Chapter 15, Problem 15.12P

A)

To determine

Lessee guaranteed residual value

The lessee guaranteed residual value of leased asset is an estimation of the commercial value of the asset at the end of lease term. The present value is considered when determining the lease classification criteria (Criteria 4). Lessee guaranteed residual value is added to lease receivable and also added to sales revenue.

To Determine: the amounts at the beginning of lease for the lessor at each independent situation.

Explanation of Solution

	Situation
	1	2	3	4
Lessor
Lease payments	(1) 40,000	(2) 44,000	(3) 44,000	(4) 40,000
Gross investment   in the lease	(5) 40,000	(6) 44,000	(7) 44,000	(8) 44,000
Net investment   in the lease	(9) 34,437	(10) 37,072	(11) 37,072	(12) 37,072

Table (1)

Working note:

The lease payment is calculated as follows:

$\begin{array}{c}\text{Lease payments }\left(\text{Situation 1}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guarnteed by lessee }\\ \text{and or by the third party}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$0\right]\\ =\$40,000\end{array}$ (1)

$\begin{array}{c}\text{Lease payments }\left(\text{Situation 2}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guarnteed by lessee }\\ \text{and or by the third party}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$4000\right]\\ =\$44,000\end{array}$ (2)

$\begin{array}{c}\text{Lease payments }\left(\text{Situation 3}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guarnteed by lessee }\\ \text{and or by the third party}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$4000\right]\\ =\$44,000\end{array}$ (3)

$\begin{array}{c}\text{Lease payments }\left(\text{Situation 4}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guarnteed by lessee }\\ \text{and or by the third party}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$0\right]\\ =\$44,000\end{array}$ (4)

The gross investment in lease is calculated as follows:

$\begin{array}{c}\text{Gross investment in lease}\left(\text{Situation 1}\right)\text{ = }\left[\text{Minimum Lease payments }+\text{ Unguaranteed residual value}\right]\\ =\left[\$40,000+\$0\right]\\ =\$40,000\end{array}$ (5)

$\begin{array}{c}\text{Gross investment in lease}\left(\text{Situation 2}\right)\text{ =}\left[\text{Minimum Lease payments }+\text{ Unguaranteed residual value}\right]\\ =\left[\$40,000+\$0\right]\\ =\$44,000\end{array}$ (6)

$\begin{array}{c}\text{Gross investment in lease}\left(\text{Situation 3}\right)\text{ =}\left[\text{Minimum Lease payments }+\text{ Unguaranteed residual value}\right]\\ =\left[\$44,000+\$0\right]\\ =\$44,000\end{array}$ (7)

$\begin{array}{c}\text{Gross investment in lease}\left(\text{Situation 4}\right)\text{ =}\left[\text{Minimum Lease payments }+\text{ Unguaranteed residual value}\right]\\ =\left[\$40,000+\$4000\right]\\ =\$44,000\end{array}$ (8)

The net investment in the lease is calculated as follows:

$\begin{array}{c}\text{Net investment in lease}\left(\text{Situation 1}\right)\text{ =}\left[\text{Annual lease payments}\times \text{PVIFA}\left(11\%,4\right)\right]\\ =\left[\$10,000\times 3.44371\right]\\ =\$34,437\end{array}$ (9)

$\begin{array}{c}\text{Net investment in lease}\left(\text{Situation 2}\right)\text{ =}\left[\begin{array}{l}\left[\text{Annual lease payments}\times \text{PVIFA}\left(11\%,4\right)\right]\\ +\left[\text{Guaranteed lease payments}\times \text{PVIF}\left(11\%,4\right)\right]\end{array}\right]\\ =\left[\left(\$10,000\times 3.44371\right)+\left(\$4,000\times 0.65873\right)\right]\\ =\$37,072\end{array}$ (10)

$\begin{array}{c}\text{Net investment in lease}\left(\text{Situation 3}\right)\text{ =}\left[\begin{array}{l}\left[\text{Annual lease payments}\times \text{PVIFA}\left(11\%,4\right)\right]\\ +\left[\begin{array}{l}\text{Guaranteed lease payments}\\ \times \text{PVIF}\left(11\%,4\right)\end{array}\right]\\ +\left[\begin{array}{l}\text{Unguaranteed lease payments}\\ \times \text{PVIF}\left(11\%,4\right)\end{array}\right]\end{array}\right]\\ =\left[\begin{array}{l}\left(\$10,000\times 3.44371\right)\\ +0+\left(\$4,000\times 0.65873\right)\end{array}\right]\\ =\$37,072\end{array}$ (11)

$\begin{array}{c}\text{Net investment in lease}\left(\text{Situation 4}\right)\text{ =}\left[\begin{array}{l}\left[\text{Annual lease payments}\times \text{PVIFA}\left(11\%,4\right)\right]\\ \left[\begin{array}{l}\text{Guaranteed lease payments}\\ \times \text{PVIF}\left(11\%,4\right)\end{array}\right]\\ +\left[\begin{array}{l}\text{Unguaranteed lease payments}\\ \times \text{PVIF}\left(11\%,4\right)\end{array}\right]\end{array}\right]\\ =\left[\begin{array}{l}\left(\$10,000\times 3.44371\right)+0+\\ \left(\$4,000\times 0.65873\right)\end{array}\right]\\ =\$37,072\end{array}$ (12)

(B)

To determine

the amounts at the beginning of lease for the lessee at each independent situation.

Explanation of Solution

	Situation
	1	2	3	4
Lessee
Minimum Lease payments	(13) 40,000	(14) 44,000	(15) 40,000	(16) 40,000
Leased asset	(17) 34,437	(18) 37,072	(19) 34,437	(20) 34,437
Lease liability	(17) 34,437	(18) 37,072	(19) 34,437	(20) 34,347

Table (2)

The lease payment is calculated as follows:

$\begin{array}{c}\text{Minimum lease payments }\left(\text{Situation 1}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guaranteed by lessee}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$0\right]\\ =\$40,000\end{array}$ (13)

$\begin{array}{c}\text{Minimum lease payments }\left(\text{Situation 2}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guaranteed by lessee}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$4000\right]\\ =\$44,000\end{array}$ (14)

$\begin{array}{c}\text{Minimum lease payments }\left(\text{Situation 3}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guaranteed by lessee}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$0\right]\\ =\$40,000\end{array}$ (15)

$\begin{array}{c}\text{Minimum lease payments }\left(\text{Situation 4}\right)\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Annual lease payments}\\ \times \text{Number of fixed payments}\end{array}\right)\text{ +}\\ \text{Residual value guaranteed by lessee}\end{array}\right]\\ =\left[\left(\$10,000\times 4\right)+\$0\right]\\ =\$40,000\end{array}$ (16)

The amount to be recorded as right-of-use asset and lease liability is calculated as follows:

$\begin{array}{c}\text{Leased asset }\left(\text{Situation 1}\right)\text{ =}\left[\text{Annual lease payments}\times \text{PVIFA}\left(11\%,4\right)\right]\\ =\left[\$10,000\times 3.44371\right]\\ =\$34,437\end{array}$ (17)

$\begin{array}{c}\text{Leased asset }\left(\text{Situation 2}\right)\text{ =}\left[\text{Annual lease payments}\times \text{PVIFA}\left(11\%,4\right)\right]\\ =\left[\$10,000\times 3.44371\right]\\ =\$34,437\end{array}$ (18)

$\begin{array}{c}\text{Leased asset}\left(\text{Situation 3}\right)\text{ =}\left[\text{Annual lease payments}\times \text{PVIFA}\left(11\%,4\right)\right]\\ =\left[\$10,000\times 3.44371\right]\\ =\$34,437\end{array}$ (19)

$\begin{array}{c}\text{Leased asset}\left(\text{Situation 4}\right)\text{ =}\left[\left[\begin{array}{l}\text{Annual lease payments}\\ \times \text{PVIFA}\left(11\%,4\right)\end{array}\right]\right]\\ =\left[\left(\$10,000\times 3.44371\right)\right]\\ =\$34,437\end{array}$ (20)