Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
bartleby

Concept explainers

bartleby

Videos

Textbook Question
Book Icon
Chapter 20, Problem 5P

Sales-Type Lease with Guaranteed Residual Value Calder Company, the lessor, enters into a lease with Darwin Company, the lessee, to provide heavy equipment beginning January 1, 2017. The lease is appropriately classified as a sales-type lease. The lease terms, provisions, and related events are as follows:

  • The lease is noncancelable, has a term of 8 years, and has no renewal or bargain purchase option.
  • The annual rentals are $65,000, payable at the end of each year.
  • The interest rate implicit in the lease is 15%.
  • Darwin agrees to pay all executory costs directly to a third party.
  • The cost of the equipment is $280,000. The fair value of the equipment to Calder is $308,021.03.
  • Calder incurs no material initial direct costs.
  • Calder expects that it will be able to collect all lease payments.
  • Calder estimates that the fair value at the end of the lease term will be $50,000 and that the economic life the equipment is 9 years. This residual value is guaranteed by Darwin.

The following present value factors are relevant:

  • PV of an ordinary annuity n = 8, i = 15% = 4.487322
  • PV n = 8, i = 15% = 0.326902
  • PV n = 1, i = 15% = 0.869565

Required:

  1. 1. Determine the proper classification of the lease.
  2. 2. Prepare a table summarizing the lease receipts and interest income earned by Calder for this lease.
  3. 3. Prepare journal entries for Calder for the years 2019, 2020, and 2021.
  4. 4. Next Level Prepare partial balance sheets for December 31, 2019, and December 31, 2020, showing how the accounts should be reported. Use the present value of next year’s payment approach to classify the lease receivable as current and noncurrent.
  5. 5. Next Level Prepare partial balance sheets for December 31, 2019, and December 31, 2020, showing how the accounts should be reported. Use the change in present value approach to classify the lease receivable as current and noncurrent.

1.

Expert Solution
Check Mark
To determine

Identify the proper classification of the lease.

Explanation of Solution

Direct Financing Lease: Under direct financing lease, the lessor considers the lease as a sale of the asset at fair value equal to the cost of the asset or its carrying value and records an accompanying receivable. Since there is no manufacture’s or dealer’s profit or loss, the lessor records the net amount at which the receivable must be equal to the cost of the asset or carrying value of the property.

The reasons for classifying the lease as direct financing lease from the criteria table as presented below:

Capitalization CriteriaMet or notRemarks
1.Transfer of ownership at the end of leaseNo 
2.Bargain purchase optionNo 
3.Lease term is for major part of its economic lifeYes89% (8years/9years)
4.Present value of lease payments is substantially all of the fair valueYesPV is 100% of the fair value of the equipment
5. Specializes nature of the asset  
Additional criteria (For lessor) 
1. Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair valueYes 
2. Probable that the lessor will collect the lease payments Yes 

Table (2)

From the above table, it is noted that the lease is a sales type lease for Company C as more than one capitalization criteria is met and both of the recognition criteria also met according to the terms of the lease agreement.

Working Note 1: Compute the present value of minimum lease payment:

PVof the minimum lease payments}=($65,000×PVfactor of 8 payments at 15%)+(PV of single amount of $50,000,Guaranteed residual value at 15%)=($65,000×4.487322)+($50,000×0.0326902)=$291,675.93+$16,345.10=$308,021.03

2.

Expert Solution
Check Mark
To determine

Prepare a table summarizing the lease receipts and interest revenue earned by the lessor for the direct financing lease.

Explanation of Solution

Prepare a table summarizing the lease receipts and interest revenue earned by the lessor for the direct financing lease:

DateLease payment receivedInterest revenue at 15%Decrease in lease receivableLease receivable
(1)(2)(3)(4)(5)
January 1,2019   $ 308,021.03
December31,2019$65,000.00$ 46,203.15$ 18,796.85$ 289,224.18
December31,2020$65,000.00$ 43,383.63$ 21,616.37$ 267,607.82
December31,2021$65,000.00$ 40,141.17$ 24,858.83$ 242,748.99
December31,2022$65,000.00$ 36,412.35$ 28,587.65$ 214,161.34
December31,2023$65,000.00$ 32,124.20$ 32,875.80$ 181,285.54
December31,2024$65,000.00$ 27,192.83$ 37,807.17$ 143,478.37
December31,2025$65,000.00$ 21,521.75$ 43,478.25$ 100,000.13
December31,2026$65,000.00$ 14,999.87$ 50,000.13$ 50,000.00

Table (1)

Notes to the above table:

Lease Receivable(January 01,2019) is the undiscounted value of the lease payments along with the unguranteed residual value.Present value of the unguranteed residual value.Interest income at 15% on lease receivable(December 31,2019) = $308,021.03×15%Decrease of lease receivable(December 31,2019) = $65,000.00$46,203.15Lease receivable(December 31,2019) = $308,021.03$18,796.85Interest income at 15% on lease receivable(December 31,2026) is adjusted for $0.13 rounding error.

3.

Expert Solution
Check Mark
To determine

Prepare the journal entries for Company C for the years 2019, 2020, and 2021.

Explanation of Solution

Prepare the journal entries for Company C for the years 2019, 2020, and 2021:

DateAccounts title and explanationPost Ref.Debit($)Credit($)
January 1,2019Equipment Leased to Others 308,021.03 
    Cash  308,021.03
 (To record the payment of capital lease at inception)   
  
January 1,2019Cost of goods sold $280,000 
    Equipment leased to others  $280,000
 (To record the cost of the leased equipment)   
  
December 31,2019Cash  $65,000.00 
    Lease Receivable  $18,796.85
    Interest Revenue: Leases  $46,203.15
 (To recognize the interest revenue of the year)   
  
December 31,2020Cash  $65,000.00 
    Lease Receivable$21,616.37
     Interest Revenue: Leases  $43,383.63
 (To recognize the interest revenue of the year)   
  
  
December 31,2021Cash  $65,000 
    Lease Receivable  $24,858.83
     Interest Revenue: Leases  $40,141.17
 (To recognize the interest revenue of the year)   

Table (3)

4.

Expert Solution
Check Mark
To determine

Prepare a partial balance sheet for December 31, 2019 and December 31, 2020 showing the reported accounts in it.

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.

Here using the present value of next year’s payment approach to classify the lease receivable as current and non-current.

Prepare a partial balance sheet for December 31, 2019 and December 31, 2020 showing the reported accounts in it:

Company C
Balance Sheet(Partial)
As on December 31
Particulars20192020
Assets  
Current Assets:  
Net Investment in Direct Financing Leases$56,521.73 $56,521.73
Non-Current Assets:  
Net Investment in Direct Financing Leases$211,086.08 $232,702.45
   
Liabilities  
Current liabilities:  
   
Non-Current liabilities:  
   

Table (4)

Notes for the above table:

Net Investment in DirectFinancing Leases: Current(2019 and 2020)}= $65,000×0.869565Net Investment in Direct Financing: Leases: Non-current(2019)}= $289,224.18$56,521.73Net Investment in Direct Financing: Leases: Non-current(2020)}= $267,607.81$56,521.73

5.

Expert Solution
Check Mark
To determine

Prepare a partial balance sheet for December 31, 2016 and December 31, 2017 showing the reported accounts in it.

Explanation of Solution

Here using the present value approach to classify the lease receivable as current and non-current.

Prepare a partial balance sheet for December 31, 2016 and December 31, 2017 showing the reported accounts in it:

Company C
Balance Sheet(Partial)
As on December 31
Particulars20162017
Assets  
Current Assets:  
Net Investment in Direct Financing Leases$24,858.83 $21,616.37
Non-Current Assets:  
Net Investment in Direct Financing Leases$242,748.99 $267,607.82
   
Liabilities  
Current liabilities:  
   
Non-Current liabilities:  
   

Table (4)

Notes for the above table:

For 2019, the amounts are calculated by the "change in present value approach" which are $21,616.37 ans $267,607.82 respectively.For 2020, the amounts are calculated by the "change in present value approach" which are $24,858.83 ans $242,748.99 respectively.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2016. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease noncancelable and requires annual rental payments of $50,000 to be made at the end of each year. 2. The equipment costs $130,000. The equipment has an estimated life of 4 years and an estimated residual value at the end of the lease term of zero 3. Fox agrees to pay all executory costs. 4. The interest rate implicit in the lease is 12%. 5. The initial direct costs are insignificant and assumed to be zero. 6. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Required: 1. Next Level Determine if the lease is a sales-type or direct financing lease from Berne's point of view (calculate the selling price and assume that this is also the fair value).…
(Lessor Entries; Direct-Financing Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:1. Jan Way Company has the option to purchase the equipment for $16,000 upon termination of the lease.2. The equipment has a cost and fair value of $160,000 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of $16,000.3. Jan Way Company is required to pay $5,000 each year to the lessor for executory costs.4. Castle Leasing Company desires to earn a return of 10% on its investment.5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.Instructions(a) Prepare the journal entries on the books of Castle Leasing to reflect the…
(Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2017, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease.1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.2. Equal rental payments are due on January 1 of each year, beginning in 2017.3. The fair value of the equipment on January 1, 2017, is $150,000, and its cost is $120,000.4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Flynn depreciates all of its equipment on a straight-line basis.5. Bensen set the annual rental to ensure an 11% rate of return. Flynn’s incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.Instructions(Both the lessor and the lessee’s…

Chapter 20 Solutions

Intermediate Accounting: Reporting And Analysis

Ch. 20 - Describe the difference between how a lessee would...Ch. 20 - Prob. 12GICh. 20 - What is the basic difference between the...Ch. 20 - Why are compound interest concepts appropriate and...Ch. 20 - Describe briefly the accounting procedures...Ch. 20 - Prob. 16GICh. 20 - Prob. 17GICh. 20 - Which of the following should be included by the...Ch. 20 - East Company leased a new machine from North...Ch. 20 - Prob. 3MCCh. 20 - Fox Company, a dealer in machinery and equipment,...Ch. 20 - Fox Company, a dealer in machinery and equipment,...Ch. 20 - In the third year of a 6-year finance lease, the...Ch. 20 - Prob. 7MCCh. 20 - At its inception, the lease term of Lease G is 65%...Ch. 20 - Rent received in advance by the lessor for an...Ch. 20 - On August 1, 2019, Kern Company leased a machine...Ch. 20 - Next Level Keller Corporation (the lessee) entered...Ch. 20 - Use the information in RE20-1. Prepare the journal...Ch. 20 - Next Level Garvey Company (the lessee) entered...Ch. 20 - Use the information in RE20-3. Prepare the journal...Ch. 20 - Use the information in RE20-3. Prepare the journal...Ch. 20 - Montevallo Corporation leased equipment from Folio...Ch. 20 - Use the information in RE20-6. However, assume...Ch. 20 - Use the following information to decide whether...Ch. 20 - Use the information in RE20-3. Prepare the journal...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Lessee Accounting with Payments Made at Beginning...Ch. 20 - Lessee Accounting Issues Sax Company signs a lease...Ch. 20 - Lessee Accounting for Finance Lease On January 1,...Ch. 20 - Prob. 5ECh. 20 - Lessor Accounting Issues Ramsey Company leases...Ch. 20 - Lessor Accounting with Receipts at End of Year...Ch. 20 - Lessor Accounting with Unguaranteed Residual Value...Ch. 20 - Lessor Accounting with Guaranteed Residual Value...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Guaranteed and Unguaranteed Residual Values...Ch. 20 - Lessor Accounting Issues Rexon Company leases...Ch. 20 - Lessee and Lessor Accounting Issues Diego Leasing...Ch. 20 - Lessee and Lessor Accounting Issues The following...Ch. 20 - Lease Income and Expense Reuben Company retires a...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Determining Type of Lease and Subsequent...Ch. 20 - Accounting for Leases by Lessee and Lessor Scupper...Ch. 20 - Lessee Accounting Issues Timmer Company signs a...Ch. 20 - Sales-Type Lease with Guaranteed Residual Value...Ch. 20 - Sales-Type Lease with Unguaranteed Residual Value...Ch. 20 - Sales-Type Lease with Receipts at End of Year...Ch. 20 - Initial Direct Costs and Related Issues On January...Ch. 20 - Various Lease Issues for Lessor and Lessee Lessee...Ch. 20 - Prob. 10PCh. 20 - Various Lease Issues Farrington Company leases a...Ch. 20 - Comprehensive Landlord Company and Tenant Company...Ch. 20 - Prob. 1CCh. 20 - Identified Asset A customer enters into a 3-year...Ch. 20 - Prob. 3CCh. 20 - Types of Leases On January 1, Hazard Company, a...Ch. 20 - Initial Direct Costs Efland Company leases...Ch. 20 - Prob. 6C
Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
Accounting for Finance and Operating Leases | U.S. GAAP CPA Exams; Author: Maxwell CPA Review;https://www.youtube.com/watch?v=iMSaxzIqH9s;License: Standard Youtube License