortization table Date April 1, 2012 April 1, 2012 April 1, 2013 April 1, 2014 Periodic Payment Interest Reduction in Principal 80,000 80,000 80,000 36,778 33,321 80,000 43,222 46,679 Balance of Principal P539,730 459,730 416,508 369,829 Ironman 2012 Apr 1 Dec 31 31 Equipment Finance lease obligation 539,730 539,730 Finance lease obligation Cash 80,000 Interest expense Interest payable 36,778 x 9/12 27,584 Depreciation expense Accumulated depreciation (539,730-80,000)/8 = 57,466 57,466 x 9/12 = 43,100 43,100 Interest expense (36,778-27,584) Interest payable Finance lease obligation Cash 9,194 27,584 43,222 Interest expense Interest payable 33,321 x 9/12 24,991 Depreciation expense Accumulated depreciation (539,730-80,000)/8 = 57,466 57,466 80,000 27,584 43,100 2013 Apr Dec 31 31 80,000 24,991 52 57,466 Chapter – Leases (d) Books of Ben Ten 2012 Apr Finance lease receivable Unearned interest revenue Equipment for lease 80,000x = 640,000; 640,000 + 80,000 GRV = 720,000 Dec 31 720,000 180,270 539,730 Cash Finance lease receivable 80,000 Unearned interest revenue Interest revenue 27,584 Cash Finance lease receivable 80,000 80,000 27,584 2011 Apr 1 Dec 31 80,000 Unearned interest revenue Interest revenue 9,194 Unearned interest revenue Interest revenue 32,893 x 9/12 24,991 9,194 24,991 (e) The asset shall be recorded at P496,512 which is 80,000 x 6.2064 Depreciation for 2012 = 496,512/8 x 9/12 = 46,548 (f) No difference in journal entries To the lessor, under the direct finance lease, it does not matter whether the residual value is guaranteed or unguaranteed 4-15 (Prudent Company) (a) Sales price Cost of machine Gross profit 1,011,840 784,500 227,340 (b) Gross investment (135,000 x 12) Sales Total financial revenue over the lease term (c) Interest revenue for 2012 (1,011,840 – 135,000) x 10% x 6/12 (d) Finance lease receivable Less Unearned interest revenue Net finance lease receivable, December 31, 2012 53 1,620,000 1,011,840 608,160 43,842 1,485,000 564,318 920,682 Chapter – Leases 4-16 (Glad Manufacturing Company) (a) 2012 Apr Finance lease receivable Cost of sales Unearned interest revenue Sales Finished goods inventory 1,500,000 893,350 426,380 1,026,970 940,000 175,000 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 Dec 31 Cash Finance lease receivable 175,000 Unearned interest revenue Interest revenue 89,862 x 9/12 67,397 Interest revenue Unearned interest revenue 67,397 175,000 67,397 2013 Jan Apr Dec 31 67,397 Cash Unearned interest revenue Finance lease receivable Interest revenue 175,000 89,862 Unearned interest revenue Interest revenue 61,011 175,000 89,862 61,011 81,348 x 9/12 Partial amortization table Date April 1, 2012 April 1, 2012 April 1, 2013 April 1, 2014 Periodic Payment Interest Reduction in Principal 175,000 175,000 175,000 89,862 81,348 175,000 85,138 93,652 *The compound entry may also be presented as follows: Apr Finance lease receivable 1,400,000 Sales Unearned interest revenue 1 Cost of sales Finished goods inventory 940,000 Finance lease receivable Cost of sales Unearned interest revenue 100,000 54 Balance of Principal P1,073,620 898,620 813,482 719,830 1,026,970 373,030 940,000 46,650 53,350 Chapter – Leases (b) (i) (ii) (c) 4-17 Sales Cost of Sales (940,000 – 46,650) Gross profit on sales Interest Revenue for 2012 (see journal entries) 1,026,970 893,350 133,620 67,397 Sales (1,026,970 + 46,650) Cost of sales (cost of the asset) 1,073,620 940,000 Ruby Company a Manufacturer’s or dealer’s lease, because FV exceeds CV The difference represents gross profit, which characterizes a dealer’s or manufacturer’s lease b Present value of MLP = 850,365 x 4.6048 Present value of residual value = 166,300 x 5066 Total present value Carrying value of leased asset Gross Profit Lease arrangement cost Interest income 377,756 x 3/12 Total income in 2012 c P3,914,080 84,248 P3,998,328 3,200,000 P 798,328 ( 85,000) 94,439 P 807,767 Amortization Table Date Oct 1, 2012 Oct 1, 2012 Oct 1, 2013 Oct 1, 2014 Periodic Payment Interest Reduction in Principal P850,365 850,365 850,365 P377,756 321,042 P850,365 472,609 529,323 Balance of Principal P3,998,328 3,147,963 2,675,354 2,146,031 2012 Oct Finance lease receivable (850,365 x 6) + 166,300 Cost of goods sold (3,200,000 – 84,248) Inventory Sales Unearned interest revenue 5,268,490 3,115,752 Selling expense Cash 3,200,000 3,914,080 1,270,162 85,000 85,000 Cash 850,365 Finance lease receivable Dec 31 850,365 Unearned interest revenue Interest revenue 94,439 94,439 2013 Oct Cash 850,365 Finance lease receivable 850,365 Dec 31 Unearned interest revenue Interest revenue (377,756 – 94,439) + (321,042 x 3/12) 55 363,578 363,578 Chapter – Leases d Amortization Table for Emerald Date Oct 1, 2012 Oct 1, 2012 Oct 1, 2013 Oct 1, 2014 Periodic Payment Interest Reduction in Principal 850,365 850,365 850,365 367,646 309,720 850,365 482,719 540,645 Balance of Principal P3,914,080 3,063,715 2,580,996 2,040,351 2012 Oct Leased equipment Finance lease obligation 3,914,080 3,914,080 Finance lease obligation Cash 850,365 850,365 Dec 31 Interest expense Interest payable 367,646 x 3/12 = 91,912 31 Depreciation expense Accumulated depreciation 3,914,080/6 x 3/12 91,912 91,912 163,087 163,087 2013 Oct Interest payable Interest expense 367,646 – 91,912 Finance lease obligation Cash Dec31 Interest expense Interest payable 309,720 x 3/12 91,912 275,734 482,719 850,365 77,430 77,430 Depreciation expense Accumulated depreciation 652,347 652,347 4-18 (Metro Industries) Correction to the problem: the equipment’s fair value is P368,606, instead of P400,000 (a) Sales = (99,046 x 3.1699) + (80,000 x.6830) = P368,606 (b) Sales P368,606 Cost of equipment sold (300,000) Selling expense ( 15,000) Interest income (368,606 x 10%) 36,861 Total profit from lease P 90,467 (c) Depreciation expense recorded by Western (368,606 – 80,000) / = P 72,152 4-19 (Legend Company) (a) Selling price of the machinery (150,000 x 4.0373) (b) Deferred gain on January 1, 2012 (605,595 – 411,750) (c) Depreciation expense for 2012 (605,595 / years) (d) Interest expense for 2012 (605,595 – 150,000) x 12% (e) Gain on sale-leaseback for 2010 (193,845 / years) 56 605,595 193,845 121,119 54,671 38,769 Chapter – Leases 4-20 (Honest Company) (a) 2012 July July Dec 31 Cash Accumulated depreciation Equipment Gain on sale leaseback 540,000 350,000 800,000 90,000 Rent expense Cash 80,000 Prepaid rent Rent expense 40,000 80,000 40,000 (b) 2012 July 1 Dec 31 31 Cash Accumulated depreciation Equipment Gain on sale leaseback Unearned profit on sale leaseback 540,000 350,000 800,000 50,000 40,000 Rent expense Cash 80,000 Prepaid rent Rent expense 40,000 80,000 40,000 Unearned profit on sale leaseback Profit on sale leaseback 5,000 5,000 (40,000/4) x 6/12 (c) 2012 July 1 Dec 31 Cash Accumulated depreciation Loss on sale leaseback Equipment 400,000 350,000 50,000 800,000 Rent expense Cash 80,000 Prepaid rent Rent expense 40,000 80,000 40,000 57 Chapter – Leases (d) 2012 July 1 Dec 31 Cash Accumulated depreciation Deferred loss on sale leaseback Equipment 350,000 350,000 100,000 800,000 Rent expense Cash 80,000 Prepaid rent Rent expense 40,000 Rent expense/Loss on sale leaseback 12,500 80,000 40,000 Deferred loss on sale leaseback 100,000 x 6/48 = 12,500 MULTIPLE CHOICE QUESTIONS Theory MC1 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 MC11 MC12 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 B 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 MC39 MC40 MC41 B D D C A D MC42 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 (1,742,174 x 3.48685) + (1,200,000 x 68301) = 6,894,311 (6,894,311 – 1,200,000)/4 = 1,423,578 1,742,174 X 3.48685 = 6,074,699 6,074,699/4 = 1,518,675 CV = 6,245,450 – [(6,245,450 – 80,000)/6 X ] = 2,135,150 2,135,150 – 1,250,000 = 885,150 100,000 x = 600,000 58 12,500 Chapter – Leases MC43 D MC44 MC45 MC46 MC47 MC48 MC49 C A B D A D MC50 MC51 MC52 C D A MC53 A MC54 D MC55 MC56 MC57 MC58 A B B B MC59 MC60 D B 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 = 146,000 400,000 – 300,000 – 15,000 + (400,000 X 10%) = 125,000 400,000 – (108,951 – 40,000 interest) = 331,049 323,400 / 4.312 = 75,000; 75,000 x = 375,000; 375,000 – 323,400 = 51,600 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 Initial direct costs increase the net investment in lease recorded by the lessor; although an unguaranteed residual value is considered by the lessor and not by the lessee, the terms of the lease already indicated that the residual value is guaranteed This excess over the limited hours should be accrued by the end of 2013, even if payment would be made at January 1, 2013 550,000 – 400,000 =150,000 ; in the absence of any information, sales price is presumed to be at fair value 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 = 45,000 800,000 – 710,000 = 90,000 deferred on Mar 31; 710,000 – 650,000 = 60,000 immediate gain on Mar 31; 60,000 + [(90,000/12) x 9/12] = 65,625 If selling price is at fair value, full amount of gain is recognized immediately Additional information, lease term is 12 years out of total life of 25 years Deferred loss = 650,000 – 470,000; amortized loss = (180,000/12) x 9/12 = 11,250; 470,000 – 11,250 = 168,750 59 ... expense 4- 9 2 012 2 013 3 61, 44 7 72,289 3 61, 44 7 14 4,578 27 ,47 7 59,203 21, 556 65 ,12 4 215 ,5 64 15 0 ,44 0 27 ,47 7 72,289 21, 556 72,289 (Riza, Inc.) (a) 1, 011 , 840 /13 5,000 = 7 .49 51 PV of an annuity due for 12 ... Leases (b) Date 01/ 01/ 12 01/ 01/ 12 01/ 01/ 13 01/ 01/ 14 01/ 01/ 15 01/ 01/ 16 12 / 31/ 16 Total Annual Payment 15 0,000 15 0,000 15 0,000 15 0,000 15 0,000 240 ,000 Interest Expense 71, 013 61, 5 34 50, 918 39,028 25,736*... 275,000 (1, 742 ,17 4 x 3 .48 685) + (1, 200,000 x 683 01) = 6,8 94, 311 (6,8 94, 311 – 1, 200,000) /4 = 1, 42 3,578 1, 742 ,17 4 X 3 .48 685 = 6,0 74, 699 6,0 74, 699 /4 = 1, 518 ,675 CV = 6, 245 ,45 0 – [(6, 245 ,45 0 – 80,000)/6