Chapter 20, Problem 11P

1 (a)

To determine

Compute the lessor’s (Company B) periodic rental receipts.

Explanation of Solution

Compute the lessor’s (Company B) periodic rental receipts:

$\begin{array}{l}\text{Peridic Rental Receipts = }\frac{\text{Cost of Asset}}{\text{PV}\text{}\text{factor of 4 receipts at 14\%}}\\ \text{ = }\frac{\$50,000}{2.913712}\\ \text{ = \$17,160}\text{.24}\end{array}$

Therefore, the periodic rental of Company B is $17,160.24.

1 (b)

To determine

Compute the present value of the special property rights under the lease for Company M (Lessee Company).

Explanation of Solution

Compute the present value of the special property rights under the lease for Company M:

$\begin{array}{c}\text{PV}\text{}\text{of the special property rights = }\left(\begin{array}{l}\text{Periodic rental payment}\\ \times \text{PV gactor for 4 payments at 14\%}\end{array}\right)\\ \text{= \$17,160}\text{.24}\times \text{2}\text{.913712}\\ \text{= \$50,000 }\end{array}$

Therefore, the present value of the special property rights under the lease for Company M is $50,000.

1 (c)

To determine

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company.

Explanation of Solution

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company:

Summary Table for 2016 and 2017
Company M
	Lease payment required	Interest Expense (14%)	Reduction of Lease Obligation	Balance of Lease Obligation
Company B
Date	Lease payment received	Interest Revenue (14%)	Amount of Net Investment Recovered	Net Investment
January 1,2016				$50,000.00
January 1,2016	$17,160.24	$7,000.00	$10,160.24	$39,839.76
December 31,2016	$17,160.24	$5,577.57	$11,582.67	$28,257.09
January 1,2017	$17,160.24	$3,955.99	$13,204.25	$15,052.84
December 31,2017	$17,160.24	$2,107.40	$15,052.84	$0.00

Table (1)

Notes to the above table:

$\begin{array}{l}\text{Interest Revenue/Expense = \$50,000}\times \text{14\%}\\ \left(\begin{array}{l}\text{Reduction of Lease Obligation}\\ \text{/Amount of Net Investment Recovered}\end{array}\right)\text{= \$17,160}\text{.24}-\text{\$7,000}\\ \text{Balance of Lease Obligation/Net Investment = \$50,000}-\text{\$10,160}\text{.24}\end{array}$

2 (a)

To determine

Compute the lessor’s periodic rental receipts.

Explanation of Solution

Compute the lessor’s periodic rental receipts:

$\begin{array}{l}\text{Peridic Rental Receipts = }\frac{\text{Cost of Asset}}{\text{PV}\text{}\text{factor of 4 receipts in advance at 14\%}}\\ \text{ = }\frac{\$50,000}{3.321632}\\ \text{ = }\$15,052.84\end{array}$

Therefore, the lessor’s periodic rental receipts $15,052.84.

2 (b)

To determine

Compute the present value of the special property rights under the lease for Company M (Lessee Company).

Explanation of Solution

Compute the present value of the special property rights under the lease for Company M:

$\begin{array}{c}\text{PV}\text{}\text{of the special property rights }=\left(\begin{array}{l}\text{Periodic rental payment}\\ \times \text{PV factor for 4 payments in advane at 14\%}\end{array}\right)\\ =\$15,052.84\times 3.321632\\ =\$50,000\end{array}$

Therefore, present value of the special property rights are $50,000.

2 (c)

To determine

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company

Explanation of Solution

Prepare a table summarizing lease and interest payments that would be useful to both M Company and B Company.

Summary Table for 2016 and 2017
Company M
	Lease payment required	Interest Expense (14%)		Balance of Lease Obligation
Company B
Date	Lease payment received	Interest Revenue (14%)		Net Investment
January 1,2016				$50,000.00
January 1,2016	$15,052.84	$0.00		34,947.16
December 31,2016	$0.00	$4,892.60		39,839.76
January 1,2017	$15,052.84	0.00		24,786.92
December 31,2017	$0.00	3,470.17		28,257.09
January 1,2018	15,052.84	0		13,204.25
December 31,2018	0	1,848.59		15,052.84
January 1,2019	15,052.84	0		0

Table (2)

Notes:

$\begin{array}{l}\text{Net Investment= Previous balance-Lease payment received+Interest Revenue}\\ \text{Interest Revenue}\left(\text{December 31,2016}\right)=\text{ \$34,947}\text{.16}\times \text{14\%}\\ \text{Interest Revenue}\left(\text{December 31,2018}\right)\text{ is adjusted for \$0}\text{.01 for rounding error}\text{.}\end{array}$

$\begin{array}{c}\text{Net Investment}\left(01/01/2016\right)=\text{Lease Receivable}-\text{Unearned Interest: Leases}\\ =\text{}\$60,211.36-\$10,211.36\\ =\$50,000\end{array}$

$\begin{array}{c}\text{Net Investment}\left(31/12/2016\right)=\text{Lease Receivable}-\text{Unearned Interest: Leases}\\ =\text{}\$45,158.52-\$5,318.76\\ =\$39,839.76\end{array}$

$\begin{array}{c}\text{Net Investment}\left(31/12/2017\right)=\text{Lease Receivable}-\text{Unearned Interest: Leases}\\ =\text{}\$30,105.68-\$1,848.59\\ =\$28,257.09\end{array}$

$\begin{array}{c}\text{Net Investment}\left(31/12/2018\right)=\text{Lease Receivable}-\text{Unearned Interest: Leases}\\ =\text{}\$15,052.84-\$0.00\\ =\$15,052.84\end{array}$

$\begin{array}{l}\text{Lease Receiveble}\left(01/01/2016\right)=\text{ \$15,052}\text{.84}\times \text{4}\\ \text{Unearned Interest: Leases}\left(01/01/2016\right)\text{ = \$60,211}\text{.36-\$50,000}\text{.00}\end{array}$

3

To determine

Prepare the journal entries for the Company B and Company M for the year 2016.

Explanation of Solution

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare the journal entries for the Company B and Company M for the year 2016:

In the books of Company M:

Date	Accounts title and explanation	Post Ref.	Debit($)	Credit($)
January 1,2016	Leased Equipment		50,000.00
	Capital Lease Obligation			50,000.00
	(To record the capital lease at inception)
January 1,2016	Capital Lease Obligation		15,052.84
	Cash			15,052.84
	(To record the capital lease payment)
December 31,2016	Depreciation Expense: Leased Equipment		12,500.00
	Accumulated Depreciation: Equipment			12,500.00
	(To record the depreciation expense)
December 31,2016	Interest Expense		4,892.60
	Accrued Interest on Capital Lease Obligation			4,892.60
	(To record the interest expense)

Table (3)

In the books of Company B:

Date	Accounts title and explanation	Post Ref.	Debit($)	Credit($)
January 1,2016	Equipment Leased to Others		50,000.00
	Cash			50,000.00
	(To record the payment of capital lease at inception)
January 1,2016	Lease Receivable		60,211.36
	Equipment Leased to Others			50,000.00
	Unearned Interest: Leases			10,211.36
	(To record the lease receivable in a capital lease)
January 1,2016	Cash		15,052.84
	Lease Receivable			15,052.84
	(To record the receipt lease payment)
December 31,2016	Unearned Interest: Leases		4,892.60
	Interest Revenue: Leases			4,892.60
	(To recognize the interest revenue for the year)

Table (4)

4

To determine

Show the way that Company M and Company B report their asset and liability amount on their balance sheet at December 31, 2016

Explanation of Solution

Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare Company M’s balance sheet as on December 31, 2016:

Company M
Balance Sheet(Partial)
As on December 31, 2016
Particulars	Amount ($)
Assets
Property, Plant and Equipment:
Leased Equipment                $50,000.00
Less, accumulated depreciation         $12,500.00	$37,500
Liabilities
Current Liabilities:
Accrued interest on capital lease obligation	$4,892.60
Capital Lease Obligation	$10,160.24
Non-Current Liabilities:
Capital Lease Obligation	$24,786.92

Table (5)

Prepare Company B’s balance sheet as on December 31, 2016:

Company B
Balance Sheet(Partial)
As on December 31, 2016
Particulars	Amount ($)
Assets
Current Assets:
Net Investment in direct financing lease	$15,052.84
Non-Current Assets:
Net Investment in direct financing lease	$24,786.92

Table (6)