Chapter 21 Lease Answer Problems

CHAPTER 21 ACCOUNTING FOR LEASES CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Time Range (minutes) 5-10 Number E21-1 Content Operating Lease. (Easy) Annual rental payments, no renewable option clause, executory costs. Lessee's journal entries to record agreement, payments, expenses. Capital Lease. (Moderate) Calculation of rental payments made at end of year. Table summarizing lease payments, interest expense. Journal entries. IFRS differences. Capital Lease. (Moderate) Payments made at beginning of year. Table summarizing lease payments, interest expense. Journal entries.Direct Financing Lease. (Moderate) Calculation of rental receipts, made at end of year. Table summarizing rental receipts, interest revenue. Journal entries. Direct Financing Lease. (Easy) Journal entries to record contract, first rental receipt. Direct Financing Lease / Capital Lease. (Moderate) Table summarizing lease and interest payments. Journal entries for lessor and lessee. Sales-Type Lease. (Moderate) Payments made at end of year. Calculation of selling price (fair value). Table summarizing lease receipts, interest revenue. Journal entries. Sales-Type Lease. Moderate) Payments made at beginning of year. Calculation of selling price (fair value). Table summarizing lease receipts, interest revenue. Journal entries. Sales-Type Lease / Capital Lease. (Moderate) Computation of lease payments. Journal entries for lessor and lessee. Operating Lease / Sales-Type Lease. (Moderate) Accounted for as operating, should have been sales-type. Computation of effect on net income. Operating Lease. (Easy) Computation of income derived from lease by lessor, amount of rent expense 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 Number E21-12 Content Determining Type of Lease. (Moderate) Title passes at leaseend, collectibility reasonably assured, no uncertainties surrounding costs to be incurred. Table summarizing recei pts, revenue. Lessor's journal entries. Guaranteed and Unguaranteed Residual Values. (Moderate) Calculate residual value. Determine classification of the lease depending on the type of residual value. (Appendix). Sales-Leaseback. (Easy) Calculation of lease payments. Lessor's journal entries to record sale and agreement.Description of how to treat the gain by the lessee. Determining Type of Lease. (Moderate) No bargain purchase option, no agreement to transfer ownership at lease-end, no uncertainties surrounding costs to be incurred. Journal entries for lessee and lessor. Guaranteed residual value. Determining Type of Lease. (Moderate) Lessor's viewpoint. Option to buy, collectibility reasonably assured, no uncertainties surrounding costs. Journal entries, disclosure requirements. Capital Lease. (Moderate) Calculation of rental payments. Table summarizing lease payments, interest expense.Journal entries, partial balance sheet. IFRS differences. Direct Financing Lease. (Challenging) Table summarizing lease receipts, interest revenue. Explanation of lease classification. Journal entries. Partial balance sheets. Comprehensive: Direct Financing and Capital Lease. (Challenging) Computation of rental amounts. Table summarizing lease and interest receipts. Analysis of lessee's lease classification. Journal entries for lessor and lessee. Comparative financial statement presentation. Direct Financing Lease. (Moderate) Unguaranteed residual value. Computation of rental amounts.Table summarizing lease and interest receipts. Journal entries. Sales-Type Lease. (Challenging) Calculation of implied selling price. Table summarizing lease receipts, interest revenue. Explanation of lease classification. Journal entries, partial balance sheet. Various Lease Issues. (Challenging) Journal entries for lessee and lessor to record all lease transactions. Various Lease Issues. (Challenging) Computation of annual rentals if payable at beginning of year, at end of year. Table. Journal e ntries for lessee and lessor. Partial balance sheet disclosures. 21-2Time Range (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 Number P21-10 Content Initial Direct Costs. (Moderate) Analysis for various lease classifications. Determination of lessor's lease classification. Discussion of lessor's journal entries. Various Lease Issues. (Challenging) Classification of lease for lessee, for lessor. Option to buy, collectibility reasonably assured, no uncertainties. Lessor journal entries. Accounting for a change in residual value. Accounting for Leases. Challenging) Journal entries to record the lease for both the lessee and lessor. (AICPA adapted). Lessor's Income Statement. (Challenging) Preparation of lessor's income statement, including sales-type and operating lease as well as long-term construction contracts. (Appendix). Determining Types of Leases. (Moderate) For lessee, for les sor. Lease of land. No bargain purchase option, collectibility reasonably assured, no uncertainties surrounding costs. (Appendix). Sales-Leaseback. (Moderate) Classification of lease by lessee. Journal entries for both lessee and lessor. Time Range (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 GAAP provides a common set of criteria for determining the classification of leases by both the lessee and the lessor. The advantages of leasing for the lessee include: 1. Financing benefits: a. b. c. The lease provides 100% financing so that the lessee acquires the asset without having to make a down payment. The lease contract may contain fewer restrictive provisions for financing. The leasing arrangement creates a claim that is against only the leased equipment and not against all assets. 2.Risk benefit: The lease may reduce the risk of obsolescence for the lessee. 3. Tax benefit: For income tax purposes, the lessee, through deduction of the lease payment, can write off the full cost of an asset. 4. Financial reporting benefit: For operating leases, the lease does not add an asset or a liability to the lessee's balance sheet. 5. Billing benefit: For certain contract-type work, leasing may permit higher charges because interest on borrowed money to purchase assets is not usually allowed as a contract charge, whereas the interest element contained in the rental payments is allowed as a contract charge. 1-3 Q21-3 By structuring the terms of the lease so that it qualifies as an operating lease, the lessee avoids having to include the asset and the liability in the balance sheet. Exclusion of these items creates more favorable financial ratios, such as rate of return on investment, the current ratio, and the ratio of debt to equity. This, in turn, may increase the borrowing capacity of the lessee. The lessee is practicing â€Å"off balance sheet financing. † A capital lease, on the other hand, would appear in the financial statements and affect financial ratios.It may impede lessee borrowing efforts. a. A lease is â€Å"an agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets), usually for a stated period of time. † b. A sales-type lease for the lessor is a lease that meets any one of the Column A criteria and both of the Column B criteria in Exhibit 20-2, and results in a manufacturer's or dealer's profit. c. A direct financing lease for the lessor is a lease that meets any one of the Column A criteria and both of the Column B criteria, and does not result in a manufacturer's or dealer's profit. d.A sale-leaseback transaction is a lease transaction in which the owner of an asset sells it, and then immediately leases it back from the buyer. e. An operating lease for the lessee is a lease that meets none of the Column A criteria. For the lessor, it is a lease that meets none of the Column A criteria, and fails at least one of t he Column B criteria. f. A leveraged lease is a three-party lease in which one party (the equity participant) buys or manufactures an asset and leases it to another party (the asset user), with a third party (the debt participant) providing nonrecourse financing for the transaction.Q21-4 Q21-5 a. Inception of lease is the date of the lease agreement; or, if the leased property is being constructed, the date that the title passes to the lessor. b. Bargain purchase option is a provision allowing the lessee to purchase the leased property at the end of the life of the lease at a price so favorable that the exercise of the option appears, at the inception of the lease, to be reasonably assured. c. Unguaranteed residual value is the portion of the estimated residual value of the leased property that is not guaranteed by the lessee or by a third party unrelated to the lessor. . Implicit interest rate is the interest (discount) rate that, when applied on a present value basis to the sum of the minimum lease payments and any unguaranteed residual value accruing to the lessor, causes the resulting present value to be equal to the net investment of the leased property to the lessor. 21-4 Q21-5 (continued) e. Initial direct costs are costs incurred by the lessor to originate a lease that (1) result directly from acquiring that lease and (2) would not have been incurred had that leasing transaction not occurred.They also include costs directly related to specified activities performed by the lessor for that lease, such as evaluating the lessee's financial condition, negotiating lease terms, preparing and processing lease documents, and closing the transaction. Q21-6 If there is a bargain purchase option, the components of the minimum lease payments are: (1) the minimum periodic rental payment required by the lease over the lease term, and (2) the payment required by the bargain purchase option.Otherwise, they include (1) the minimum periodic rental payments plus (2) any g uarantee by the lessee of the residual value, and (3) any payments upon failure to renew or extend the lease. The criteria for a capital lease are: 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is 75% or more of the estimated economic life of the asset 4. Present value of minimum lease payments is 90% or more of fair value of the leased property to the lessor One (or more) of these criteria must be met for the lessee to classify a lease as a capital lease.Q21-8 Under an operating lease, the lessee records each rental payment as rent expense; no amount is capitalized. The lessor records each rental receipt as rent revenue. The leased asset is retained on the lessor's books and is depreciated by the lessor. Under a capital lease, the lessee records the present value of the minimum lease payments as both an asset and a liability. The lessee recognizes a portion of each payment as interest expense to produce a constant rate of interest on the book val ue at the beginning of the period, and recognizes the remainder of the payment as a reduction of the lease obligation.The lessee depreciates the asset over the term of the lease, unless there is a bargain purchase option or transfer of ownership at the end of the lease, in which case the depreciation period is the economic life of the asset. The two additional criteria for a sales-type lease are: 1. Collectibility of the minimum lease payments is reasonably assured. 2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. In addition, the lease must result in a manufacturer's or dealer's profit or loss.Q21-7 Q21-9 Q21-10 21-5 Q21-11 The basic difference in accounting for a sales-type lease is that the carrying value of the asset is charged to cost of asset leased (expense), and the present value of the minimum lease payments is recorded as the amount of the sale. In a direct financing lease, no sales or expense is re cognized. Instead, the asset is removed from the books and the difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue.The net investment in a sales type lease is accounted for in a similar manner to that for a direct financing lease. The FASB states that the interest revenue from a lease is recognized so as to yield a constant return on net investment. Compound interest techniques can be used to compute this return if the following are known: (a) the amount of the lease payment, (b) the cost or fair value of the lease, and (c) the number of periods of the lease. Multiplying the interest rate by the amount of the net investment at the beginning of the year results in a constant return on investment.Q21-12 Q21-13 Q21-14 Owens Company records the lease as a capital lease due to the bargain purchase option, and depreciates the asset over its estimated economic life. The original lease was a capital lease and McFarland C ompany is relieved of its obligation. McFarland removes the equipment from its books, and recognizes the gain when the new lease transaction takes place, that is, during the current year. a. Lessee's disclosure: 1. For all leases, a general description of the leasing arrangement 2.For operating leases having lease terms in excess of one year: (a) Future minimum rental payments required as of the date of the latest balance sheet presented, for each of the 5 succeeding fiscal years and in total The total of minimum rentals to be received in the future under noncancellable subleases Q21-15 (b) 3. For all operating leases, rental expense for each period 4. For capital leases: (a) (b) The gross amount of assets recorded under capital leases by major classes according to nature or function Future minimum lease payments for each of the 5 succeeding fiscal years and in total 21-6 Q21-15 (continued) a. 4. continued) (c) (d) The total of minimum sublease rentals to be received in the future u nder noncancellable subleases Assets, accumulated depreciation, depreciation expense, and liabilities b. Lessor's disclosure: 1. A general description of all leasing arrangements 2. For operating leases: (a) The cost and carrying amount, if different, of property on lease or held for leasing by major classes of property, and the amount of the total accumulated depreciation Minimum future rentals on noncancellable leases for each of the 5 succeeding fiscal years and in total Total contingent rentals included in income for each period b) (c) 3. For direct financing and sales-type leases: (a) The components of the net investment in direct financing and sales-type leases including: (1) (2) (3) (4) (b) (c) Q21-16 Q21-17 The future minimum lease payments to be received Including any profit thereon The unguaranteed residual values accruing to the benefit of the lessor For direct financing leases only, initial direct costs Unearned income Future minimum lease payments to be received for eac h of the 5 succeeding fiscal years Total contingent rentals included in income for each periodIFRS classify leases as either finance leases or operating leases. A finance lease is equivalent to a capital lease under U. S. GAAP. In general, IFRS provide a series of indicators that, individually or in combination, normally lead a lease to be classified as a finance lease. U. S. GAAP contains a series of four criteria which, if any one is met, will result in the classification of a lease as a capital lease. While these indicators and criteria are similar, the IFRS indicators are less detailed and require more judgment in classifying leases. Specifically, both IFRS and U.S. GAAP treat leases that transfer title from the lessor to the lessee and leases that contain bargain purchase options as finance (capital) leases. However, if an asset is leased for the major part of an asset’s economic life, IFRS consider this an indicator of a finance lease. IFRS do not define what is meant b y â€Å"substantially all† of the asset’s fair value while U. S. GAAP sets a 90% threshold. 21-7 Q21-18 The primary accounting issue in accounting for a sales-leaseback transaction from the seller-lessee's viewpoint is the recognition of a profit or a loss on the sale.Any profit or loss is deferred and amortized in proportion to the amortization of the leased asset, if a capital lease, or in proportion to the rental payments, if an operating lease. If the fair value of the property is less than its undepreciated cost at the time of the transaction, a loss is recognized immediately on the difference between the undepreciated cost and the fair value. The fact that there are three or four parties (equity participant, asset user, debt participant, and also a manufacturer if the equity participant does not make the product) distinguishes a leveraged lease from other leases.For the lessee there are no new accounting issues. The lessee classifies and accounts for the lease as for a nonleveraged lease. Q21-19 ANSWERS TO MULTIPLE CHOICE 1. 2. a b 3. 4. d b 5. 6. a c 7. 8. b c 9. 10. a d 21-8 SOLUTIONS TO REVIEW EXERCISES RE21-1 1. 2. 3. 4. Classification Criteria Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of minimum lease payments is 90% or more of fair value Criteria Met? No No No No It is 40% (8 ? 20 years) It is 50% ($50,000 ? $100,000) Remarks Therefore, this lease is an operating lease.It does not meet any of the criteria. RE21-2 Rent Expense Cash 10,000 10,000 RE21-3 1. 2. 3. 4. Classification Criteria Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of minimum lease payments is 90% or more of fair value Criteria Met? No No No Yes It is 71% (5 ? 7 years) It is 100% ($250,000 ? $250,000) Remarks Therefore, this lease is a capital lease. It meets one of the four criteria. RE21-4 Jan, 1 Leased Equipment Capit al Lease Obligation Dec. 31 Interest Expense (10% x $250,000) Capital Lease Obligation ($65,949. 7 – $25,000) Cash 250,000. 00 250,000. 00 25,000. 00 40,949. 37 65,949. 37 21-9 RE21-4 (continued) Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 50,000. 00* 50,000. 00 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $50,000 ($250,000 ? 5). RE21-5 Jan, 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Dec. 31 Interest Expense Accrued Interest on Capital Lease Obligation *($275,000 – $65,949. 37) x 0. 0 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased 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 using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $55,000 ($275,000 ? 5). RE21-6 PV of lease payments = $25,000 x 6. 710081 = PV of single sum of $4,000 = $4,000 x 0. 463193 = Present value of minimum lease payments RE21-7 PV of lease payments = $25,000 x 6. 710081 = PV of single sum of $20,000 = $20,000 x 0. 63193 = Present value of minimum lease payments RE21-8 (a) (b) (c) Sales-type lease Direct financing lease Operating lease $167,752 9,264 $177,016 $167,752 1,853 $169,605 21-10 RE21-9 Jan, 1 Lease Receivable ($65,949. 37 x 5) Equipment Unearned Interest: Leases Dec. 31 Cash Lease Receivable Unearned Interest: Leases (0. 10 x $250,000) Interest Revenue: Leases *($329,746. 85 – $79,746. 85) x 0. 10 RE21-10 Jan, 1 Lease Receivable Sales Revenue Unearned Interest: Leases Cost of Asset Leased Merchandise Inventory (or Equipment Held for Lease) Dec. 31 Cash Lease Receivable Unearned Interest: Leases (0. 0 x $250,000) Interest Revenue: Lease s *($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. 00 200,000. 00 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 21-11 SOLUTIONS TO EXERCISES Note to Instructor: Although students may use their calculators or software to make the various present value calculations, any present value calculations in the following solutions to exercises and problems are based on the factors from the appropriate tables in the TVM Module of the book. E21-1 Criteria 1. . 3. 4. Transfer of ownership at end of lease Bargain purchase option 1. Determination of Lease Classification Met No No No Remarks Reverts to lessor Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value 20% ( 10 year lease life ) 50 year economic life) No PV is $485,098. 79* or 24% of the fair value *PV = (Annual lease payment – Annual executory costs) x PV factor fo r 10 payments at 14% = ($100,000 – $7,000) x 5. 216116 = $485,098. 79 The lease is an operating lease, since none of the above criteria are met. 2. 2010 Dec. 2011 Dec. E21-2 1. . 31 Rent Expense Cash Rent Expense Cash 100,000 100,000 31 100,000 100,000 1. Determination of Lease Classification Criteria Transfer of ownership at end of lease Bargain purchase option Met No No Remarks 21-12 E21-2 (continued) 3. 4. Criteria Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met Yes Remarks 100% Yes 100% The lease is a capital lease, since at least one of the Column A criteria is met. 2. Present value = Lease payments x PV factor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 3. 1) Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 aColumn Summary of Lease Payments and Interest Expense for the Sax Company (2) Lease Payment Required $ 83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) (4) (5) Interest Expense Reduction at 12% on of Lease Balance of Obligation Balancea Obligationb Obligationc $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 beginning of year x 12%. – Column 3. alance – Column 4. 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Interest Expense (12% x $300,000) Cash 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 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000. 00 ? 5) Capital Lease Obligation Interest Expense (12% x $252,777. 08) Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 60,000 60,000 52,889. 67 30,333. 25 2011 Dec. 31 83,222. 92 31 60,000 60,000 5. Under U. S.GAAP, the Sax Company would classify 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 also not met since the present value of the lease payments of $264,201 ($110,000 x 2. 401831) is 88. 1% of the fair value of $300,000. Therefore, the lease would be an operating lease. Under IFRS, the Sax Company would have to exercise judgment but it is likely that it would classify the lease as a â€Å"finance† lease since two of the indicators would probably be considered to be met.The present value of 88. 1% is probably â€Å"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. E21-3 1. Application of Criteria for Determination of Lease Classification from Lessee's Viewpoint Group I Criteria 1. 2. 3. 4. Transfe r of ownership Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value* Met No No Yes 100% Remarks Yes 100% = $20,000 x PV factor for 4 payments in advance at 12% = $20,000 x 3. 401831 = $68,036. 62 21-14 *PV of minimum lease paymentsE21-3 (continued) 1. (continued) Since the lease meets at least one of the Column A criteria, it is a capital lease. 2. (1) Summary of Lease Payments and Interest Expense for the Adden Company (2) (3) (4) Balance of Capital Lease Obligation $68,036. 62 48,036. 62a 53,801. 01c 33,801. 01 37,857. 13 17,857. 13 20,000. 00 0 Date January 1, 2010 January 1, 2010 December 31, 2010 January 1, 2011 December 31, 2011 January 1, 2012 December 31, 2012 January 1, 2013 a$68,036. 62 b$48,036. 62 c$48,036. 62 dAdjusted Interest at 12% Annual Lease on Unpaid Payment Obligation Before 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 â₠¬â€œ $20,000 x 12% + $5,764. 39 for $0. 01 rounding error 1 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Interest Expense Accrued Interest on Capital Lease Obligation Insurance Expense Property Tax Expense Cash 68,036. 62 20,000 5,764. 39 5,764. 39 1,500 6,000 3. 2010 Jan. 68,036. 62 20,000 Dec. 31 31 7,500 21-15 E21-3 (continued) 3. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($68,036. 62 ? 4) Accrued Interest on Capital Lease Obligation Capital Lease Obligation CashInterest Expense Accrued Interest on Capital Lease Obligation Insurance Expense Property Tax Expense Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased 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. Rental receipt = = Fair value of assets PV factor for 8 receipts at 14% $500,000 4. 638864 = $107,785 . 01 21-16 E21-4 (continued) 2. Summary of Lease Payments Received and Interest Revenue Earned by the Rexon Company (1) (2) Annual Lease Payment Received $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) Interest Revenue at 14% on Net Investment $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) Amount of Net Investment Recovered $37,785. 01b 43,074. 91 49,105. 40 55,980. 15 63,817. 38 72,751. 81 82,937. 06 94,548. 28 (5) Lease 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 Interest: Leases $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) Net Investment $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- Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 Dec ember 31, 2015 December 31, 2016 December 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 rounding error 21-17 E21-4 (continued) 3. 2010 Jan. 1 Lease Receivable Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 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 Proof that the yield is 1%: PVn=48, i=1% is not given in text; it is 37. 973959; thus PV of lease payments received = Monthly lease payment x PV factor for 48 receipts at 1% = $1,600 x 37. 973959 = $60,758 (This is not required for the problem) 2010 Jan. 2 Lease Receivable Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Int erest Revenue: Leases [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 lease payment = Cost of the equipmet PV factor for 5 years in advance at 14% = $30,000 3. 913712 = $7,665. 36 Summary Table (1) Lessee Company (2) Lease Payment Required Lease Rental Collected (3) Interest at 14% on Unpaid Obligation Interest at 14% on Net Investment (4) Balance of Lease Obligation Net Investmenta Lessor Company Date January 1, 2010 January 1, 2010 $7,665. 36 December 31, 2010 0 January 1, 2011 7,665. 36 December 31, 2011 0 January 1, 2012 7,665. 36 December 31, 2012 0 January 1, 2013 7,665. 6 December 31, 2013 0 January 1, 2014 7,665. 36 aPrevious balance – Column 2 + 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 rounding error 21-19 E21-6 (continued) Date 01/01/10 12/31/10 12/31/11 12/31/12 12/31/13 1$7,665. 36 Lease Receivable $38,326. 801 30,661. 44 22,996. 08 15,330. 72 7,665. 36 x5 – $30,000. 00 – $3,126. 85 – Unearned Net = Interest: Leases Investment $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 Company: 2010 Jan. 1 Lease Receivable ($7,665. 36 x 5) Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 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 Company: 2010 Jan. 1 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash 30,000 7,665. 36 30,000 7,665. 36 21-20 E21-6 (continued) 2. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($30,000 ? ) Interest Expense Accrued Interest on Capital Lease Obligation Executory Costs (Expenses) Cash 6,000 6,000 3,126. 85 3,126. 85 500 500 31 31 E21-7 1. Selling price (fair value and the net investment) = $50,000 (PVn = 4, i = 12%) = $50,000 x 3. 037349 = $151,867. 45 2. Summary of lease receipts and interest revenue: Information needed to prepare table: Gross investment = Annual lease payment received x Number of payments = $50,000 x 4 = $200,000 Initial PV of the investment: PV of lease payments (see 1) = $151,867. 45 Unearned interest revenue = Gross investment – Initial PV of investment = $200,000 – $151,867. 5 = $48,132. 55 = $151,867. 45 = $130,000. 00 Sales price = PV of minimum lease payments Cost of asset leased = Cost of equipment 21-21 E21-7 (continued) 2. (continued) Gross profit = Sales price – Cost of asset leased = $151,867. 45 – $130,000. 00 = $21,867. 45 (Table follows Requirement 3) 3. 2010 Jan. 1 Lease Receivable Sales Unearned Interest: Leases Cost of Asset Leased Equipment Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Recei vable Unearned Interest: Leases Interest Revenue: Leases 200,000. 00 151,867. 45 48,132. 55 130,000. 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. Summary of Lease Payments Received and Interest Revenue Earned by the Berne Company (1) (2) Annual Lease Payment Received $50,000 50,000 50,000 50,000 (3) Interest Revenue at 12% on Net Investment $18,224. 09a 14,410. 98 10,140. 30 5,357. 18f (4) Amount of Net Investment Recovered $31,775. 91b 35,589. 02 39,859. 70 44,642. 82 (5) Lease Receivable $200,000 150,000c 100,000 50,000 -0(6) Unearned Interest: Leases $48,132. 55 29,908. 46d 15,497. 48 5,357. 18 -0(7) Net Investment $151,867. 45 120,091. 54e 84,502. 52 44,642. 2 -0- Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 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$4 8,132. 55 e$151,867. 45 fAdjusted for $0. 04 rounding error 21-23 E21-8 1. Selling price (fair value) = $100,000 (PV in advance) n = 5, i = 14% = $100,000 (3. 913712) = $391,371. 20 2. Summary of lease payments received and interest revenue: Information needed to prepare table: Gross investment 20-24 = = = (Annual lease payment received x Number of payments) + Unguaranteed residual value ($100,000 x 5) + $20,000 $520,000Initial present value of the investment: PV of lease payments (see part 1) PV of unguaranteed residual value: $20,000 x PV of a single sum for 5 years at 14%: $20,000 x 0. 519369 Total initial PV (this is also the net investment) Unearned interest: leases $391,371. 20 10,387. 38 $401,758. 58 = Gross investment – Initial PV of the investment = $520,000. 00 – $401,758. 58 = $118,241. 42 Sales price = = Present value of lease payments $391,371. 20 (see part 1) = Cost of asset – PV of the unguaranteed residual value = $313,000. 00 – $10,387. 3 8 = $302,612. 62 Cost of asset leased 21-24 E21-8 (continued) 2. continued) Gross profit = = = Sales price – Cost of asset leased $391,371. 20 – $302,612. 62 $ 88,758. 58 Summary of Lease Payments Received and Interest Revenue Earned by the Edom Company (1) (2) Annual Lease Payments Received $100,000. 00 100,000. 00 100,000. 00 100,000. 00 100,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $520,000. 00a 420,000. 00 320,000. 00 220,000. 00 120,000. 00 20,000. 00 (5) Unearned Interest: Leases $118,241. 42b 75,995. 22 41,834. 55 16,891. 39 2,456. 18 0 (6) Net Investment $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 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 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 1 4% + $42,246. 20, or $420,000 – $75,995. 22 residual value Lease Receivable Cost of Asset Leased Sales Equipment (or Inventory) Unearned Interest: Leases 520,000. 00 302,612. 62 – $401,758. 58 c$301,758. 58 d$301,758. 58 eAdjusted for $0. 05 rounding error 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 Summary Table for First 3 Months (1) Bullard Company: Month Anson Company: Month Beginning of 1 Beginning of 1 End of 1 Beginning of 2 End of 2 Beginning of 3 End of 3 (2) Lease Payment Required (3) Interest Expense (4) Balance of Lease Obligation 1 31 Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 100,000 42,246. 20 100,000 42,246. 20 1 31 100,000 34,160. 67 100,000 34,160. 67 Lease Receipt $2,000 0 2,000 0 2,000 0 Interest Revenue 0 $588b 0 574 0 560 Net Investmenta $60,817 58,817 59,40 5c 57,405 57,979 55,979 56,539 1-26 E21-9 (continued) Receivable $70,0001 68,000 66,000 64,000 1($2,000 2$58,817 b1% aLease – Unearned = Interest: Leases $9,183 8,595 8,021 7,461 Net Investment $60,8172 59,405 57,979 56,539 x 35) + $2,000 + $588 Lease Receivable Sales ($58,817 + $2,000) Unearned Interest: Leases ($72,000 – $60,817) Cost of Asset Leased Merchandise 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 inception Initial receipt At end of 1st month Cash Lease Receivable Unearned Interest: Leases Interest Revenue: LeasesSecond Cash Installment Lease Receivable At end of Unearned Interest: Leases 2nd month Interest Revenue: Leases Third Cash installment Lease Receivable At end of 3rd month Unearned Interest: Leases Interest Revenue: Leases 21-27 E21-9 (continued) 2. Computation of Lessee's Obligation Using the Implicit Interest Rate PV of lease payments = $ 2,000 + PV of remaining 3 5 payments of $2,000 each at 1% = $ 2,000 + $58,817 = $60,817* *Note: By definition, the present value of the lease payments equals the initial payment plus the present value of the remaining lease payments, since the initial payment is at the beginning of the period.At inception Initial payment At end of 1st month Leased Equipment Capital Leases Obligation Capital Lease Obligation Cash Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($60,817 ? 36) Second Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of Interest Expense 2nd month Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased 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) Third Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of 3rd month Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment E21-10 Computation of the effect on income before income taxes using the sales-type lease method Sales = PV of lease payments receivable = (PV factor for 8 payments in advance at 12%) x $60,000 = 5. 563757 x $60,000 = $333,825 Cost of asset leased = = Cost of the property $275,000 574 1,426 560 560 1,689 1,689 ,000 21-29 E21-10 (continued) Interest 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 Incremental effect on income before income taxes Sales Less: Cost of asset leased Gross margin Add: Interest revenue Incremental revenue recognized $333,825 (275,000) $ 58,825 32,859 $ 91,684 Computation of the effect on income before in come taxes using the operating lease method Rental revenue Depreciation expense = $60,000. 0 = = Cost – Residual Value Economic life $275,000 – $0 8 = $34,375 Incremental effect on income before income taxes Rental revenue $60,000 Less: Depreciation expense (34,375) $25,625 Effect on income before income taxes Sales-type lease income Operating lease income Income before income taxes $91,684 (25,625) $66,059 understated 21-30 E21-11 1. Computation of Income Before Income Taxes Derived by Reuben Company for Year Ended December 31, 2010 Rental revenue Maintenance expense Depreciation 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. Rent expense = 10/12 x $180,000 = $150,000 E21-12 1. Application of Criteria for Determination of Lease Classification from Lessor's Viewpoint Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met Yes No Y es 80% ( Remarks Lease term is 75% or more of economic life 4 year lease life ) 5 year economic life 4. Present value of lease payments is 90% or more of fair value Column B Criteria 1. Collectibility assured 2.No uncertainties Yes Present value is $8,400, or 100% of the fair value Yes Yes Since the lease meets at least one of the Column A criteria and both of the Column B criteria, and there is no dealer's profit (PV of lease payments – Cost of car = $8,400 – $8,400 = $0), the transaction should be classified as a direct financing lease. 21-31 E21-12 (continued) 2. Summary of lease payments received and interest revenue: Computation of amount of lease receipts: Yearly lease receipt = Cost of the car PV factor for 4 payments at 10% $8,400 3. 169865 = $2,649. 96 (Table follows Requirement 3) 3. 2010 Jan. 1 1 Automobile Held for Lease Cash Lease Receivable Automobile Held for Lease Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue : Leases (from table) Cash Lease Receivable Unearned Interest: Leases Interest Revenue: 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.Summary of Lease Payments Received and Interest Revenue Earned by the Ravis Rent-A-Car Company (by Interest Method) (1) (2) Annual Lease Payments Received $2,649. 96 2,649. 96 2,649. 96 2,649. 96 (3) Interest Revenue at 10% on Net Investment $840. 00a 659. 00 459. 90 240. 94f (4) Amount of Net Investment Recovered $1,809. 96b 1,990. 96 2,190. 05 2,409. 02 (5) Lease Receivable $10,599. 84 7,949. 88c 5,299. 92 2,649. 96 -0(6) Unearned Interest: Leases $2,199. 84 1,359. 84d 700. 84 240. 94 -0(7) Net Investment $8,400. 00 6,590. 04e 4,599. 08 2,409. 02Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 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 rounding error 21-33 E21-13 1. Present value of lease payments = $10,000 x PV factor for 6 payments at 10% = $10,000 x 4. 355261 = $43,552 (rounded down for simplicity) = $50,000 fair value of the machine – $43,552 = $6,448 = $6,448 x FV of 1 factor for 6 periods at 10% = $6,448 x 1. 771561 = $11,421 (rounded) Present value of residual valueResidual value at the end of the lease term 2. 20-34 Since the first three criteria are not met, the classification of the lease depends on the fourth criterion. A guaranteed residual value is not included in the minimum lease payments. Therefore, Baker Company would classify the lease as a capital lease because the fourth criterion is met as follows: Present value of minimum lease payments = = $43,552 + $6,448 $50,000, or 100% of the fair value of the machine 3. Since the first three criteria are not met, the classification of the leas e depends on the fourth criterion.An unguaranteed residual value is included in the minimum lease payments. Therefore, Baker Company would classify the lease as an operating lease because the fourth criterion is not met as follows: Present value of minimum lease payments = $43,552, or 87. 1% of the fair value of the machine E21-14 1. 2010 Jan. 1 Cash Land Unearned Profit on Sales-Leaseback Leased Land Capital Lease Obligation Insurance and Property Tax Expense Cash 31 Capital Lease Obligation Interest Expense – 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 entry is 2010 Dec. 31 Unearned Profit on Sales – Leaseback Realized Profit on Sales – Leaseback 20,000 20,000 21-35 SOLUTIONS TO PROBLEMS P21-1 1. Application of Criteria for De termination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic lifePV of $268,685. 58* is 88% of fair value 4. Present value of lease payments is 90% or more of fair value *PV No = (Yearly lease payments – Executory costs) x PV factor for 5 payments in advance 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 Company (lessee) and the Superior Equipment Company (lessor). Reasons: None of the Column A criteria are met. 2. Alice Company (lessee): 2010 Jan. 1 Rent Expense Cash 70,000 70,000 21-36 P21-1 (continued) 2. (continued) Superior Equipment Company (lessor): 2011 Jan.During the year Dec. 31 1 Cash Rental Revenue Property Tax Expense Maintenance Expense Insurance Expense Cash 70,000 650 1,600 1,200 70,000 3,450 Depreciation Expense: Equipment 49,500 Accumulated Depreciation: Equipment [($500,000 – $5,000) ? 10] Application of Criteria for Determination of Lease Classification 49,500 3. Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic life PV of $305,000* (rounded) 100% of fair value . Present value of lease payments is 90% or more of fair value *PV Yes = [(Yearly lease payments – Executory costs) x PV factor for 5 payments in advance at 12%] + PV of guaranteed residual 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 Company (lessee) and the Superior Equipment Company (lessor). Reasons: †¢ The lessee would classify the lease as a capital lease because one of the Column A criteria i s met. The lessor would classify the lease as a direct financing lease because (a) one of the Column A criteria is met, (b) both of the Column B criteria are met, and (c) there is no profit at the inception of the lease (fair value = present value of the minimum lease payments). 21-37 P21-1 (continued) 3. (continued) Alice Company (lessee): 2010 Jan. 1 1 Leased Equipment Capital Lease Obligation Executory Costs Expense Capital Lease Obligation Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment [($305,000 – $64,000) ? ] Interest Expense [12% x ($305,000 – $66,550)] Accrued Interest on Capital Lease Obligation Executory Costs Expense Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment Interest Expense [12% x ($305,000 – $66,550 – $37,936)] Accrued Interest on Capital 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 Capital Lease Obligation Cash 64,000 64,000 Superior Equipment Company (lessor): 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($66,550 x 5 + $64,000) Equipment Leased to Others Unearned Interest: Leases Cash Lease Receivable Property Tax Expense Maintenance Expense Insurance Expense Cash Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Property Tax Expense Maintenance Expense Insurance Expense Cash Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable 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. Application of Criteria for Determination of Lease Classific ation Column A Criteria 1. 2. 3. 4. Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met No Yes Yes 100% Present value is $185,090. 68 or 100% of fair value Remarks YesThis is a sales-type lease for Ballieu Company, since one or more of the Column A criteria are met, both of the Column B criteria are met, and there is a dealer's profit (PV of lease payments – Cost of asset = $185,090. 68 – $150,000 = $35,090. 68) 2. (1) Two-Year Table of Lease Payment Receipts and Interest Revenue Recognition (2) Annual Lease Payments Received $35,000. 00 35,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $280,000. 00a 245,000. 00 210,000. 00 (5) Unearned Interest: Leases $94,909. 32b 73,896. 62 (6) Net Investment $185,090. 8 150,090. 68 171,103. 38d 136,103. 38 155,157. 85 Date 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 Receivable ($35,000 x 8) Sales Unearned Interest: Leases ($280,000 – $185,090. 68) Cost of Asset Leased Specialty Equipment (Inventory) Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest 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 disclose: a. A general description of the leasing arrangements b. (1) The components of the net investment at the date of each balance sheet presented: (a) The future lease payments to be received (b) The unearned interest revenue: leases (2) Future lease payments to be received for each of the 5 succeeding fiscal years as of the date of the latest ba lance sheet presented P21-3 1.Present value = Lease payments x PV factor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 21-41 P21-3 (continued) 2. (1) Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 a$300,000 Summary Table of Lease Payments and Interest Expense for Timmer Company (2) Lease Payment Required $83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) Interest Expense at 12% on Obligation Balancea $36,000. 00a 30,333. 25 23,986. 49 16,878. 12 8,916. 74d (4) Reduction of Lease Obligation $47,222. 2b 52,889. 67 59,236. 43 66,344. 80 74,306. 18 (5) Balance 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 Capital Lease Obligation Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense Cash Depre ciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000. 00 ? 5) Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense 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 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment TIMMER COMPANY Balance Sheet (Partial) December 31, 2010 Assets Property, Plant, and Equipment Leased property less accumulated amortization $240,000. 00 (Note X) a$83,222. 92 60,000 60,000 4. Liabilities Current Capital lease obligation Noncurrent Capital 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 â€Å"change in present value approach† are $52,889. 67 and $199,887. 41, respectively Under U. S. GAAP, the Timmer Company would classify 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 also not met since the present 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. Under IFRS, the Timmer Company would have to exercise judgment but it is likely that it would classify the lease as a â€Å"finance† lease since two of the indicators would probably be considered to be met. The present value of 89. 8% is probably â€Å"substantially all† of the fair value of the asset. Also, it could be argued that 60% is the â€Å"major part† of the economic life of the asset. 5. 21-43 P21-4 1. Summary Table of Lease Payments Received and Interest Revenue Earned by the Calden Company (1) (2) Lease Payment Received $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) Interest Revenue at 15% on Net Investment $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) Reduction of Net Investment $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 Receivable $570,000a 505,000e 440,000 375,000 310,000 245,000 180,000 115,000 50,000 (6) Unearned Interest: 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) Net 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 Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 a$570,000 21-44 is the undiscounted value of the lease payments plus the unguaranteed residual value is the present value of the lease payments plus the present valu e of the unguaranteed residual 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: Application of Criteria for Determination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain 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 factor for 8 payments at 15% = $65,000 x 4. 487322 = $291,675. 93 Column B Criteria 1. Collectibility assured 2. No uncertainties Met Yes Yes Remarks The lease is properly classified as a direct financing lease because at least one of the Column A criteria is met, both of the Column B criteria are met, and there is no dealer's profit. 3. 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($520,000 + $50,000) Equipment Leased to Others Unearned Interest: 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 Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases CALDER COMPANY Balance Sheet (Partial) Assets Current Assets Net investment in direct financing leases (Note X) Noncurrent Assets Net 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. December 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 â€Å"change in present value approach† are $21,616. 37 and $267,607. 82, respectively amounts computed by the â€Å"change in present value approach† are $24,858. 83 and $242,748. 99, respectively dThese 21-46 P21-5 1. a) Landlord Company computation of annual rental amount Annual rental amount = = Cost of equipment PV factor for 6 receipts in advance at 14% $300,000 4. 433081 = $67,673. 02 (b) Tenant Company computation of the present value of the lease rights: To find the present value of the lease rights, Tenant Company would multiply the annual rental payment ($67,673. 02) by the PV factor for 6 periods paid in advance at i%. The percentage i would be the lower of 14% or Tenant Company's incremental borrowing rate. This incremental borrowing rate is the additional information needed.Summary Table of Lease Payments Received and Interest Revenue Recog nition for the Landlord Company (1) (2) Annual Lease Payments Received $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) Interest Revenue at 14% on Net Investment (4) Lease Receivable $406,038. 12a 338,365. 10 270,692. 08 203,019. 06 135,346. 04 67,673. 02 0 (5) Unearned Interest: Leases $106,038. 12b 73,512. 4 45,907. 18 23,911. 52 8,310. 69 0 (6) Net 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 also be suitable for Tenant Company if Tenant's incremental borrowing rate is ? 14%. 21-47 P21-5 (continued) 3. Journal entries: Tenant Company (lessee): 2010 Jan. 1 1 During the year Dec. 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000 ? 6) Interest Expense Accrued Interest on Capital Lease Obligation Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment Interest Expense Accrued Interest on Capital 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 Leased to Others Cash Lease Receivable ($67,673. 02 x 6) Equipm ent Leased to Others Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest 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 Balance Sheets (Partial) December 31 Assets 2011 2010 Liabilities 2011 2010 Leased equipment less accumulated amortization (Notes 1 and 2) $200,000. 00 $250,000. 00 Current Capital lease obligation $ 67,673. 02 Noncurrent Capital lease obligation 157,111. 88 (Notes 1 and 2) $ 67,673. 02 197,179. 74

Branches of Psychology Essay

Abnormal psychology is the area that looks at psychopathology and abnormal behavior. 2. Behavioral Psychology (Behaviorism) )Is a theory of learning based upon the idea that all behaviors are acquired through conditioning. 3. Biopsychology It is focused on the study of how the brain influences behavior is often known as biopsychology. 4. Cognitive Psychology Focuses on internal states, such as motivation, problem solving, decision-making, thinking and attention. 5. Comparative Psychology Comparative psychology is the branch of psychology concerned with the study of animal behavior. 6. Cross-Cultural Psychology Branch of psychology that looks at how cultural factors influence human behavior. 7. Developmental PsychologyThis branch of psychology looks at development throughout the lifespan, from childhood to adulthood. 8. Educational PsychologyBranch of psychology concerned with schools, teaching psychology, educational issues and student concerns. 9. Experimental PsychologyBranch of psychology that utilizes scientific methods to research the brain and behavior. 10. Forensic PsychologyForensic psychology is a specialty area that deals with issues related to psychology and the law 11. Health PsychologyIt is focused on how biology, psychology, behavior and social factors influence health and illness. 12. Personality PsychologyIt is focused on the patterns of thoughts, feelings, and behavior that make a person unique. 13. Social PsychologySocial psychology seeks to explain and understand social behavior and looks at diverse topics. 4. Sports psychology Is a interdisciplinary science that draws on knowledge from the fields of Kinesiology (human kinetic) and Psychology. Mathematical psychology   Is an approach to  psychological  research that is based on mathematical modeling(mathematical concept and language) 16. Clinical psychology Clinical psychology also promotes adoption, adjustment and personal development. 17. Evolutionary psychology This looks at how human behavior has been affected by psychological adjustments during evolution. 8. NeuropsychologyStudy the structure and function of the brain in relation to clear behaviors and psychological processes. 19. Occupational psychology Study the performance of people at work. 20. Integral psychology  Branch of psychology that presents an all-encompassing holistic rather than an exclusivist or reductive approach 21. International  or  global psychology Is an emerging branch of  psychology  that focuses on the worldwide enterprise of psychology in terms of communication and networking. 22. Legal psychologyBranch of psychology  involves  empirical,  psychological  research of the law, legal institutions, and people who come into contact with the law. 23. Media psychology Seeks an understanding of how people perceive, interpret, use, and respond to a media-rich world. 24. Systems psychology Branch of both  theoretical psychology  and  applied psychology  that studies  human behaviour  and  experiencein  complex systems. 25. Theoretical psychology  It is concerned with theoretical and philosophical aspects of the discipline of  psychology.

Health Care Utilization Paper Essay

Well it seems like community health centers expand to provide care for those with little or no income. The federal government can provide funding to develop additional access to medical communities that are struggling financially. People in the U.S. utilize health care services for many reasons, to prevent disease, prevent future illnesses, and to eliminate pain. Men have the tendency to wait until the last minute to check their health status or until they develop a symptom. Women on the other hand are different in this aspect. The factors that John’s health care utilization is that the situation he is in, his approved physician is 40 minutes away and that the appointment has to be set 2 weeks in advance. That creates a dilemma in John’s life because now he feels like he is stuck without an option. There is a solution to solve this problem if we take the information that is given in the story. With John and his daddy’s condition, that makes it more difficult to g et the appropriate care that they need because they have to wait for two weeks to get treated. I believe that with the proximity and the times that they accept patients because they don’t offer weekend and evening hours, I think John should find another option. The kind of insurance he has, the area he lives in, his level of income, his transportation issues and his health conditions are some of the factors that affect John. You can’t put your health on hold; if it needs immediate attention then you should go and seek what is nearest to you regardless of the coverage. There are local doctors and him and his father both should go before things progress further. I think that the factors that are equal, they can be mutable and immutable. Things that could be mutable can be that John could possibly get a job that already has good health insurance coverage instead of having to rely on Medicaid. He could get a higher paying job to pay for the medical expenses if he doesn’t have health coverage. John can change his living arrangements and move closer to a health care facility that accepts his form of insurance such as Medicaid and that could help him to be in the distance of getting better health care. Also John has transportation issues so to solve that, if John has doctor’s appointments,  Medicaid can pay for the ride at no charge to get him to his destination. That is an added benefit that Medicaid offers and is very useful. The things that are immutable are John’s health condition, that situation cannot be modified or changed as well as his father’s health condition. It can be with proper nutrition or change the lifestyle but probably, the condition is unlikely to change. Aside from John and his Primary Care Provider, some other stakeholders involved in receiving Medicaid can include senior Medicaid and agency leadership, the State legislature and the Centers for Medicare and Medicaid Services (CMS). The reason for a stakeholder is for care management and managing expectations of the care program. The rise and cost and spending effects that many stakeholders include are things like the consumer, government, physicians, and elderly. Healthcare Cost and Utilization Project (HCUP). August 2014. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/research/data/hcup/index.html

Human Performance Technology

Human Performance Technology (HPT) uses a wide range of interventions that are drawn from many other disciplines including, behavioral psychology, instructional systems design, organizational development, and human resources management. It stresses a rigorous analysis of present and desired levels of performance, identifies the causes for the performance gap, offers a wide range of interventions with which to improve performance, guides the change management process, and evaluates the results. Human Performance Technology Process The human performance technology process begins with a comparison of the present and the desired levels of individual and organizational performance to identify the performance gap. A cause analysis is then done to determine what impact the work environment (information, resources, and incentives) and the people (motives, individual capacity, and skills) are having on performance. Solution to performance problems can fail when they are selected to treat only visible symptoms rather than underlying causes. When the root causes of a problem are uncovered and eliminated, however, the likelihood of significantly reducing or eliminating problems is greatly enhanced. Once the performance gap and the causes have been determined, the appropriate interventions are designed and developed. These may include measurement and feedback systems, new tools and equipment, compensation and reward systems, selection and placement of employees, and training and development. The interventions are then implemented and the change process managed. Evaluation is done after each phase of the process. Initially, formative evaluation assesses the performance analysis, cause analysis, intervention selection and design, and intervention and change phases. Then evaluation focuses on the immediate response of employees and their ability and willingness to do the desired behaviors. The final evaluations are centered on improvement of business outcomes (such as quality, productivity, sales, and customer retention, profitability, and market share) as well as determining return on investment for the intervention. Components of the Human Performance Technology One of the most powerful steps a company can take is to establish measurable, observable criteria whereby a competent individual can determine if a specific, critical task has been done correctly and completely. If individuals have no formal, structured means to evaluate their own performance, supervisors will have no structured, formal means to evaluate an individual performance and provide useful feedback. Training can only address skill deficiencies, that is, the â€Å"can't do† versus â€Å"won't do† behaviors. Nonetheless, training can have a dramatic impact by increasing productivity, decreasing unplanned downtime, reducing the learning curve, and reducing trial-and-error learning. A deficiency that companies must often overcome is the lack of standard operating procedures (SOPs), job aids, and other visual tools that can be used to minimize or mitigate process variations introduced by people. The processes, systems, or methods whereby information is conveyed to job incumbents individually and as a group are integral to the total technology plan. Give the workforce early and frequent information. Give all ranks of employees plenty of advance information regarding the impending technological changes. Help them to understand – in clear and simple terms- project objectives. Educate them as to why these technological upgrades are necessary and how they present opportunities for changes in the way things are done. Let workers know that concurrent with your commitment to technology upgrades is an equal commitment to employee development. Assure them that you will provide them with adequate and timely training support. Finally, set up a structure to harvest process improvement ideas during the debugging and trial run stages. A human performance technologist, high levels of human performance is usually accomplished through instructional technology and performance technology. Instructional technology attempts to improve organizational performance through improving the ability of individual to perform. While performance technology attempts to improve organizational performance through improving the work environment and the work practices of the organization. In today's educational environment, educators use computer applications to perform many rudimentary tasks, such as preparing instructional materials, reporting student progress, and delivering instruction. The objective of most performance technology into a work environment should be to assist the teacher in completing the tasks. So, human performance technology applied to the design of teacher tools, which is an electronic performance support tool for teachers that will help them in their work environment and task performance by recording the occurrences of tasks, such as grading, lesson planning and reporting and the amount of time performing the tasks. But most of the teachers are not proficient in using the latest technology so they revert back to the manual way of doing their tasks. They need enough time to use the new technology because current work responsibilities demanded a great amount of time. However, the perception of more time needed to use the technology can be elimina ted when teachers realize that the technology is an easier method of performing some of their current work tasks. Many students have limited access to technology because some educational institution cannot afford to adapt to the latest technology because of limited resources. In some instances technology is provided but students have not yet develop the necessary skills to learn it (e.g. the client are kindergartens.

The debate between pro-choice and pro-life Essay

The debate between pro-choice and pro-life - Essay Example The author of this paper believes that neither of these two candidates has thus far been able to sway those individuals who were pro-choice or pro-life to change their fundamental belief to a new or different philosophical standpoint. Clearly this debate is a lifelong and never-ending deliberation. Therefore should the individuals who are pro-choice just submit to those who are pro-life and accept defeat? You, the reader, be the judge. The Toulmin Model of Argumentation posits six primary elements in the course of an argument, namely, claim, grounds, warrant, backing support, rebuttal/reservation and clarification. Firstly, the claim is the statement of the argumentation. The second element of an argument is the grounds which are substantiated explanation for the claim. The third element is the warrant which refers to theory or the series of analysis that unite the grounds to the claim. The backing is the fourth element and its main purpose is to support the warrant. Rebuttal or reservation is the fifth factor and it gives an account of ‘counter-examples and counter-arguments’ which are two major components of the Toulmin model. The final ingredient is qualification which asserts a boundary to the claim, warrant and backing. This essay is an attempt to utilize the Toulmin model of argument to analyze the various arguments submitted to question pro-choice versus pro-life. Is there a difference between the human and an animal? The author of this paper believes that the animal level belongs to some dogs and other animals that would eat or kill their own offspring immediately upon delivery. The human element in us is that we have a choice- a choice to eat or kill the child or to allow the child to live to develop into all that it was meant to become. The author of this paper claims that the mere fact that a sperm and an egg were allowed to germinate should be basis enough to allow the new life that is been conceived to

Musil, behind the wall Assignment Example | Topics and Well Written Essays - 250 words

Musil, behind the wall - Assignment Example It resulted to long-term cooperation between the environmentalists, the religious community and the scientists. So many religious environmental writers have come up to address the continuing environmental crisis and the climate change that continues to worsen (4-6). Musil asserts that the Roman Catholics have not been left behind. John Paul II made some significant efforts when he moved the Roman Catholic Church towards environmental concerns (9). St. Francis was made the patron who would be in charge of the environment in the late 1970s. In addition, he questioned the science and technology that had resulted to the problems of destruction from the nuclear weapons (10). On the other hand, Judaism has been blamed for the various environmental sins that have resulted from modern chronic consumerism and industrialism. Since the production of a journal named peace Seders the ecologically minded groups from the Jewish religion started connecting, and this resulted to representation in the Kyoto negotiations of all denominations (11-13). Musil is openly in support for the religious environmental movements as the publication has revealed discuss all the religious groups and the steps they have taken to address the issues regarding the environment. In addition, at the end of his article, he gives various recommendations to the religious climate movement to inspire grassroots congregations and offer a stable prophetic critique of inaction. He particularly notes that the movement has experienced a period of reevaluation within Obama’s Administration (22). He is in support of the religious environmental movement and illustrates that the main strength is that it can take a concern on social action and get hope within its theological and Biblical

Differentiating Between Market Structure Essay Example | Topics and Well Written Essays - 1000 words

Differentiating Between Market Structure - Essay Example Beachbody operates under a perfect competitive market whereby a number of a companies has been in the industry to provide this highly demanded product by the consumers. In this field, a number of firms are in operation to provide this demanded products by the customers. Similarly, many customers are lining up to get the best services from these firms in terms of their needs. When running such a business, the decision must be made to ensure the success of the business and maximization of the profits. Understanding the market structures and some of the fundamental economic principle that are in operational in such a market helps Beachbody to make informed decisions that have profound potential to impact all the processes of the business from sales to consumer retention. In reality, a perfectly competitive market rarely exists. In essence, the concept associated with perfect competition is used to provide a benchmark for analyzing this market structures. A firm is operating in a perfectly competitive market conducts business in a market with many buyers and sellers. The products in the market are almost identical with just a few differentiation and have very few barriers to market entry if any. The firms in such a market face an entirely horizontal demand curve. This translate to the fact that the firms act as the prices takers in the market. As long as any firm is in operation it can sell as much or as little as it wishes. However, the management must understand that setting up the prices above the market price will lose the customers to the competitors. The customer would purchase the exact product from another firm hence negatively impacting on the sales of the company. On this note, Beach body, having a number of competitors in the market such as Jenny Craig, Inc., Weight Watchers International, Inc. and Nutrisystem, Inc. need to set up the prices in a way that