CHAPTER 4 LEASES PROBLEMS 4-1.
(Hope (Hope Manufa Manufactu cturin ring g Comp Company any and Charity Charity Co.) Co.) (a) Lessor’s Books 2007 Jan. 1 Machinery For Lease 2,200,000 Cash 1
1
C a sh Rent Revenue Unearned Rent Revenue 2 M/5 = 400,000 2 M x 30% = 600,000 Machinery For Lease C a sh
Dec.
Depreciation Expense
2,200,000
600,000 400,000 200,000
60,000 60,000 212,000
3 1 Accumulated Depreciation Machine for Lease (2.2 M – 200,000)/10 200,000 60,000 / 5 years 12,000 Total 212,000
200,000 12,000
2008
Jan. 1
C a sh
400,000 Rent Revenue 2,000,000 x 20%
Dec.
Depreciation Expense
400,000
212,000
3 1 Accumulated Depreciation Machine for Lease
200,000 12,000
Lessee’s Books 2007
Jan. 1
Rent Expense Prepaid Rent Cash
400,000 200,000
Rent Expense Cash
400,000
600,000
2008
Jan. 1
400,00
(b) Income Statement: Rent Revenue
Hope 400,000
Charity
Chapter 4 – Leases
Depreciation Expense Rent Expense Balance Sheet: Machine for Lease, net of Accum Depreciation Unearned Rent Revenue Prepaid Rent
4-2. 4-2.
(Blessed sed Re Realty) a. 7,500 x 4 10,000 x 3 12,000 x 3 15,000 x 2 Total
b.
mos. mos. mos. mos.
212,000 400,000 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. 1 – 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
(Faith Company) (a) Monthly rental payment No. of payments (60-6 mos free) Total payments Rent Expense Expense for 2007 (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 2007
x
4
42,000
4-3. 4-3.
(b)
10,000 x 54 540,000
10,000
9,000
36,000
Faith Company 2007
Dec. 31
Rent Expense
36,000
Rent Payable
36,000
2008
Mar. 1 -
Dec. 1 monthly entry Rent Expense Cash
10,000 10,000
37
Chapter 4 – Leases
Dec. 31
Rent Expense
8,000
Rent Payable
8,000
Rent expense for 2007: 540,000 x 12/60 108,000 Payments in 2007 100,000 Increase in rent payable 8,000
Love Corporation 2007
Dec. 31
Rent Receivable
36,000
Rent Revenue
36,000
2008
Mar. 1 -
Dec. 1 monthly entry C a sh Rent Revenue
Dec. 31
Rent Receivable
10,000 10,000 8,000
Rent Revenue 4-4.
(Way Co Company) a. Fixed annual rental Additional rent 5% (6 M – 5 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 4 more years at 10%) 150,000 x .68301 =
8,000
960,000 50,000 12,500 1,022,500 112,500
102,452
4-5. 4-5.
(Tru (Truth th Corp Corpo orati ration on)) 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 4-6. 4-6.
690,000
(437,500)
(Pro (Provi vide den nt Com Compa pan ny) Lessor’s Books 2007
July 1
Equipment For Lease Cash
1,500,000 1,500,000
38
Chapter 4 – Leases
Oct. 1
1 Nov. 1
Dec. 1
31
31
C a sh Rent Revenue
54,000
C a sh Rent Revenue
20,000
Ca C a sh Rent Revenue
20,000
C a sh 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 2007
Oct. 1 1 Nov. 1 Dec. 1
31
4-7. 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, In Inc.) 260,000 x 4.24 200,000 x 0.65 Total capitalized cost (a)
54,000 20,000 20,000 20,000 20,000
49,500
1,102,400 130,000 1,2 1,232, 32,400
Amortization Ta Table Date
Total Annual Payment
01/01/07 01/01/07 01/01/08 01/01/09 01/01/10 01/01/11
260,000 260,000 260,000 260,000 260,000
Interest Expense 87,516 71,992 55,072 36,628
39
Reduction in Principal 260,000 172.484 188,008 204,928 223,372
Lease Obligation 1,232,400 972,400 799,916 611,908 406,980 183,608
Chapter 4 – Leases
12/31/11 200,000 16,392* 183,608 *Adjusted; difference is due due to rounding rounding off.
-
(b) 2007
Jan. 1
Leased Automobile Finance Lease Obligation
1
Dec.
Finance Lease Obligation Cash
1,232,400 1,232,400 260,000 260,000
Interest Expense
87,516
3 1 Interest Payable 3 1
87,516
Depreciation Expense
206,480
Accumulated Depreciation (1,232,400-200,000)/5
206,480
2008
Jan. 1
Finance Lease Obligation Interest Payable Cash
Dec.
172,484 87,516 260,000
Interest Expense
71,992
3 1 Interest Payable 3 1
71,992
Depreciation Expense
206,480
Accumulated Depreciation
206,480
© 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
(Dia (Diana na Corp Corpor orat atio ion n) (a) 86,680 x 4.1699 61,447
1,232,400 50,000
4-8. 4-8.
(b)
=
Amortization Table
40
Chapter 4 – Leases
Date
Total Annual Payment
Interest Expense 01/01/07 01/01/07 86,680 01/01/08 86,680 27,477 01/01/09 86,680 21,556 01/01/10 86,680 15,044 01/01/11 86,680 7,876* *Adjusted; difference is due to rounding off.
Reduction in Principal
Lease Obligation
86,680 59,203 65,124 71,636 78,804
361,447 274,767 215,564 150,440 78,804 -
(c) 2007
Jan
Leased Machine
361,447
1 Finance Lease Obligation Finance Lease Obligation
361,447 86,680
1 Cash Dec.
86,680
Interest Expense
27,477
3 1 Interest Payable 3 1
27,477
Depreciation Expense
72,289
Accumulated Depreciation 361,447/5 years
72,289
2008
Jan. 1
Finance Lease Obligation Interest Payable Cash
Dec.
Interest Expense
59,203 27,477 86,680 21,556
3 1 Interest Payable 3 1
21,556
Depreciation Expense
72,289
Accumulated Depreciation (d) Balance Sheet Property, Plant and Equipment Leased Machine Accumulated Depreciation Current Liabilities: Interest Payable Finance Lease Obligation Noncurrent Liabilities: Finance Lease Obligation Income Statement
41
72,289
2006
2007
361,447 72,289
361,447 144,578
27,477 59,203
21,556 65,124
215,564
150,440
Chapter 4 – Leases
Interest Expense Depreciation Expense 4-9.
27,477 72,289
21,556 72,289
(Riza, Inc.) (a) (a) 1,011 1,011,8 ,840 40/1 /135, 35,00 000 0 = 7.49 7.4951 51 PV PV of of an an ann annui uity ty due due for for 12 periods From Table VI across 12 periods, 7.4951 is under 10% interest rate. (b) Date 12/31/07 12/31/07 12/31/08 12/31/09
Total Annual Payment
135,000 135,000 135,000
Interest Expense 87,684 82,952
(c) (c) (1, (1,011, 011,84 840 0 – 40, 40,000) 000) / 15 year years s (d) 12/31/07 Leased Equipment Finance Lease Obligation 12/31/07
12/31/08
Reduction in Principal
Lease Obligation
135,000 47,316 52,048
1,011,840 876,840 829,524 777,476
=
64,7 64,789 89 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
12/31/08
(e) (e)
Depreciation Expense 64,789 Accumulated Depreciation 64,789 (1,011,840 – 40,000) / 15 Leas Lease e Obl Oblig igat atio ion n as as of of Dec Decem embe ber r 31, 31, 2008 2008:: Current portion 52,048 Noncurrent portion
777,476 4-10. 4-10. (Shirl (Shirley ey Corpor Corporati ation) on) (a) 150,000 x 4.037 240,000 x 0.567 Total capitalized cost
605,595 136,176 741,771
(b) Date 01/01/07
Total Annual Payment
Interest Expense -
42
Reduction in Principal
Lease Obligation
-
741,771
Chapter 4 – Leases
01/01/07 150,000 150,000 01/01/08 150,000 71,013 78,987 01/01/09 150,000 61,534 88,466 01/01/10 150,000 50,918 99,082 01/01/11 150,000 39,028 110,972 12/31/11 240,000 25,736* 214,264 *Adjusted; difference is due to r ounding off. (c) 741,771 / 15 years = 49,451 (d)
591,771 512,784 424,318 325,236 214,264 -
2007
Jan. 1
Leased Machinery Finance Lease Obligation
1
Dec.
Finance Lease Obligation Cash Interest Expense
741,771 741,771 150,000 150,000 71,013
3 1 Interest Payable Dec.
71,013
Depreciation Expense
49,451
3 1 Accumulated Depreciation
49,451
2008
Jan. 1
Finance Lease Obligation Interest Payable Cash
Dec.
Interest Expense
78,987 71,013 150,000 61,534
3 1 Interest Payable 3 1
61,534
Depreciation Expense
49,451
Accumulated Depreciation (e) Dec.
Interest Expense
49,451 25,736
3 1 Finance Lease Obligation Accumulated Depreciation Machinery Leased Machinery Cash (f)
43
214,264 247,255 494,516 741,771 240,000
Chapter 4 – Leases
Dec.
Interest Expense
25,736
3 1 Finance Lease Obligation Accumulated Depreciation Loss on Finance Lease Leased Machinery
214,264 247,255 254,516 741,771
4-11. 4-11. (Joy (Joy Comp Compan any) y) a. 2007
Aug. 1
1
1
Dec.
Finance Lease Receivable Equipment for Lease Unearned Interest Revenue
605,000 480,000 125,000
Unearned Interest Revenue Cash
1,900 1,900
C a sh Finance Lease Receivable
100,000 100,000
Unearned Interest Revenue
15,912
3 1 Interest Revenue 38,190 x 5/12 Partial Amortization Table Date 08/01/07 08/01/07 08/01/08
(b)
Periodic Payment 100,000 100,000
Interest 38,190
15,912
Reduction in Principal 100,000 61,810
Balance of Principal 481,900 381,900 320,090
As of of De December 31 31, 20 2007: Total
Current
Non-
current Finance Lease Receivable P505,000 P100,000 P405,000 Unearned Interest Revenue 107,188 22,278 84,910 P397,812 P 77,722 P320,090 Current portion: Principal due in 2008 P 61,810 Accrued interest, 12/31/07 15,912 P 77,722 4-12. 4-12. (Glad (Glad Manufac Manufactur turing ing Compan Company) y) (a)
44
Chapter 4 – Leases
2007
Apr.
Finance Lease Receivable
1,500,000
1 * Cost of Sales Unearned Interest Revenue Sales Finished Goods Inventory
893,350 426,380 1,026,970 940,000
175,000 x 8 = 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
C a sh
175,000
1 Finance Lease Receivable Dec.
Unearned Interest Revenue
175,000 67,397
3 1 Interest Revenue (1,073,620-175,000) x 10% x 9/12
67,397
2008
Jan. 1
Apr. 1
Interest Revenue Unearned Interest Revenue
67,397
C a sh Unearned Interest Revenue Finance Lease Receivable Interest Revenue
175,000 89,862
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
3 1 Interest Revenue
61,011
898,620-175,000+89,862 =813,482 813,482 x 10% x 9/12 = 61,011
*The compound compound entry may also be presented as as follows:
45
Chapter 4 – Leases
Apr. 1
1
1
(b)
(i)
Finance Lease Receivable Sales Unearned Interest Revenue
1,400,000 1,026,970 373,030
Cost of Sales Finished Goods Inventory
940,000
Finance Lease Receivable Cost of Sales Unearned Interest Revenue
100,000
940,000
46,650 53,350
Sales Cost of Sales (940,000 – 46,650)
1,026,970
893,350 Gross Profit on Sales 133,620 (ii) (ii)
Inte Interes restt Rev Reven enue ue for for 200 2006 6 (se (see e jou journ rnal al entr entries ies))
67,397 (c)
Sales (1,026,970 + 46,650) Cost of Sales (cost of the asset)
1,073,620 940,000
4-13. 4-13. (Pru (Prude dent nt Compa Company ny)) (a) Sales price Cost of machine Gross profit
1,011,840 784,500 227,340
(b) (b) Gross ross inve invest stme men nt (13 (135, 5,00 000 0 x 12) 12) 1,620,000 Sales 1,011,840 Total financial revenue 608,160 (c) Interest Revenue for for 2006 006 (1,011,840 – 135,000) x 10% x 6/12 43,842 (d) Finance Le Lease Re Receiv eivable 1,485,000 Less Unearned Interest Revenue 564,318 Net Finance Lease Receivable, December 31, 2007 920,682 4-14.
(Jackie Chan and Chris Tucker) Annual Lease Payment: Fair value of asset PV of BPO = 40,000 x .6209
P600,000
PV of periodic payment PV factor (Annuity due for 5 years at 10%)
P575,164
Periodic payment
P137,932
24,836
÷4.1699
Periodic
Reduction in
46
Balance of
Chapter 4 – Leases
Date Jan. 1, 2007 Jan. 1, 2007 Jan. 1, 2008 Jan. 1, 2009
Payment P137,932 137,932 137,932
Interest
P46,207 37,034
Principal P137,932 91,725 100,898
Principal P600,000 462,068 370,343 269,445
Depreciable cost = P600,000 – P20,000 = P580,000 2007 Depreciation = P580,000 x 6/21 = P165,714 2008 Depreciaiton = P580,000 x 5/21 = 138,095
(a) Books of Chris Tucker 2007 Jan. 1 Le Leased Equipment Finance Lease Obligation 1 Finance Lease Obligation C a sh Dec 31
Interest Expense Interest Payable
600,000 600,000 137,932 137,932 46,207
46,207 31 Depreciation Expense – Leased Equipment 165,714 Accumulated Depreciation – Leased Equipment 165,714 2008 Jan. 1 Finance Lease Obligation Interest Payable C a sh 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) Boo Books ks of of Jacki Jackie e Chan Chan 2007 Jan. 1 Finance Lease Receivable Equipment for Lease 600,000 Unearned Interest Revenue 129,660 Cash
729,660
137,932
47
Chapter 4 – Leases
Finance Lease Receivable 137,932 Dec 31 46,207
Unearned Interest Revenue Interest Revenue
46,207
2008 Jan. 1 Cash
137,932
Finance Lease Receivable 137,932 Dec 31 37,034
Unearned Interest Revenue Interest Revenue
37,034
4-15. 4-15. Ruby Ruby Company Company a.
Manufac facturer rer’s or dealer’s leas ease
b.
Fair value/present value Carrying value of leased asset Gross Profit Lease arrangement cost (initial direct cost) ( 85,000) Interest income 4,000,000 x 12% x 3/12 120,000 Total profit in 2007 835,000 c.
P4,000,000 3,200,000 P 800,000
P
Amortization Table Date Oct. 1, 2007 Oct. 1, 2007 Oct. 1, 2008 Oct. 1, 2009
Periodic Payment
Interest
P850,365 850,365 850,365
P377,956 321,267
Reduction in Principal P850,365 472,409 529,098
2007 Oct. 1 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
Balance of Principal 4,000,000 3,149,635 2,677,226 2,148,128
5,268,490 3,115,752 3,200,000 3,914,080
Oct. 1 Selling Expense Cash
85,000
Oct. 1 Cash
850,365
85,000
Finance Lease Receivable 850,365
48
Chapter 4 – Leases
Dec. 31 Unearned Interest Revenue Interest Revenue 377,956 x 3/12 2008 Oct. 1 Cash Finance Lease Receivable 850,365 Dec 31
d.
94,489 94,489
850,365
Unearned Interest Revenue Interest Revenue (377,956 – 94,489) + (321,267 x 3/12)
363,784 363,784
Amortization Table Date Oct. 1, 2007 Oct. 1, 2007 Oct. 1, 2008 Oct. 1, 2009
Periodic Payment 850,365 850,365 850,365
Interest
367,848 309,945
2007 Oct. 1 Leased Equipment Finance Lease Obligation Finance Lease Obligation Cash
Balance of Principal 3,915,761 3,065,396 2,582,879 2,042,459
850,365 482,517 540,420
3,915,761 3,915,761 850,365 850,365
Dec 31 Interest Expense Interest Payable 367,848 x 3/12 = 91,962 31 Depreciation Expense Accumulated Depreciation 163,157 3,915,761/6 x 3/12 2008 Oct. 1 Interest Payable Interest Expense 367,848 – 91,962 Finance Lease Obligation Cash Dec31
Reduction in Principal
Interest Expense Interest Payable 309,945 x 3/12
91,962 91,962
163,157
91,962 275,886 482,517 850,365 77,486 77,486
Depreciation Expense Accumulated Depreciation 652,627 3,915,761/6
652,627
4-16. 4-16. (Leg (Legen end d Compa Company ny)) (a) (a) Sell Sellin ing g pri price ce of the the mac machi hine nery ry (15 (150,0 0,000 00 x 4.0 4.0373 373)) 605,595
49
Chapter 4 – Leases
(b) (b) Defe Deferr rred ed gain gain on Janu Januar ary y 1, 2007 2007 (60 (605,5 5,595 95 – 411,7 411,750) 50) 193,845 (c) (c) Depr Deprec ecia iati tion on Expen xpense se for for 200 2007 7 (60 (605, 5,59 595 5 / 5 yea years rs ) 121,119 (d) (d) Inte Intere rest st Ex Expe pens nse e for for 2007 2007 (605, (605,59 595 5 – 150,0 150,000) 00) x 12% 12% 54,671 (e) (e) Gain Gain on sale sale-l -lea easeb sebac ack k for for 2007 2007 (19 (193, 3,845 845 / 5 year years) s) 38,769 4-17. 4-17. (Hon (Hones estt Compa Company ny)) (a) 2007
July
C a sh
540,000
Accumulated Depreciation Equipment Gain on Sale Leaseback
350,000
1
Rent Expense
800,000 90,000 80,000
1 Cash Dec.
80,000
Prepaid Rent
40,000
3 1 Rent Expense
40,000
(b)
50
Chapter 4 – Leases
2007
July
C a sh
540,000
Accumulated Depreciation Equipment Gain on Sale Leaseback Unearned Profit on Sale Leaseback
350,000
1
Rent Expense
800,000 50,000 40,000
80,000
1 Cash Dec.
80,000
Prepaid Rent
40,000
3 1 Rent Expense 3 1
40,000
Unearned Profit on Sale Leaseback
5,000
Profit on Sale Leaseback
5,000
(40,000/4) x 6/12 (c ) 2 0 0 7
July
C a sh
400,000
Accumulated Depreciation Loss on Sale Leaseback Equipment
350,000 50,000
1
Rent Expense
800,000 80,000
1 Cash Dec.
80,000
Prepaid Rent
40,000
3 1 Rent Expense
40,000
2007
July
C a sh
350,000
Accumulated Depreciation Deferred Loss on Sale Leaseback Equipment
350,000 100,000
1
Rent Expense
800,000 80,000
1 Cash Dec.
80,000
Prepaid Rent
40,000
3 1
51
Chapter 4 – Leases
Rent Expense
40,000
Rent Expense
12,500
Deferred Loss on Sale Leaseback 100,000 x 6/48 = 12,500
52
12,500
