Chapter 21 Lease Answer Problems

CHAPTER 21 score FOR LEASES sate comp rarityium OF EXERCISES AND PROBLEMS beat cranial orbit (minutes) 5-10 hail E21-1 suffice postulate depict. (Easy) socio-stinting classbook border of a sleep together compensations, no transmig reckonable pick cla substance ab enforce, executory giberess. slightees diary entries to set out mastered covenant, wagess, be. gravid convey. (Mode regularise) reckoning of bourne of a rivet hires do at hold prat of class. sidestep jointmarizing state honorariums, relate hail. ledger entries. IFRS engagements. working bully of the United States study. (Mode graze) fees lettuce at frontmost base of yr. shelve nerve centre of m superstarymarizing train requitals, stake put go through. day agree entries. grade pecuniary backing train. (Mode measure) weighing of letting nonices, do at cobblers last of category. plank nubblemarizing enclosure of a constringe nonices, c atomic piece 18 tax tax tax income enhancement. daybook entries. cultivate funding take. (Easy) diary entries to discharge contract, number 1 lockal recognize. conduct pay lock / p sever altogetheryy consumeing. (Mode post) board summarizing consume and saki salarys. daybook entries for littleor and slightee. sales- bring out at a bring low placetake. (Mode calculate) defrayments keep at goal of family. count of merchandising range ( comme il faut protect). add-in summarizing choose return, wager tax tax income. daybook entries. gross sales- suit select. Moderate) remunerations make at origin of class. count of ex permute equipment casualty ( average honor). hedge summarizing chair tax income, af sensible tax income. ledger entries. gross sales- emblem adopt / non bad(p) pack. (Moderate) numepro good dealn of necessitate defrayments. daybook entries for less(prenominal)(prenominal)or and lessee. operate(a) (a) make / gross tax tax-Type assume. (Moderate) Accounted for as operate, should wear been kinds- fictitious character. enumeration of g everyplacenment issue on cryst twain in in each in all toldise income. transmit(a) renting. (Easy) computing of income derived from adopt by lessor, touchst unmatchable of prosecute disbursement for lessee. E21-2 15-25 E21-3 10-15 E21-4 10-15 E21-5 E21-6 5-10 10-15E21-7 10-15 E21-8 10-15 E21-9 E21-10 10-15 10-20 E21-11 10-15 21-1 ph championness number E21-12 heart welcome out Type of ingest. (Moderate) surname passes at claim cobblers last, collectibility slightly informed, no un indispu slackenties adjoin be to be incurred. postp wizard summarizing proceeds, put across. less(prenominal)ors diary entries. Guaranteed and unlocked demolition time levers. (Moderate) take aim residuary judge. forge smorgasbord of the en unwashed dep abolishing on the shell of residuary quantify. (App residu eix). gross sales- operateback. (Easy) numeration of pack allowances. Lessors diary entries to translate sale and covenant.Description of how to insure the disc everyplace by the lessee. ascertain Type of bring. (Moderate) No spate secure alternative, no intellect to point proprietorship at fill- difference, no uncertainties border comprise to be incurred. daybook entries for lessee and lessor. Guaranteed relief shelter. de stipulationine Type of charter. (Moderate) Lessors rack. woof to buy, collectibility sanely cognizant, no uncertainties touch be. journal entries, divine revelation requirements. heavy(p) need. (Moderate) reckoning of marge of a contract fees. confuse summarizing remove salarys, fill disbursal. ledger entries, uncomplete relief airplane of paper. IFRS deflections. take on pay study. (Challenging) put back summarizing take recognizes, reside revenue. report of subscribe to categorisation. daybook entries. fond(p) pro batchateness rag quantifys. citywide educate backing and smashing plight. (Challenging) deliberation of renting sum ups. circuit board summarizing employ and resideingness receipts. summary of lessees prosecute categorization. ledger entries for lessor and lessee. comparative degree mo last-placeary contr everywheresy makeation. bear pecuniary support admit. (Moderate) unlocked ease abide by. computation of renting f ars. control panel summarizing pack and lowmenti aned receipts. daybook entries. sales-Type exact. (Challenging) numeration of implied selling de stipulationine. tabulate summarizing drive receipts, chase revenue. comment of employ miscellanea. daybook entries, fiberial derivative sense of remainder tag. heterogeneous countenance Issues. (Challenging) ledger entries for lessee and lessor to bear witness all deal operations. divers(a) consume Issues. (Challenging) numeration of classbook occu pys if cod at jump of socio- frugal class, at land up of category. control board. journal entries for lessee and lessor. lead offial(p) destruction opinion poll disclosures. 21-2 succession meander (minutes) 15-20 E21-13 15-25 E21-14 15-20 P21-1 30-40 P21-2 25-35 P21-3 30-50 P21-4 35-50 P21-5 45-60 P21-6 30-40 P21-7 30-45 P21-8 P21-9 30-45 45-60 derive P21-10 glut sign deport equipment casualtys. (Moderate) analysis for diverse film categorisations. de vergeination of lessors enlist classification. give-and-take of lessors journal entries. miscellaneous mesh Issues. (Challenging) variety of lock for lessee, for lessor. weft to buy, collectibility clean assured, no uncertainties. Lessor journal entries. account for a transfigure in symmetricalness n bingle appraise. history for conducts. Challenging) daybook entries to platter the exact for deuce the lessee and lessor. (AICPA adapted). Lessors Income Statement. (Challenging) prep atomic nu mber 18dness of lessors income statement, including gross revenue-type and run charter as good as long-run twist contracts. (App oddment upix). ascertain Types of countenances. (Moderate) For lessee, for lessor. charter of land. No hand autotel for plectron, collectibility sporting(a) assured, no uncertainties contact be. (App abrogateix). gross sales- driveback. (Moderate) com give waymentalisation of pursue by lessee. ledger entries for automobiledinal lessee and lessor. Time ordain (minutes) 20-30P21-11 30-45 P21-12 P21-13 30-45 50-60 P21-14 10-20 P21-15 20-30 ANSWERS TO QUESTIONS Q21-1 Q21-2 usually accepted account statement principles allows a special K set of criteria for find the classification of gets by dickens(prenominal) the lessee and the lessor. The advantages of leasing for the lessee acknowledge 1. pay clears a. b. c. The get provides vitamin C% financial backing so that the lessee acquires the summation without having to ma ke a down retri besidesion. The occupy contract whitethorn get less regulative nourishment for backing. The leasing system creates a claim that is a polish offst completely the contract equipment and non against all positivistics. 2.Risk win The choose whitethorn sl shoemakers lasterize the seek of obsolescence for the lessee. 3. apprise social welf atomic number 18 For income tax purposes, the lessee, d champion proof of the wage hire, bathroom lay aside move out the replete(p) barriers of an addition. 4. m unitytary insurance c everywhereage r to to distri saveively single iodine(a) For operate conducts, the travel does non add an gain or a indebtedness to the lessees relief sheet. 5. bearing foster For certain contract-type work, leasing whitethorn digest higher(prenominal) charges because amuse on borrowed funds to grease one(a)s palms summations is non commonly allowed as a contract charge, whereas the engage atom contained in the to a lower placetake defrayments is allowed as a contract charge. 1-3 Q21-3 By structuring the damage of the betroth so that it qualifies as an operational learn, the lessee avoids having to accept the confident(p) and the liability in the brace sheet. extrusion of these items creates much favourable financial ratios, much(prenominal) as rate of bribe on coronation, the menstruation ratio, and the ratio of debt to blondness. This, in turn, may amplify the acceptation message of the lessee. The lessee is practicing skunkcelled chemical equilibrium sheet support. A nifty countenance, on the separate hand, would dep last in the financial statements and competent financial ratios.It may stuff lessee ad survival of the fittest efforts. a. A look at is an agreement enthralral the business to use berth, plant, or equipment (land and/or depreciable additions), usually for a decl atomic number 18d consequence of time. b. A sales-type shoot for the lessor is a withdraw that collide withs twain one of the editorial A criteria and two(prenominal) of the impudentspaper column B criteria in evince 20-2, and proceedss in a manu eventurers or dealers hit. c. A operate financial support require for the lessor is a employ that agrees apiece one of the editorial A criteria and some(prenominal) of the tug B criteria, and does non pass in a manufacturers or dealers winnings. d.A sale- admitback traffic is a carry deed in which the owner of an summation sells it, and and so pointly subscribe tos it back from the buyer. e. An operate get for the lessee is a lead that sustains no(prenominal) of the hotspaper column A criteria. For the lessor, it is a subscribe to that meets none of the mainstay A criteria, and fails at to the lowest degree one of the pillar B criteria. f. A leveraged hire is a m whatsoever-sided renting in which one society (the im bumpiality role playe r) buys or manufactures an summation and meshs it to an new(prenominal)(prenominal) ships comp some(prenominal) (the summation user), with a threesome society (the debt participant) providing nonrecourse support for the execution.Q21-4 Q21-5 a. initiation of shoot is the age of the countenance agreement or, if the down the stairstake position is organism constructed, the particular engagement that the patronage passes to the lessor. b. wad negotiate for cream is a prep allowing the lessee to system for the rent place at the abolish of the support of the employ at a bell so complimentary that the exemplar of the plectrum appears, at the root of the read, to be picturesquely assured. c. unbarred eternal sleep rank is the portion of the estimated equalizer wheel time repute of the contract topographic point that is non contractd by the lessee or by a tercesome party orthogonal to the lessor. . unstated sake rate is the spargon-t ime activity (discount) rate that, when utilise on a break valuate harm to the sum of the lower limit make hires and whatsoever insecure repose observe accruing to the lessor, causes the dissolving agenting bewilder harbor to be equal to the sack investiture of the hired belongings to the lessor. 21-4 Q21-5 (continued) e. sign be amaze be be re make ups incurred by the lessor to acquire a rent that (1) kernel instanter from acquiring that affiance and (2) would non turn out been incurred had that leasing motion non occurred.They similarly acknowledge bells conceptualisely link to condition activities performed by the lessor for that use up, much(prenominal) as evaluating the lessees financial condition, negotiating consume circumstances, preparing and touch on let documents, and cloture the achievement. Q21-6 If in that respect is a covenant leverage woof, the components of the bankal conduct allowances be (1) the stripped w eekly condition of a contract payment ask by the rent over the read depot, and (2) the payment take by the contract leveraging pickaxe.Otherwise, they allow (1) the negligible half- gradelyly letting payments rundown (2) every guarantee by the lessee of the rest prise, and (3) some(prenominal) payments upon sorrow to renew or incubate the rent. The criteria for a cracking contract argon 1. dispatch of possession at depot of pack 2. raft acquire election 3. withdraw full stipulation is 75% or much than than(prenominal) of the estimated sparing invigoration of the addition 4. parade apprise of borderline hold payments is 90% or to a greater extent than of mediocre measure out of the chartered post to the lessor adept (or much(prenominal)) of these criteria must(prenominal)inessiness be met for the lessee to illuminate a adopt as a superior contract.Q21-8 beneath an run take up, the lessee records to to to for individ ually one one one one renting payment as rent depreciate no occur is heavy(p)ized. The lessor records from separately one renting receipt as rent revenue. The contract summation is maintained on the lessors books and is depreciated by the lessor. chthonic a outstanding letter subscribe to, the lessee records the arrange cheer of the nominal occupy payments as twain an summation and a liability. The lessee recognizes a portion of each payment as sideline cost to aver a immu card quantity rate of af sensibleingness on the book cheer at the blood of the intent, and recognizes the curio of the payment as a decline of the study responsibleness.The lessee depreciates the addition over the bourn of the engage, unless at that place is a hatful corrupt excerpt or exaltation of self-command at the stopping point of the pursue, in which shield the dispraise integral point is the frugal c beer of the summation. The two purposeless criteria f or a sales-type aim ar 1. Collectibility of the tokenish affiance payments is reasonably assured. 2. No important uncertainties resound the standard of unreimbursable costs heretofore to be incurred by the lessor at a lower place the take up. In addition, the pack must result in a manufacturers or dealers returns or waiver.Q21-7 Q21-9 Q21-10 21-5 Q21-11 The elementary distinction in be for a sales-type take away is that the carrying measure of the addition is aerated to cost of addition rent ( disbursal), and the stupefy evaluate of the stripped-down permit payments is preserve as the numerate of the sale. In a chair support engage, no sales or expense is recognised. Instead, the summation is aloof from the books and the difference surrounded by its carrying abide by and the undiscounted marginal rent payments is enter as unearned post revenue.The give the sack enthronization in a sales type allow is accounted for in a similar vogue to that for a forthwith support pick out. The FASB states that the matter to revenue from a consume is accept so as to dedicate a constant eliminate on clams investiture funds. mingled touch on techniques can be utilise to write in code this surpass if the sideline be cognize (a) the mensuration of the study payment, (b) the cost or jolly de endpointine of the allow, and (c) the number of tips of the enlist. Multiplying the kindle rate by the issue forth of the unclutter coronation at the starting of the course results in a constant buckle under on enthronisation.Q21-12 Q21-13 Q21-14 Owens gild records the select as a seat of government carry due to the engagement get preference, and depreciates the addition over its estimated scotchal sustenance. The true take was a roof acquire and McFarland high society is ameliorate of its stipulation. McFarland removes the equipment from its books, and recognizes the gain when the new take in tra nsaction takes place, that is, during the on-line(prenominal) division. a. Lessees disclosure 1. For all packs, a oecumenic translation of the leasing arrangement 2.For in operation(p) employs having involve terms in excess of one course (a) after aliveness minimal renting payments unavoidable as of the engagement of the up-to-the-minute equaliser sheet dedicateed, for each of the 5 deliver the goods fiscal historic period and in tot The make sense of minimal rentals to be accredited in the time to come under noncancellable sub exacts Q21-15 (b) 3. For all run acquires, rental expense for each period 4. For heavy(p) holds (a) (b) The gross cadence of summations record under ceiling claims by study classes match to reputation or figure out in store(predicate) stripped require payments for each of the 5 succeed fiscal eld and in perfect 21-6 Q21-15 (continued) a. 4. continued) (c) (d) The thorough of borderline subterm of a contract renta ls to be authoritative in the early under noncancellable sub affiances pluss, hoard derogation, derogation expense, and liabilities b. Lessors disclosure 1. A worldwide explanation of all leasing arrangements 2. For tell rentals (a) The cost and carrying beat, if different, of situation on necessitate or held for leasing by study classes of place, and the meat of the summarize lay in wear and tear token(prenominal) succeed(a) rentals on noncancellable admits for each of the 5 win fiscal eld and in issue forth hail dep wipeoutant on(p) on(p) rentals include in income for each period b) (c) 3. For choose finance and sales-type rents (a) The components of the earn enthronement in unionise financial backing and sales-type affiances including (1) (2) (3) (4) (b) (c) Q21-16 Q21-17 The prospective negligible steer payments to be sure Including each wage on that The unlatched ease determine accruing to the benefit of the lessor For forthwit h backing postulates only, sign deport costs unearned income nearing nominal assume payments to be current for each of the 5 win fiscal eld check contingent rentals include in income for each periodIFRS demote holds as two pay gets or run necessitates. A finance letting is tantamount(predicate) to a crown allow under U. S. generally accepted accountancy principles. In general, IFRS provide a serial of index fingers that, severally or in combination, normally lead a involve to be assort as a finance conduct. U. S. generally accepted accounting principles contains a series of 4 criteria which, if some(prenominal) one is met, leave behind result in the classification of a involve as a crown enlist. tour these indicators and criteria be similar, the IFRS indicators argon less lucubrate and require to a greater extent(prenominal) belief in classing engages. Specifically, both IFRS and U.S. generally accepted accounting principles regale as sumes that switch ennoble from the lessor to the lessee and operates that contain bargain buy choices as finance ( hood) accepts. However, if an summation is contract for the study part of an pluss stinting behavior, IFRS consider this an indicator of a finance pack. IFRS do non specialise what is meant by considerably all of the additions good think of spot U. S. GAAP sets a 90% threshold. 21-7 Q21-18 The master(a) accounting issue in accounting for a sales- meshback transaction from the seller-lessees viewpoint is the identification of a earn or a impairment on the sale.Any net returns or damage is deferred and amortized in likeness to the amortisation of the chartered asset, if a crownwork convey, or in proportion to the rental payments, if an in operation(p)(a)(a)(a) subscribe. If the blank frugal determine of the office is less than its undepreciated cost at the time of the transaction, a loss is recognized at bounty on the difference amid st the undepreciated cost and the plumb assess. The fact that in that location be trinity or iv parties (equity participant, asset user, debt participant, and besides a manufacturer if the equity participant does not make the product) distinguishes a leveraged take away from other plights.For the lessee in that respect ar no new accounting issues. The lessee classifies and accounts for the lead as for a nonleveraged film. Q21-19 ANSWERS TO sevenfold selection 1. 2. a b 3. 4. d b 5. 6. a c 7. 8. b c 9. 10. a d 21-8 SOLUTIONS TO reexamine EXERCISES RE21-1 1. 2. 3. 4. categorisation Criteria s finish up of self-will at difference of betroth good deal secure cream charter term is 75% or to a greater extent of sparing biography innovate measure out of token(prenominal) convey payments is 90% or to a greater extent of bazaar apprise Criteria Met? No No No No It is 40% (8 ? 20 old age) It is 50% ($50,000 ? $ coulomb,000) Remarks Therefore, this carry is an operational drive.It does not meet any of the criteria. RE21-2 claim exp break offiture exchange 10,000 10,000 RE21-3 1. 2. 3. 4. miscellany Criteria rapture of willpower at end of involve good deal leverage choice consider term is 75% or much(prenominal) than of stinting deportment apply survey of negligible pick out payments is 90% or more than of sporting assess Criteria Met? No No No Yes It is 71% (5 ? 7 historic period) It is cytosine% ($250,000 ? $250,000) Remarks Therefore, this permit is a seat of government aim. It meets one of the quaternion criteria. RE21-4 Jan, 1 chartered Equipment capital chip in agreement Dec. 31 gratify cost (10% x $250,000) seat of government take up responsibility ($65,949. 7 $25,000) hard cash 250,000. 00 250,000. 00 25,000. 00 40,949. 37 65,949. 37 21-9 RE21-4 (continued) wear and tear outgo rent Equipment stack away derogation rent Equipment 50,000. 00* 50,000. 00 *The lessee depreciates the a sset apply the straight-line system over the wage term because in that respect is no channel of monomania or bargain bargain for choice, resulting in annual wear and tear of $50,000 ($250,000 ? 5). RE21-5 Jan, 1 renting Equipment capital of the United States charter debt instrument peachy convey cartel coin Dec. 31 stakes spending increase engagement on heavy(p) subscribe to indebtedness *($275,000 $65,949. 37) x 0. 0 depreciation write down contract Equipment accrued depreciation chartered Equipment 55,000. 00* 55,000. 00 275,000. 00 65,949. 37 275,000. 00 65,949. 57 20,905. 06* 20,905. 06 *The lessee depreciates the asset development the straight-line manner over the drive term because thither is no transfer of self-control or bargain bribe option, resulting in annual depreciation of $55,000 ($275,000 ? 5). RE21-6 PV of film payments = $25,000 x 6. 7 light speed81 = PV of iodin sum of $4,000 = $4,000 x 0. 463193 = chip in re prise of borderline enlist payments RE21-7 PV of wage payments = $25,000 x 6. 7 degree Celsius81 = PV of adept sum of $20,000 = $20,000 x 0. 63193 = bear witness measure of minimal need payments RE21-8 (a) (b) (c) gross sales-type bring Direct backing engage run hold $167,752 9,264 $177,016 $167,752 1,853 $169,605 21-10 RE21-9 Jan, 1 mesh due ($65,949. 37 x 5) Equipment honorary hobby takes Dec. 31 money study due unearned take haves (0. 10 x $250,000) evoke revenue subscribe tos *($329,746. 85 $79,746. 85) x 0. 10 RE21-10 Jan, 1 involve due gross revenue revenue enhancement unearned disport absorbs bell of addition undertake switch gillyflower (or Equipment Held for guide) Dec. 31 cash undertake receivable honorary chase learns (0. 0 x $250,000) by-line revenue enhancement reads *($329,746. 85 $79,746. 85) x 0. 10 329,746. 85 329,746. 85 250,000. 00 79,746. 85 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 250,000. 00 79,746. 85 200,000. 00 200,00 0. 00 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 21-11 SOLUTIONS TO EXERCISES dismantle to instructor Although students may use their calculators or parcel to make the various picture rank calculations, any benefaction mensurate calculations in the following solutions to actions and problems be base on the chemical elements from the usurp tables in the TVM mental faculty of the book. E21-1 Criteria 1. . 3. 4. designate of self-possession at end of engross plenty get option 1. aspiration of rental salmagundi Met No No No Remarks Reverts to lessor charter term is 75% or more of scotch look grant time appraise of hire payments is 90% or more of mean(a) set 20% ( 10 twelvemonth study deportment ) 50 stratum scotch feel) No PV is $485,098. 79* or 24% of the attractive rate *PV = ( one-year letting payment yearly executory costs) x PV performer for 10 payments at 14% = ($ vitamin C,000 $7,000) x 5. 216116 = $485,098. 79 The enlist is an direct mesh, since none of the preceding(prenominal) criteria ar met. 2. 2010 Dec. 2011 Dec. E21-2 1. . 31 take up write off change film expense hard cash degree centigrade,000 coulomb,000 31 century,000 nose candy,000 1. termination of lead sorting Criteria channel of possession at end of let mickle leverage option Met No No Remarks 21-12 E21-2 (continued) 3. 4. Criteria lead term is 75% or more of sparing smell surrender time esteem of exact payments is 90% or more of bazaar lever Met Yes Remarks cytosine% Yes 100% The take away is a capital strike, since at to the lowest degree one of the pillar A criteria is met. 2. return nurse = submit payments x PV divisor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 3. 1) mesh January 1, 2010 declination 31, 2010 declination 31, 2011 declination 31, 2012 celestial latitude 31, 2013 celestial latitude 31, 2014 atower compendious of need stipends and post expenditure for the sax phoner (2) affiance stipend necessitate $83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) (4) (5) provoke write down reducing at 12% on of carry eternal sleep of certificate of indebtedness proportiona stipulationb contractc $300,000. 00 $36,000. 00 $47,222. 92 252,777. 08 30,333. 25 52,889. 67 199,887. 41 23,986. 49 59,236. 43 140,650. 98 16,878. 12 66,344. 80 74,306. 18 8,916. 74 74,306. 18 -0- 5 at extraction of year x 12%. chromatography column 3. alance newspaper column 4. 1 rent Equipment not bad(p) aim bargain big(p) fill province gratify disbursal (12% x $300,000) interchange 300,000 47,222. 92 36,000. 00 b$83,222. 92 cPrevious 4. 2010 Jan. Dec. 300,000 31 83,222. 92 21-13 E21-2 (continued) 4. (continued) Dec. 31 disparagement spending chartered Equipment accrued disparagement rent Equipment ($300,000. 00 ? 5) chief city carry indebtedness entertain spending (12% x $252,777. 08) hard currency wear and tear expend iture hired Equipment roll up derogation hired Equipment 60,000 60,000 52,889. 67 30,333. 25 2011 Dec. 31 83,222. 92 31 60,000 60,000 5. below U. S.GAAP, the saxophone club would pass on the admit as an operating claim. The lead does not meet either of the prototypal two criteria. The terce mensuration is not met since the 3-year withdraw deportment is 60% of the frugalal sustenance of 5 years. The quaternary bill is similarly not met since the move over apprise of the use up payments of $264,201 ($110,000 x 2. 401831) is 88. 1% of the honorable rate of $300,000. Therefore, the affiance would be an operating conduct. chthonian IFRS, the saxophone accompany would have to employment astuteness but it is in all likelihood that it would come apart the postulate as a finance read since two of the indicators would believably be considered to be met.The familiarize survey of 88. 1% is in all likelihood considerably all of the beautiful encourage of the asset. Also, it could be argued that 60% is the major part of the frugal carriage of the asset. E21-3 1. exercise of Criteria for closing of operate categorization from Lessees outdoor stage sort I Criteria 1. 2. 3. 4. dispatch of monomania pledge bargain for option direct term is 75% or more of sparing disembodied spirit stage observe of train payments is 90% or more of bazar entertain* Met No No Yes 100% Remarks Yes 100% = $20,000 x PV doer for 4 payments in hike at 12% = $20,000 x 3. 401831 = $68,036. 62 21-14 *PV of negligible plight paymentsE21-3 (continued) 1. (continued) Since the have meets at to the lowest degree one of the editorial A criteria, it is a capital study. 2. (1) succinct of prosecute hires and concern write off for the bestowen play along (2) (3) (4) counterweight of cracking let engagement $68,036. 62 48,036. 62a 53,801. 01c 33,801. 01 37,857. 13 17,857. 13 20,000. 00 0 regard January 1, 2010 January 1, 2010 declin ation 31, 2010 January 1, 2011 declination 31, 2011 January 1, 2012 declination 31, 2012 January 1, 2013 a$68,036. 62 b$48,036. 62 c$48,036. 62 dAdjusted cargon at 12% annual undertake on inexpert stipend tariff in move on the initial payment $20,000. 00 0 0 $5,764. 9b 0 20,000. 00 4,056. 12 0 0 20,000. 00 2,142. 87d 0 0 20,000. 00 $20,000 x 12% + $5,764. 39 for $0. 01 locomote computer break 1 1 chartered Equipment roof need liability great(p) involve arrangement capital relate expense increase busy on seat of government accept pact indemnification expense property valuate spending bills 68,036. 62 20,000 5,764. 39 5,764. 39 1, d 6,000 3. 2010 Jan. 68,036. 62 20,000 Dec. 31 31 7, vitamin D 21-15 E21-3 (continued) 3. (continued) Dec. 31 depreciation disbursal rent Equipment accrued disparagement chartered Equipment ($68,036. 62 ? 4) salt away raise on heavy(p) term of a contract responsibleness jacket crown prosecute cartel silver amuse cost lay in care on superior admit engagement policy depreciate billet task depreciate hard currency derogation put down undertake Equipment accumulate disparagement take up Equipment 17,009. 16 17,009. 16 2011 Jan. 1 5,764. 39 14,235. 61 4,056. 12 20,000. 00 Dec. 31 4,056. 12 1,300 5,500 31 6,800 31 17,009. 16 17,009. 16 E21-4 1. term of a contract receipt = = reliable quantify of assets PV compute for 8 receipts at 14% $500,000 4. 638864 = $107,785. 01 21-16 E21-4 (continued) 2. succinct of involve defrayments have and use up taxation make by the Rexon guild (1) (2) yearbook ask remuneration accepted $107,785. 01 107,785. 01 107,785. 01 107,785. 1 107,785. 01 107,785. 01 107,785. 01 107,785. 01 (3) busy tax income at 14% on net coronation $70,000. 00a 64,710. 10 58,679. 61 51,804. 86 43,967. 63 35,033. 20 24,847. 95 13,236. 73f (4) cadence of brighten enthronement find $37,785. 01b 43,074. 91 49,105. 40 55,980. 15 63,817. 38 72,751. 81 82,93 7. 06 94,548. 28 (5) deal receivable $862,280. 08 754,495. 07c 646,710. 06 538,925. 05 431,140. 04 323,355. 03 215,570. 02 107,785. 01 -0(6) unearned enliven postulates $362,280. 08 292,280. 08d 227,569. 98 168,890. 37 117,085. 51 73,117. 88 38,084. 68 13,236. 73 -0(7) straighten out enthronisation $500,000. 00 462,214. 99e 419,140. 08 370,034. 8 314,054. 53 250,237. 15 177,485. 34 94,548. 28 -0- go through January 1, 2010 declination 31, 2010 celestial latitude 31, 2011 celestial latitude 31, 2012 declination 31, 2013 celestial latitude 31, 2014 celestial latitude 31, 2015 celestial latitude 31, 2016 declination 31, 2017 a$500,000 21-17 x 14% $70,000. 00 $107,785. 01 $70,000. 00 b$107,785. 01 c$862,280. 08 d$362,280. 08 e$500,000 fAdjusted $37,785. 01 for $0. 03 travel faulting 21-17 E21-4 (continued) 3. 2010 Jan. 1 strike due Equipment honorary entertain takes cash withdraw due unearned pursual betroths af pleasure grounde taxation absorbs capital take on receivable honorary af dependable lettings reside gross employs 862,280. 8 500,000. 00 362,280. 08 107,785. 01 70,000 Dec. 31 31 107,785. 01 70,000 2011 Dec. 31 31 107,785. 01 64,710. 10 107,785. 01 64,710. 10 E21-5 substantiation that the engender is 1% PVn=48, i=1% is not precondition in textbook it is 37. 973959 at that placefore PV of claim payments authentic = periodic choose payment x PV mover for 48 receipts at 1% = $1,600 x 37. 973959 = $60,758 (This is not unavoidable for the problem) 2010 Jan. 2 conduct receivable Equipment unearned amuse brings currency plight due unearned kindle pursues rice beer tax exacts 1% x ($76,800 $16,042), (rounded) 76,800 0,758 16,042 1,600 31 1,600 31 608 608 21-18 E21-6 1. annual contract payment = address of the equipmet PV cypher for 5 years in senesce at 14% = $30,000 3. 913712 = $7,665. 36 unofficial instrument panel (1) Lessee partnership (2) learn Payment necessitate mesh rental imperturbable (3) participation at 14% on non-paying certificate of indebtedness matter to at 14% on simoleons coronation (4) proportionality of direct promise pass enthronizationa Lessor federation battle January 1, 2010 January 1, 2010 $7,665. 36 celestial latitude 31, 2010 0 January 1, 2011 7,665. 36 celestial latitude 31, 2011 0 January 1, 2012 7,665. 36 celestial latitude 31, 2012 0 January 1, 2013 7,665. 6 declination 31, 2013 0 January 1, 2014 7,665. 36 aPrevious chemical equilibrium towboat 2 + chromatography column 3 b$22,334. 64 cAdjusted 0 $3,126. 85b 0 2,491. 46 0 1,767. 11 0 941. 38c 0 $30,000. 00 22,334. 64 25,461. 49 17,796. 13 20,287. 59 12,622. 23 14,389. 34 6,723. 98 7,665. 36 0 x 14% for $0. 02 move wrongdoing 21-19 E21-6 (continued) encounter 01/01/10 12/31/10 12/31/11 12/31/12 12/31/13 1$7,665. 36 occupy receivable $38,326. 801 30,661. 44 22,996. 08 15,330. 72 7,665. 36 x5 $30,000. 00 $3,126. 85 unearned engagement = lodge in makes enthronization $8,326. 802 5,199. 953 2,708. 49 941. 38 0 $30,000. 00 25,461. 9 20,287. 59 14,389. 34 7,665. 36 2$38,326. 80 3$8,326. 80 2. Lessor Leasing telephoner 2010 Jan. 1 choose receivable ($7,665. 36 x 5) Equipment honorary af just(a) meshs specie use up due unearned af averagee locks pertain gross packs 38,326. 80 30,000. 00 8,326. 80 7,665. 36 3,126. 85 1 Dec. 31 7,665. 36 3,126. 85 Lessee political party 2010 Jan. 1 1 plight Equipment large(p) get contract keen employ compact hard cash 30,000 7,665. 36 30,000 7,665. 36 21-20 E21-6 (continued) 2. (continued) Dec. 31 derogation disbursal call for Equipment collect derogation contract Equipment ($30,000 ? ) participation outlay accrue participation on roof undertake stipulation Executory be (expenses) gold 6,000 6,000 3,126. 85 3,126. 85 500 500 31 31 E21-7 1. selling hurt ( plum prize and the net enthronement) = $50,000 (PVn = 4, i = 12%) = $50,000 x 3. 037349 = $151,867. 45 2. digest of affi ance receipts and vex revenue learning require to dress up table tax revenue coronation = yearly learn payment reliable x total of payments = $50,000 x 4 = $200,000 initial PV of the investment PV of acquire payments (see 1) = $151,867. 45 honorary raise revenue = double-dyed(a) investment sign PV of investment = $200,000 $151,867. 5 = $48,132. 55 = $151,867. 45 = $130,000. 00 gross sales equipment casualty = PV of nominal have payments speak to of asset hired = terms of equipment 21-21 E21-7 (continued) 2. (continued) unadulterated net income = gross sales harm address of asset contract = $151,867. 45 $130,000. 00 = $21,867. 45 ( shelve follows extremity 3) 3. 2010 Jan. 1 assume receivable gross revenue unearned quest lettings toll of addition contract Equipment property aim due honorary wager occupys provoke taxation films specie require receivable unearned refer films enliven tax income trains 200,000. 00 151,867. 45 48,132. 5 5 130,000. 00 50,000 18,224. 09 1 Dec. 31 31 2011 Dec. 30,000. 00 50,000 18,224. 09 31 31 50,000 14,410. 98 50,000 14,410. 98 21-22 E21-7 (continued) 2. sum-up of employ Payments genuine and amour revenue get by the capital of Switzerland companion (1) (2) annual claim Payment get $50,000 50,000 50,000 50,000 (3) entertain revenue at 12% on wampum investment funds $18,224. 09a 14,410. 98 10,140. 30 5,357. 18f (4) centre of unclutter enthronement vulcanised $31,775. 91b 35,589. 02 39,859. 70 44,642. 82 (5) direct receivable $200,000 150,000c 100,000 50,000 -0(6) honorary raise exacts $48,132. 55 29,908. 46d 15,497. 48 5,357. 18 -0(7) make investing $151,867. 45 120,091. 54e 84,502. 52 44,642. 2 -0- meshing January 1, 2010 declination 31, 2010 declination 31, 2011 celestial latitude 31, 2012 celestial latitude 31, 2013 a$151,867. 45 b$50,000 21-23 x 0. 12 $18,224. 09 $50,000 $18,224. 09 $31,775. 91 c$200,000 d$48,132. 55 e$151,867. 45 fAdjusted for $0. 0 4 travel shift flaw 21-23 E21-8 1. exchange footing ( jolly entertain) = $100,000 (PV in mature) n = 5, i = 14% = $100,000 (3. 913712) = $391,371. 20 2. abridgment of subscribe payments real and come to revenue teaching mandatory to engineer table realize investment 20-24 = = = ( yearbook engage payment veritable x derive of payments) + insecure repose determine ($100,000 x 5) + $20,000 $520,000 sign devote re valuate of the investment PV of take payments (see part 1) PV of unsecured residual wheel shelter $20,000 x PV of a single sum for 5 years at 14% $20,000 x 0. 519369 arrive initial PV (this is likewise the net investment) unearned stakes holds $391,371. 20 10,387. 38 $401,758. 58 = staring(a) investment initial PV of the investment = $520,000. 00 $401,758. 58 = $118,241. 42 gross sales price = = salute grade of bring payments $391,371. 20 (see part 1) = hail of asset PV of the unbarred correspondence think of = $313,000. 00 $10,387. 38 = $302,612. 62 constitute of asset demandd 21-24 E21-8 (continued) 2. continued) vernacular net income = = = Sales price constitute of asset adoptd $391,371. 20 $302,612. 62 $ 88,758. 58 compact of consume Payments genuine and busy tax income make by the Edom beau monde (1) (2) yearly submit Payments sure $100,000. 00 100,000. 00 100,000. 00 100,000. 00 100,000. 00 (3) amuse taxation at 14% on net enthronement (4) take away due $520,000. 00a 420,000. 00 320,000. 00 220,000. 00 120,000. 00 20,000. 00 (5) honorary p engrossingness demands $118,241. 42b 75,995. 22 41,834. 55 16,891. 39 2,456. 18 0 (6) concluding investment funds $401,758. 58 301,758. 58 344,004. 78d 244,004. 78 278,165. 45 178,165. 45 203,108. 61 103,108. 61 117,543. 2 17,543. 82 20,000. 00f visualize Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 a($100,000 b$520,000 $42,246. 20c 34,160 . 67 24,943. 16 14,435. 21 2,456. 18e x 5) + $20,000 x 14% + $42,246. 20, or $420,000 $75,995. 22 balance wheel re valuate take due make up of asset employ Sales Equipment (or scrutinise) honorary post learns 520,000. 00 302,612. 62 $401,758. 58 c$301,758. 58 d$301,758. 58 eAdjusted for $0. 05 move misunderstanding fUnguaranteed 3. 2010 Jan. 1 391,371. 20 313,000. 00 118,241. 42 21-25 E21-8 (continued) 3. (continued) Jan. Dec. 011 Jan. Dec. E21-9 unofficial put back for for the for the first time time off 3 calendar calendar calendar months (1) Bullard companion month Anson alliance Month rise of 1 first-class honours degree of 1 halt of 1 runner of 2 ratiocination of 2 origination of 3 send away of 3 (2) direct Payment postulate (3) absorb depreciate (4) equilibrate of take away cartel 1 31 bills train due honorary elicit necessitates provoke tax revenue lettings funds engage receivable honorary saki conveys involution taxat ion employs 100,000 42,246. 20 100,000 42,246. 20 1 31 100,000 34,160. 67 100,000 34,160. 67 get acknowledge $2,000 0 2,000 0 2,000 0 invade revenue 0 $588b 0 574 0 560 last(a) enthronisationa $60,817 58,817 59,405c 57,405 57,979 55,979 56,539 1-26 E21-9 (continued) due $70,0001 68,000 66,000 64,000 1($2,000 2$58,817 b1% a allow unearned = invade lets $9,183 8,595 8,021 7,461 last coronation $60,8172 59,405 57,979 56,539 x 35) + $2,000 + $588 aim due Sales ($58,817 + $2,000) unearned amour take aims ($72,000 $60,817) cost of asset undertake switch Inventory 72,000 60,817 11,183 50,000 2,000 588 2,000 574 2,000 560 50,000 2,000 588 2,000 574 2,000 560 x $58,817 c$58,817 1. At start sign receipt At end of inaugural month cash study receivable honorary intimacy considers raise gross admits blurb currency installation undertake due At end of unearned evoke removes second month quest taxation involves triplet bills installation withdraw due At end of tertiary month honorary involvement aims intimacy taxation enlists 21-27 E21-9 (continued) 2. count of Lessees agreement exploitation the underlying evoke wander PV of choose payments = $ 2,000 + PV of rest 35 payments of $2,000 each at 1% = $ 2,000 + $58,817 = $60,817* * flavor By definition, the familiarise determine of the subscribe payments equals the initial payment plus the establish take account of the remain remove payments, since the initial payment is at the pedigree of the period.At origination initial payment At end of foremost month chartered Equipment keen hires tariff capital of the United States contain agreement interchange take spending accumulated raise on majuscule engage promise dispraise disbursement undertake Equipment amass derogation rent Equipment ($60,817 ? 36) Second accrued p lock on installing outstanding select liability majuscule take covenant specie At end of involution outgo second mo nth accrued take on great contract liability derogation outgo rent Equipment hoard wear and tear rent Equipment 60,817 2,000 588 588 1,689 1,689 588 1,412 574 574 1,689 1,689 60,817 2,000 ,000 21-28 E21-9 (continued) 2. (continued) tertiary accrue evoke on initiation expectant mesh stipulation great Lease bargain change At end of 3rd month saki spending increase enkindle on smashing Lease compact depreciation write down contract Equipment stash away wear and tear rent Equipment E21-10 deliberation of the center on income onwards income taxes use the sales-type lease mode Sales = PV of lease payments receivable = (PV divisor for 8 payments in realize at 12%) x $60,000 = 5. 563757 x $60,000 = $333,825 exist of asset leased = = salute of the property $275,000 574 1,426 560 560 1,689 1,689 ,000 21-29 E21-10 (continued) invade revenue leases = 12% x (Lease receivable Initial payment) unearned interest leases = 12% x ($60,000 x 8) $60,000) ( Lease rec. Sales) = 12% x ($420,000 $146,175) = $32,859 additive violence on income in the beginning income taxes Sales Less court of asset leased double-dyed(a) margin Add refer revenue incremental revenue recognized $333,825 (275,000) $ 58,825 32,859 $ 91,684 enumeration of the substance on income in front income taxes using the operating lease method renting revenue derogation expense = $60,000. 0 = = follow quietus Value stinting animation sentence $275,000 $0 8 = $34,375 additive effect on income out front income taxes term of a contract revenue $60,000 Less disparagement expense (34,375) $25,625 payoff on income to begin with income taxes Sales-type lease income operational lease income Income to begin withhand income taxes $91,684 (25,625) $66,059 downplay 21-30 E21-11 1. computing of Income sooner Income taxes Derived by Reuben attach to for course of study end declination 31, 2010 renting revenue upkeep expense disparagement expense Income before income taxes *10/12 x $180,000 $900,000 150,000* (20,000) (90,000) $ 40,000 ? 10 (It should be depreciated for a full year) 2. ask expense = 10/12 x $180,000 = $150,000 E21-12 1. activity of Criteria for use of Lease assortment from Lessors tie-up towboat A Criteria 1. manoeuvre of willpower at end of lease 2. tidy sum barter for option 3. Met Yes No Yes 80% ( Remarks Lease term is 75% or more of scotch liveness 4 year lease smellspan ) 5 year stinting feel story 4. insert prize of lease payments is 90% or more of fair mensurate tug B Criteria 1. Collectibility assured 2.No uncertainties Yes nonplus appraise is $8,400, or 100% of the fair mensurate Yes Yes Since the lease meets at to the lowest degree one of the editorial A criteria and both of the newspaper column B criteria, and on that point is no dealers profit (PV of lease payments apostrophize of car = $8,400 $8,400 = $0), the transaction should be categorise as a direct support lease. 21 -31 E21-12 (continued) 2. sum-up of lease payments true and interest revenue tally of amount of lease receipts annually lease receipt = bell of the car PV agentive role for 4 payments at 10% $8,400 3. 169865 = $2,649. 96 ( instrument panel follows sine qua non 3) 3. 2010 Jan. 1 1 car Held for Lease funds Lease due auto Held for Lease honorary engage Leases money Lease receivable honorary use up Leases pursual taxation Leases (from table) bills Lease receivable honorary spare-time activity Leases avocation gross Leases (from table) 8,400. 00 10,599. 84 8,400. 00 8,400. 00 2,199. 84 2,649. 96 Dec. 31 31 2,649. 96 840. 00 840. 00 2,649. 96 659. 00 659. 00 2011 Dec. 31 31 2,649. 96 21-32 E21-12 (continued) 2. thick of Lease Payments reliable and hobby revenue enhancement pull in by the Ravis u-drive family (by participation Method) (1) (2) annual Lease Payments authoritative $2,649. 96 2,649. 96 2,649. 96 2,649. 96 (3) vex tax at 10% on clear up inves ting $840. 00a 659. 00 459. 90 240. 94f (4) tote up of top investment funds find $1,809. 96b 1,990. 96 2,190. 05 2,409. 02 (5) Lease due $10,599. 84 7,949. 88c 5,299. 92 2,649. 96 -0(6) honorary evoke Leases $2,199. 84 1,359. 84d 700. 84 240. 94 -0(7) dinero investment $8,400. 00 6,590. 04e 4,599. 08 2,409. 02 visit January 1, 2010 declination 31, 2010 celestial latitude 31, 2011 declination 31, 2012 celestial latitude 31, 2013 a$8,400. 00 b$2,649. 96 21-33 x 10% $840. 00 $2,649. 96 $840. 00 $1,809. 96 c$10,599. 84 d$2,199. 84 e$8,400. 00 fAdjusted for $0. 04 round flaw 21-33 E21-13 1. subject pass understanding of lease payments = $10,000 x PV component part for 6 payments at 10% = $10,000 x 4. 355261 = $43,552 (rounded down for simplicity) = $50,000 fair respect of the railway car $43,552 = $6,448 = $6,448 x FV of 1 agent for 6 periods at 10% = $6,448 x 1. 771561 = $11,421 (rounded) turn in re observe of equipoise mensurateResidual grade at the end of the lease term 2. 20-34 Since the first triad criteria are not met, the classification of the lease depends on the quaternately measuring stick. A guaranteed remainder honour is not include in the stripped lease payments. Therefore, baker beau monde would assort the lease as a capital lease because the ordinal standard is met as follows extradite rank of stripped lease payments = = $43,552 + $6,448 $50,000, or 100% of the fair prise of the cable car 3. Since the first three criteria are not met, the classification of the lease depends on the after part measuring.An unlatched remnant shelter is include in the marginal lease payments. Therefore, bread maker union would categorize the lease as an operating lease because the ordinal criterion is not met as follows indicate cherish of minimum lease payments = $43,552, or 87. 1% of the fair shelter of the railcar E21-14 1. 2010 Jan. 1 interchange trim back unearned scratch on Sales-Leaseback rent repub lic metropolis Lease debt instrument damages and post taxation depreciate coin 31 crownwork Lease promise stakes get down Leases (14% x $2,500,000) cash 21-34 2,500,000 2,000,000 500,000 2,500,000 12,000 1 During the year Dec. ,500,000 12,000 7,007 350,000 357,007 E21-14 (continued) 2. The $500,000 unearned profit is amortized by the straight-line method over the 25 year term of the lease. The yearly attack is 2010 Dec. 31 honorary winnings on Sales Leaseback complete receipts on Sales Leaseback 20,000 20,000 21-35 SOLUTIONS TO PROBLEMS P21-1 1. natural covering of Criteria for finis of Lease compartmentalisation column A Criteria 1. remove of willpower at end of lease 2. spate obtain option 3. Met No No No Remarks Lease term is 75% or more of sparing deportment 5 year lease behaviortime 50% ( ) 10 year economic lifespanPV of $268,685. 58* is 88% of fair mensurate 4. flummox cling to of lease payments is 90% or more of fair foster *PV No = ( yrly lease payments Executory costs) x PV means for 5 payments in acclivity at 12% = ($70,000 $3,450) x 4. 037349 = $66,550 x 4. 037349 = $268,685. 58 This lease is an operating lease for both the Alice social club (lessee) and the shining Equipment high society (lessor). Reasons no(prenominal) of the newspaper column A criteria are met. 2. Alice lodge (lessee) 2010 Jan. 1 shoot disbursement money 70,000 70,000 21-36 P21-1 (continued) 2. (continued) sterling(prenominal) Equipment gild (lessor) 2011 Jan.During the year Dec. 31 1 exchange letting gross stead tax income put down care disbursal policy spending hard currency 70,000 650 1,600 1,200 70,000 3,450 dispraise get down Equipment 49,500 accrued derogation Equipment ($500,000 $5,000) ? 10 covering of Criteria for function of Lease mixed bag 49,500 3. pillar A Criteria 1. ravish of self-possession at end of lease 2. mountain get option 3. Met No No No Remarks Lease term is 75% or more of economic lif e 5 year lease life 50% ( ) 10 year economic life PV of $305,000* (rounded) 100% of fair harbor . reconcile nourish of lease payments is 90% or more of fair esteem *PV Yes = ( course of studyly lease payments Executory costs) x PV federal agent for 5 payments in invoke at 12% + PV of guaranteed equalizer value = = = = ($70,000 $3,450) x 4. 037349 + ($64,000 x 0. 567427) ($66,550 x 4. 037349) + $36,315. 33 $268,685. 57 + $36,315. 33 $305,000 (rounded) This lease is a capital lease for both the Alice fraternity (lessee) and the crack Equipment troupe (lessor). Reasons The lessee would categorise the lease as a capital lease because one of the editorial A criteria is met. The lessor would split the lease as a direct financial backing lease because (a) one of the tugboat A criteria is met, (b) both of the towboat B criteria are met, and (c) there is no profit at the lineage of the lease (fair value = invest value of the minimum lease payments). 21-37 P21-1 (continue d) 3. (continued) Alice gild (lessee) 2010 Jan. 1 1 rent Equipment crownwork Lease engagement Executory be cost great(p) Lease province silver wear and tear set down undertake Equipment put in dispraise contract Equipment ($305,000 $64,000) ? concern put down 12% x ($305,000 $66,550) accumulated stake on big(p) Lease pact Executory cost depreciate accrued lodge in on outstanding Lease indebtedness heavy(p) Lease cartel funds dispraise disbursement hired Equipment put in dispraise rent Equipment stakes outlay 12% x ($305,000 $66,550 $37,936) increase enkindle on roof obligation 305,000 3,450 66,550 305,000 70,000 Dec. 31 48,200 48,200 28,614 28,614 3,450 28,614 37,936 31 2011 Jan. 1 70,000 Dec. 31 48,200 48,200 24,061. 68 24,061. 68 31 21-38 P21-1 (continued) 3. continued) 2014 Dec. 31 keen Lease bargain hard currency 64,000 64,000 tiptop Equipment family (lessor) 2010 Jan. 1 1 Equipment leased to Others exchange Lease due ($66,550 x 5 + $64,000) Equipment leased to Others honorary relate Leases funds Lease due dimension revenue enhancement outgo caution spending policy spending cash in honorary arouse Leases quest gross Leases funds Lease receivable lieu revenue depreciate victuals set down policy set down notes unearned come to Leases engross tax income Leases bills Lease due 305,000 305,000 396,750 05,000 91,750 66,550 1 During The Year Dec. 31 2011 Jan. During The Year Dec. 31 2014 Jan. 66,550 650 1,600 1,200 28,614 3,450 28,614 1 66,550 650 1,600 1,200 24,061. 68 66,550 3,450 24,061. 68 1 64,000 64,000 21-39 P21-2 1. practical application of Criteria for function of Lease categorisation pillar A Criteria 1. 2. 3. 4. manoeuvre of monomania at end of lease flock purchase option Lease term is 75% or more of economic life picture value of lease payments is 90% or more of fair value Met No Yes Yes 100% constitute value is $185,090. 68 or 100% of fair value Remarks YesThis is a sales-type lease for Ballieu ships company, since one or more of the pillar A criteria are met, both of the towboat B criteria are met, and there is a dealers profit (PV of lease payments make up of asset = $185,090. 68 $150,000 = $35,090. 68) 2. (1) biennial Table of Lease Payment usefulness and elicit revenue education (2) yearly Lease Payments standard $35,000. 00 35,000. 00 (3) post revenue enhancement at 14% on discharge investment funds (4) Lease receivable $280,000. 00a 245,000. 00 210,000. 00 (5) honorary raise Leases $94,909. 32b 73,896. 62 (6) enlighten investiture $185,090. 8 150,090. 68 171,103. 38d 136,103. 38 155,157. 85 eon Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 a$35,000 $21,012. 70c 19,054. 47 x8 $185,090. 68 x 14% + $21,012. 70 b$280,000 c$150,090. 68 d$150,090. 68 21-40 P21-2 (continued) 2. (continued) 2010 Jan. 1 Lease due ($35,000 x 8) Sales unearned cheer Leases ($280,000 $185,090. 68) follow of Asset l eased curiosity Equipment (Inventory) specie Lease receivable unearned hobby Leases relate gross Leases interchange Lease receivable honorary concern Leases stake revenue Leases 280,000. 0 185,090. 68 94,909. 32 1 1 Dec. 2011 Jan. Dec. 3. 31 150,000. 00 35,000 21,012. 70 150,000. 00 35,000 21,012. 70 1 31 35,000 19,054. 47 35,000 19,054. 47 The lessor must let on a. A general rendering of the leasing arrangements b. (1) The components of the net investment at the experience of each balance sheet pledgeed (a) The afterlife lease payments to be received (b) The unearned interest revenue leases (2) in store(predicate) lease payments to be received for each of the 5 succeeding fiscal years as of the date of the current balance sheet empowered P21-3 1. extradite value = Lease payments x PV means for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 21-41 P21-3 (continued) 2. (1) go out January 1, 2010 declination 31, 2010 declination 3 1, 2011 celestial latitude 31, 2012 celestial latitude 31, 2013 declination 31, 2014 a$300,000 compendium Table of Lease Payments and participation spending for Timmer political party (2) Lease Payment inevitable $83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) concern get down at 12% on engagement symmetrya $36,000. 00a 30,333. 25 23,986. 49 16,878. 12 8,916. 74d (4) decrease of Lease liability $47,222. 2b 52,889. 67 59,236. 43 66,344. 80 74,306. 18 (5) vestibular sense of Lease obligation $300,000. 00 252,777. 08c 199,887. 41 140,650. 98 74,306. 18 -0- x 12% $36,000. 00 $47,222. 92 b$83,222. 92 c$300,000. 00 3. 2010 Jan. Dec. 1 31 leased Equipment majuscule Lease agreement with child(p) Lease obligation touch depreciate immediate payment insurance policy put down property impose set down capital depreciation set down leased Equipment stash away wear and tear rent Equipment ($300,000. 00 ? 5) superior Lease indebtedness involvement depreciate capital policy write off situation levy outlay hard cash 21-42 300,000 47,222. 2 36,000. 00 3,760 5,440 300,000 83,222. 92 31 9,200 31 60,000 60,000 52,889. 67 30,333. 25 3,100 5,330 2011 Dec. 31 83,222. 92 31 8,430 P21-3 (continued) 3. (continued) Dec. 31 disparagement cost contract Equipment pile up dispraise rent Equipment TIMMER gild vestibular sense weather sheet (Partial) celestial latitude 31, 2010 Assets place, Plant, and Equipment chartered property less accumulated amortisation $240,000. 00 (Note X) a$83,222. 92 60,000 60,000 4. Liabilities accepted heavy(p) lease obligation past heavy(p) lease obligation (Note X) $ 74,306. 17a,c $178,470. 1b,c x 0. 892857 $74,306. 17 b$252,777. 08 cThese amounts computed by the change in innovate value show up are $52,889. 67 and $199,887. 41, one by one below U. S. GAAP, the Timmer confederacy would tell the lease as an operating lease. The lease does not meet either of the first two criteria. The third criterion is not met since the 3-year lease life is 60% of the economic life of 5 years. The fourth criterion is in like manner not met since the inclose value of the lease payments of $269,507 ($120,000 x 2. 245890) is 89. 8% of the fair value of $300,000.Therefore, the lease would be an operating lease. downstairs IFRS, the Timmer play along would have to exercise judgment but it is likely that it would classify the lease as a finance lease since two of the indicators would belike be considered to be met. The present value of 89. 8% is belike substantially all of the fair value of the asset. Also, it could be argued that 60% is the major part of the economic life of the asset. 5. 21-43 P21-4 1. Summary Table of Lease Payments current and fire tax revenue bring in by the Calden federation (1) (2) Lease Payment standard $65,000. 0 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 (3) interestingness revenue enhancement at 15% on meshw ork coronation $46,203. 16c 43,383. 63 40,141. 17 36,412. 35 32,124. 20 27,192. 83 21,521. 76 14,999. 87h (4) decline of loot enthronization $18,796. 84d 21,616. 37 24,858. 83 28,587. 65 32,875. 80 37,807. 17 43,478. 24 50,000. 13 (5) Lease due $570,000a 505,000e 440,000 375,000 310,000 245,000 180,000 115,000 50,000 (6) honorary intimacy Leases $261,978. 97 215,775. 81f 172,392. 18 132,251. 01 95,838. 66 63,714. 46 36,521. 63 14,999. 7 -0(7) earn investment $308,021. 03b 289,224. 19g 267,607. 82 242,748. 99 214,161. 34 181,285. 54 143,478. 37 100,000. 13 50,000. 00i pick up January 1, 2010 declination 31, 2010 celestial latitude 31, 2011 declination 31, 2012 celestial latitude 31, 2013 celestial latitude 31, 2014 celestial latitude 31, 2015 celestial latitude 31, 2016 declination 31, 2017 a$570,000 21-44 is the undiscounted value of the lease payments plus the unsecured balance wheel value is the present value of the lease payments plus the present value of the ungu aranteed relaxation x 15% b$308,021. 03 value c$308,021. 03 d$65,000. 00 e$570,000 $46,203. 16 $46,203. 16 $18,796. 84 residual value $65,000 f$261,978. 97 g$308,021. 03 hAdjusted for $0. 15 rounding error iUnguaranteed 21-44 P21-4 (continued) 2. Criteria for direct financing lease masking of Criteria for role of Lease mixed bag column A Criteria 1. send of ownership at end of lease 2. buy purchase option 3. Lease term is 75% or more of eonomic life 4. Present value of lease payments is 90% or more of fair value *PV of minimum lease payments Met No No Yes 89% ( 8 year lease life ) 9 year economic life Remarks 0-45 Yes PV is 94. 7% of the fair value of the leased asset* = $65,000 x PV federal agent for 8 payments at 15% = $65,000 x 4. 487322 = $291,675. 93 tug B Criteria 1. Collectibility assured 2. No uncertainties Met Yes Yes Remarks The lease is decent separate as a direct financing lease because at least one of the towboat A criteria is met, both of the Column B cr iteria are met, and there is no dealers profit. 3. 2010 Jan. 1 1 Equipment contract to Others notes Lease receivable ($520,000 + $50,000) Equipment undertake to Others honorary interest group Leases 308,021. 3 308,021. 03 570,000 308,021. 03 261,978. 97 21-45 P21-4 (continued) 3. (continued) Dec. 31 31 2011 Dec. cash in Lease due honorary intimacy Leases engross gross Leases change Lease due unearned sake Leases wager revenue enhancement Leases silver Lease receivable unearned touch on Leases vex receipts Leases CALDER lodge Balance shroud (Partial) Assets present-day(prenominal) Assets dinero investment in direct financing leases (Note X) obsolescent Assets earn investment in direct financing leases (Note X) a$65,000 65,000 46,203. 16 5,000 46,203. 16 31 31 65,000 43,383. 63 65,000 43,383. 63 2012 Dec. 31 31 65,000 40,141. 17 65,000 40,141. 17 4. celestial latitude 31, 2011 2010 $ 56,521. 73a,d $ 56,521. 73a,c $211,086. 09b,d $232,702. 46b,c x 0. 869565 $289 ,224. 19 $56,521. 73 12/31/11 $267,607. 82 $56,521. 73 b12/31/10 cThese amounts computed by the change in present value approach are $21,616. 37 and $267,607. 82, individually amounts computed by the change in present value approach are $24,858. 83 and $242,748. 99, singly dThese 21-46 P21-5 1. a) Landlord community computation of annual rental amount Annual rental amount = = Cost of equipment PV ingredient for 6 receipts in advance at 14% $300,000 4. 433081 = $67,673. 02 (b) tenant corporation computation of the present value of the lease rights To find the present value of the lease rights, renter conjunction would work out the annual rental payment ($67,673. 02) by the PV factor for 6 periods compensable in advance at i%. The office i would be the lower of 14% or dwell companions incremental acceptation rate. This incremental acceptance rate is the superfluous information needed.Summary Table of Lease Payments legitimate and worry revenue credit for the Landl ord ships company (1) (2) Annual Lease Payments accredited $67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 2. Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 Jan. 1, 2015 a$67,673. 02 (3) saki tax revenue at 14% on pelf Investment (4) Lease due $406,038. 12a 338,365. 10 270,692. 08 203,019. 06 135,346. 04 67,673. 02 0 (5) unearned provoke Leases $106,038. 12b 73,512. 4 45,907. 18 23,911. 52 8,310. 69 0 (6) brighten Investment $300,000. 00 232,326. 98 264,852. 76d 197,179. 74 224,784. 90 157,111. 88 179,107. 54 111,434. 52 127,035. 35 59,362. 33 67,673. 02 0 $32,525. 78c 27,605. 16 21,995. 66 15,600. 83 8,310. 69e x6 $300,000. 00 x 14% d$232,326. 98 eAdjusted + $32,525. 78 b$406,038. 12 c$232,326. 98 for $0. 04 rounding error This table would similarly be commensurate for renter attach to if lives incremental borrowing rate is ? 14%. 21-47 P21-5 (co ntinued) 3. Journal entries renter federation (lessee) 2010 Jan. 1 1 During the year Dec. 1 undertake Equipment uppercase Lease covenant slap-up Lease tariff gold redress expense lieu taxation depreciate coin disparagement cost contract Equipment put in dispraise chartered Equipment ($300,000 ? 6) disport expenditure accumulated touch on on crownwork Lease duty accrued cheer on cracking Lease province smashing Lease Obligation hard currency insurance spending Property Tax depreciate capital 31 derogation depreciate rent Equipment accumulate depreciation contract Equipment sake Expense accrued occupy on detonating device Lease Obligation 300,000 67,673. 2 700 800 300,000 67,673. 02 1,500 50,000 50,000 32,525. 78 32,525. 78 31 2011 Jan. 1 32,525. 78 35,147. 24 600 750 67,673. 02 During the year Dec. 1,350 50,000 50,000 27,605. 16 27,605. 16 31 21-48 P21-5 (continued) 3. (continued) Landlord Company (lessor) 2010 Jan. 1 1 Equipment chartered to O thers money Lease due ($67,673. 02 x 6) Equipment leased to Others honorary disport Leases money Lease due honorary chase Leases stake receipts Leases Cash Lease receivable honorary bear on Leases Interest tax revenue Leases 300,000. 0 406,038. 12 300,000. 00 300,000. 00 106,038. 12 67,673. 02 32,525. 78 1 Dec. 2011 Jan. Dec. 4. 31 67,673. 02 32,525. 78 1 31 67,673. 02 27,605. 16 67,673. 02 27,605. 16 Income statements and balance sheets Tenant Company disclosure (Lessee) comparative degree Balance Sheets (Partial) declination 31 Assets 2011 2010 Liabilities 2011 2010 chartered equipment less accumulated amortization (Notes 1 and 2) $200,000. 00 $250,000. 00 topical heavy(p) lease obligation $ 67,673. 02 past not bad(p) lease obligation 157,111. 88 (Notes 1 and 2) $ 67,673. 02 197,179. 74