Introductory Examples (1A, 1B)
Example 1A - OPERATING LEASE
Farview Farms Debit Credit
Rent expense 500.00
Cash 500.00
Troy Tractors Debit Credit
Cash 500.00
Rental Income 500.00
Depreciation expense 128.00
Accumulated depreciation 128.00
Comments --An operating lease is, in essence, a
rental agreement. The lessor retains the risks
and benefits of ownership.
Example 1B - PURCHASE WITH LONG-TERM BANK FINANCING
Farview Farms Debit Credit
Cash 50,000.00
Note Payable to Bank 50,000.00
Equipment 50,000.00
Cash (to Troy Tractors) 50,000.00
At year end:
Depreciation expense 8,333.00
Accumulated depreciation 8,333.00
Interest expense 6,000.00
Interest payable 6,000.00
Troy Tractors Debit Credit
Cash 50,000.00
Sales 50,000.00
Cost of goods sold 40,000.00
Inventory 40,000.00
Idaho First Bank & Trust Debit Credit
Note Receivable 50,000.00
Cash 50,000.00
At year end
Interest receivable 6,000.00
Interest revenue 6,000.00
Lease Example 1C - DIRECT FINANCING LEASE
Farview Farms Debit Credit
Farm Equipment 50,000.00 this is a direct financing le
Lease obligation 50,000.00 Lease payable
At year end:
Depreciation expense 8,333.33 Use 6 year life because th
Accumulated depreciation 8,333.33
Interest expense 6,000.00
Lease obligation 7,871.00
Cash 13,871.00
Troy Tractors Debit Credit
Cash 50,000.00
Sales 50,000.00
Cost of goods sold 40,000.00
Inventory 40,000.00
Idaho First Bank & Trust Debit Credit
Equipment held for lease 50,000.00 no profit
Cash 50,000.00
Net investment in lease 50,000.00 Lease receivable
Equipment held for lease 50,000.00
Cash 13,871.00
Interest revenue 6,000.00
Net investment in lease 7,871.00
Lease Example 1D - SALES TYPE LEASE
n
i
pmt
fv
type
Farview Farms Debit Credit PVMLP=
Farm Equipment 50,000.00
Lease obligation 50,000.00
At year end:
Depreciation expense 8,333.00
Accumulated depreciation 8,333.00
Interest expense 6,000.00
Lease obligation $7,871.00
Cash $13,871.00
Troy Tractors Debit Credit
Net investment in lease 50,000.00 There is a profit so this is a SALES
Sales 50,000.00
Cost of goods sold 40,000.00
Inventory 40,000.00
At year end:
Cash 13,871.00
Interest revenue 6,000.00
Net investment in lease 7,871.00
There is a profit so this is a SALES TYPE lease
IFRS - Finance
Test is :
does FMV = cost?
If yes. Direct financing
If no, sales type lease
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
Find Payment:
n= 5.00
i= 0.12
PV= (50,000.00)
FV= 5,000.00 BPO )bargaon purchase option
PMT = 13,083.44
ord 0.00
Construct an amortization table and prepare the journal entries for both parties:
Bargain Purhase Option (BPO) or Residual Value (RV) = 5,000 To find PV:
PV OF MLP: 50,000 solve
INCEPTION DATE: 1/1/2012
INTEREST RATE: 12%
LEASE TERM IN YEARS 5
PAYMENT: ANNUAL 13,083.44
DATE OF FIRST PAYMENT: 12/31/2012
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 -
Economic life of leased asset 8
LEASE AMORTIZATION SCHEDULE Depreciate over 8 years
Date Lease Payment Interest Principal Balance
0 01/01/12 50,000 For lessee - always starts at PVMLP (unless that is > than FMV)
1 12/31/12 13,083 6,000 7,083 42,917
2 12/31/13 13,083 5,150 7,933 34,983
3 12/31/14 13,083 4,198 8,885 26,098
4 12/31/15 13,083 3,132 9,952 16,146
5 12/31/16 18,083 1,938 16,146 (0)
70,417 20,417 50,000 -
0
Sales type lease for lessor, capital lease for lessee
Farview Farms
Date Debit Credit
1/1/2012 Farm Equipment 50,000 Record at PVMLP not to exceed FMV
Lease liability 50,000
Lease Ex. 1E 12/4/2011 10:46 PM Page 6
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
12/31/2012 Interest expense 6,000
Lease liability 7,083
Cash 13,083
Depreciation expense 6,250
Accumulated depreciation 6,250
69,333 69,333 TRUE
Troy Tractors
1/1/2012 Lease Receivable
Sales
Cost of Goods Sold
Inventory
12/31/2012 Cash
Lease Receivable
Interest revenue
- - TRUE
Lease Ex. 1E 12/4/2011 10:46 PM Page 7
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
Find Payment:
n= 6.00
i= 0.12
PV= (50,000.00)
FV= 2,000.00
PMT = 10,638.25
ann due 1.00
Construct an amortization table and prepare the journal entries for both parties:
Bargain Purhase Option (BPO) or Residual Value (RV) = 0
PV OF MLP:
INCEPTION DATE: 01/01/12
INTEREST RATE:
LEASE TERM IN YEARS
PAYMENT: ANNUAL
DATE OF FIRST PAYMENT: 01/01/12
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1
Economic life of leased asset
LEASE AMORTIZATION SCHEDULE Depreciate over years
0.12
Date Lease Payment Interest Principal Balance
0 01/01/12 50,000
1 01/01/12 10,638 - 10,638 39,362
2 01/01/13 10,638 4,723 5,915 33,447
3 01/01/14 10,638 4,014 6,625 26,822
4 01/01/15 10,638 3,219 7,420 19,403
5 01/01/16 10,638 2,328 8,310 11,093
6 01/01/17 10,638 1,331 9,307 1,786
7 01/01/18 2,000 214 1,786 0
Lease Ex. 1F 12/4/2011 10:46 PM Page 8
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
65,829 15,829 50,000 131,912
50,000
Farview Farms
Date Debit Credit
1/1/2012 Farm Equipment 50,000.00 PV of lease payments
Lease liability 39,362.00 i 0.12
Cash 10,638.00 n 6.00
pmt 10,638.25
12/31/2012 Interest expense 4,723.00 fv 2,000.00 BPO
Accrued interest payable 4,723.00 type 1.00
8 yr life Depreciation expense 6250 payments
PV of lease(50,000.00)
Accumulated depreciation 6250
1/1/2013 Lease liability 5,915.00
Accrued interest payable 4,723.00
Cash 10,638.00
71,611.00 71,611.00 TRUE
Troy Tractors
1/1/2012 Cash
Lease Receivable
Sales
Cost of Goods Sold
Inventory
12/31/2012 Accrued interest Receivable
Interest revenue
1/1/2013 Cash
Accrued interest receivable
Lease Receivable
- - TRUE
Lease Ex. 1F 12/4/2011 10:46 PM Page 9
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
Lessor has direct financing lease because of BPO and meeting other rules For IFRS:
Lessee has a capital lease because of BPO Find implied interest rate
n= 3.00
LEASE AMORTIZATION SCHEDULE PMT = 35,869.00
Amount of BPO or GRV = 2,500.00 PV= (100,000.00)
PV OF MLP: 98,268.89 INCEPTION DATE: 03/30/12 FV= 2,500.00 BPO not PO
INTEREST RATE: 12.000% ANNUAL LAST PMT: 03/30/14 ty[e= 1.00
PAYMENT: 35,869.00 TERM IN YRS 3 rate= 10.00%
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1
IFRS PVMLP (100,000.00)
Lease 12% Reduction in Lease
Date Payment Interest Lease Liability
Expense Liability BALANCE 0.10
03/30/12 98,268.89 Lessee table starts with PVMLP unless > FMV usingf irr
0 03/30/12 35,869.00 0.00 35,869.00 62,399.89 If > FMV, start with FMV
1 03/30/13 35,869.00 7,487.99 28,381.01 34,018.88 (64,131.00)
2 03/30/14 35,869.00 4,082.27 31,786.73 2,232.14 35,869.00
3 03/30/15 2,500.00 267.86 2,232.14 0.00 35,869.00
4 03/30/16 2,500.00
0.00
110,107.00 11,838.11 98,268.89 0.00
(0.00)
Example #5 - LESSEE debit credit
03/30/12 Plant, property and equipment 98,268.89 Always capitalize at PVMLP unless greater than FMV
Lease obligation 98,268.89
Lease obligation 35,869.00
Cash 35,869.00
12/31/12 Depreciation expense 14,740.33 assumed purchase (BPO) so use life of asset
Accumulated depreciation 14,740.33 98,268.89
5.00 years
Interest expense 9/12 75% 5,615.99 19,653.78 per year
Interest payable 7487.99 * 9/12 5,615.99 0.75 nine of 12 months
14,740.33
03/30/13 Interest payable 5,616.00
Interest expense 3 months 0.25 1,872.00
Cash 35,869.00
Lease obligation 28,381.00
12/31/13 Depreciation expense 19,653.78
Acc'd depr 19,653.78
Interest expense 0.75 3,061.70
Interest payable 3,061.70
WRONG 213,078.69 213,078.69
Lease Ex. 5-Lessee 12/4/2011 10:46 PM Page 10
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
Find implied interest rate
n=
PMT =
PV=
LEASE AMORTIZATION SCHEDULE FV=
Amount of BPO or RV = i=
PV OF MLP: 0.00 INCEPTION DATE: 03/30/12
INTEREST RATE: ANNUAL LAST PMT: 03/30/11
PAYMENT: TERM IN YRS
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1
Lease 10% Reduction in Lease
Date Payment Interest Lease Receivable IDC= indirect costs
Revenue Receivable BALANCE
03/30/12 100,000.00 FMV + IDC for Direct Finance Lease
0 03/30/12 35,869.00 0.00 35,869.00 64,131.00
1 03/30/13 35,869.00 6,413.10 29,455.90 34,675.10
2 03/30/14 35,869.00 3,467.51 32,401.49 2,273.61
3 03/30/15 2,500.00 227.36 2,273.61 0.00
4 03/30/16
110,107.00 10,107.97 100,000.00 FALSE
100,000.00
Lease #7 - LESSOR debit credit
3/30/2012 Net Investment in Lease 64,131.00
Cash 35,869.00
Asset held for lease 100,000.00
12/31/2012 Interest receivable 9 of 12 months 0.75 4,809.83
Interest Revenue 4,809.83
3/30/2013 Cash 35,869.00
Interest revenue 1,603.28 suggest taking interest from table less amount already recognized
Interest Receivable 4,809.83
Net Investment in Lease 29,455.90
140,678.83 140,678.83 ok
There is an alternate style in some FASB examples
Uses a SET of 2 accounts to create "net investment in lease"
Gross investment in lease 110,107.00
Unearned income (interest) 10,107.00
Asset held for lease 100,000.00
Cash 84,079.00
Gross investment in lease 84,079.00
194,186.00 194,186.00
Lease Ex. 5-Lessor 12/4/2011 10:46 PM Page 11
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
i 0.10
n 4.00
pmt 84,079.00
fv 0.00
type 1.00
pvmlp= (293,171.03)
LEASE AMORTIZATION SCHEDULE
Amount of BPO or GRV = 0.00 Lessee does not include because not guarnateed
PV OF MLP: 293,171.03 INCEPTION DATE: 01/01/12
INTEREST RATE: 10.000% ANNUAL LAST PMT: 01/01/15
PAYMENT: 84,079.00 TERM IN YRS 4
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1
Lease 10% Reduction in Lease
Date Payment Interest Lease Liability
Expense Liability BALANCE
01/01/12 293,171.03 lesse begins with PVMLP
0 01/01/12 84,079.00 0.00 84,079.00 209,092.03
1 12/31/12 84,079.00 20,909.20 63,169.80 145,922.23
2 12/31/13 84,079.00 14,592.22 69,486.78 76,435.45
3 12/31/14 84,079.00 7,643.55 76,435.45 0.00
4 12/31/15
336,316.00 43,144.97 293,171.03 TRUE
(0.00)
Example #7 - LESSEE debit credit
01/01/12 Equipment 293,171.03
Cash 84,079.00
Lease liability 209,092.03
12/31/12 Depreciation expense 73,292.76 293,171.03
Acc'd Depreciation 73,292.76 4.00 yrs
use 4 years SL no salvage value
12/31/2012 Interest expense 20,909.20
Interest payable 20,909.20
ok 387,372.99 387,372.99
Lease Ex. 7-Lessee 12/4/2011 10:46 PM Page 12
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
Find PVMLP
n= 4.00
PMT = 84,079.00
FV= 0.00 never include UnGRV
i= 0.10
type 1.00
PV= (293,171.03)
Find PV of the Unguaranteed Residual Value (UnGRV)
LEASE AMORTIZATION SCHEDULE i 0.10
Amount of BPO or RV = n 4.00
PV OF MLP: 0.00 INCEPTION DATE: 01/01/12 pmt 0.00
INTEREST RATE: ANNUAL LAST PMT: 01/01/11 fv 10,000.00
PAYMENT: TERM IN YRS type 1.00
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1 pv 6,830.13
Lease 10% Reduction in Lease
Date Payment Interest Lease Receivable
Revenue Receivable BALANCE
01/01/12 300,000.00 Lessor always starts with FMV
0 01/01/12 84,079.00 0.00 84,079.00 215,921.00 for a sales type lease
1 12/31/12 84,079.00 21,592.10 62,486.90 153,434.10
2 12/31/13 84,079.00 15,343.41 68,735.59 84,698.51
3 12/31/14 84,079.00 8,469.85 75,609.15 9,089.36
4 12/31/15 10,000.00 908.94 9,091.06 (1.70)
346,316.00 46,314.30 300,001.70 TRUE
300,001.70
Lease #7 - LESSOR debit credit PVMLP PV of RV
1/1/2012 Net Investment in Lease 300,000.00 FMV 293,171.03 6,830.13 300,001.16
(PVMLP + PV of Unguaranteed RV)
plug Cost of Sales 243,171.03 Cost PV of RV
(Cost of asset - PV of Unguaranteed RV) 250,000.00 6,830.13 243,169.87
Inventory/Equipment 250,000.00
(Cost of asset)
Sales Revenue 293,171.03
(PVMLP) 543,171.03 543,171.03 0.00
Cash 84,079.00
Net Investment in Lease 84,079.00
12/31/2012 Interest receivable
Interest Revenue
1/1/2013 Cash
Interest Receivable
Net Investment in Lease 0.00
1,170,421.05 1,170,421.06 DRCR
Lease Ex. 7-Lessor 12/4/2011 10:46 PM Page 13
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
capital lease because lease term = 80%
LEASE AMORTIZATION SCHEDULE
Amount of BPO or GRV = 0.00
PV OF MLP: 276,024.59 INCEPTION DATE: 01/01/12
INTEREST RATE: 12.000% ANNUAL LAST PMT: 01/01/15
PAYMENT: 81,140.00 TERM IN YRS 4
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1
Lease 12% Reduction in Lease
Date Payment Interest Lease Liability
Expense Liability BALANCE
01/01/12 276,024.59
0 01/01/12 81,140.00 0.00 81,140.00 194,884.59
1 12/31/12 81,140.00 23,386.15 57,753.85 137,130.74
2 12/31/13 81,140.00 16,455.69 64,684.31 72,446.43
3 12/31/14 81,140.00 8,693.57 72,446.43 0.00
4 12/31/15 0.00
324,560.00 48,535.41 276,024.59 TRUE
(0.00)
Example #7 - LESSEE debit credit
ok 0.00 0.00
Lease Ex. 9-Lessee 12/4/2011 10:46 PM Page 14
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
Find implied interest rate
n= 4.00
PMT = 81,140.00
PV= (301,848.00) fmv + idc if DF lease
FV= 25,000.00
i= 9.560%
type 1.00
LEASE AMORTIZATION SCHEDULE direct financing lease under us gaap
Amount of BPO or RV = 0.00
PV OF MLP: 0.00 INCEPTION DATE: 06/01/12
INTEREST RATE: ANNUAL LAST PMT: 06/01/11
PAYMENT: TERM IN YRS
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1
Lease 10% Reduction in Lease
Date Payment Interest Lease Receivable
Revenue Receivable BALANCE
06/01/12 301,848.00 FMV + IDC for DF lease
0 06/01/12 81,140.00 0.00 81,140.00 220,708.00
1 06/01/13 81,140.00 21,099.60 60,040.40 160,667.60
2 06/01/14 81,140.00 15,359.76 65,780.24 94,887.36
3 06/01/15 81,140.00 9,071.19 72,068.81 22,818.55
4 06/01/16 25,000.00 2,181.45 22,818.55 0.00
5 06/01/17
6 06/01/18
349,560.00 47,712.00 301,848.00 TRUE
301,848.00
Lease #7 - LESSOR debit credit
1/1/2012 Initial Direct Costs – Leases 1,848
Cash 1,848
Equipment held for lease 300,000
Cash 300,000
1/1/2012 Net investment in lease 301,848
Equipment purchased for lease 300,000
Initial direct costs - leases 1,848
rec'bl
Cash 81,140 301,848.00
Net investment in lease 81,140 81,140.00
21,100.00
12/31/2012 Net investment in lease 21,100 81,140.00
Interest revenue 21,100 160,668.00
1/1/2013 Cash 81,140
Net investment in lease 81,140
12/31/2012 Better (???) style
Accured interest rec'bl 21,100
\ Interest revenue 21,100
1/1/2013 Accured interest rec'bl 21,100
Cash 81,140
Lease rec'bl 60,040
889,316 889,316 TRUE
Lease Ex. 9-Lessor 12/4/2011 10:46 PM Page 15
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
LEASE AMORTIZATION SCHEDULE Watch out for executory costs!
Amount of BPO or GRV = 0.00
PV OF MLP: 0.00 INCEPTION DATE: 06/01/12
INTEREST RATE: ANNUAL LAST PMT: 05/31/12
PAYMENT: TERM IN YRS
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0
Lease 0% Reduction in Lease
Date Payment Interest Lease Liability
Expense Liability BALANCE
06/01/12 0.00
0 06/01/12 0.00 0.00 0.00 0.00
1 06/01/13 0.00 0.00 0.00 0.00
2 06/01/14 0.00 0.00 0.00 0.00
3 06/01/15 0.00 0.00 0.00 0.00
4 06/01/16 0.00 0.00 0.00
0.00 0.00 0.00 TRUE
#REF! ok
Example #11 - LESSEE debit credit
06/01/12 Leased Asset
Prepaid Maintenance
Lease Obligation
Cash
12/31/12 YearFrac= 7/12
Months= 0.00
Depreciation Expense life:
Accumulated Depreciation
Interest Expense
Interest payable
Maintenance Expense
Prepaid maintenance
06/01/13 Lease Obligation
Prepaid Maintenance
Interest expense
Interest payable
Cash
ok 0.00 0.00
Lease Ex. 11-Lessee 12/4/2011 10:46 PM Page 16
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. Teresa Gordon
Find implied interest rate
n=
PMT =
PV=
FV=
i=
This is a direct financing lease with initial direct costs - therefore, you must
find the interest rate implied by the terms before you can create the amortization table.
LEASE AMORTIZATION SCHEDULE
Amount of BPO or RV = 0.00
PV OF MLP: 0.00 INCEPTION DATE: 06/01/12
INTEREST RATE: ANNUAL LAST PMT: 06/01/15
PAYMENT: TERM IN YRS 4
IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0 1
Lease 0% Reduction in Lease
Date Payment Interest Lease Receivable
Revenue Receivable BALANCE
06/01/12 0.00
0 06/01/12 0.00 0.00 0.00
1 06/01/13 0.00 0.00 0.00
2 06/01/14 0.00 0.00 0.00
3 06/01/15 0.00 0.00 0.00
4 06/01/16 0.00 0.00 0.00
0.00 0.00 0.00 TRUE
ok
Lease #11 - LESSOR debit credit
DIRECT FINANCING LEASE
06/01/12 Net Investment in Lease
Initial Direct Costs
Unearned service contracts
Equipment held for lease
Cash
total 0.00 0.00 ok
Check this! Yearfrac=
Months 0.00 7/12
12/31/12 Accrued interest receivable
Interest Revenue
Unearned service contracts
Service contracts revenue
06/01/13 Cash
Accrued interest receivable
Interest Revenue
Unearned service contracts
Net Investment in Lease
0.00
0.00 0.00 ok
Lease Ex. 11-Lessor 12/4/2011 10:46 PM Page 17
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. T. Gordon
Inputs:
i=
n=
pmt=
fv=
pv=
What type of lease is this?
Date Payment Interest "Principal" Balance
0
1 Explain:
2
3
4
5
Lessee -Hells Gate Jet Boats Debit Credit
Lease Ex 12 - Lessee 12/4/2011 10:46 PM Page 18
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. T. Gordon
Inputs:
i=
n=
pmt=
fv=
pv=
What type of lease is this?
Date Payment Interest "Principal" Balance
0
1 Explain:
2
3
4
5
Lessor - Washington Leasing Co. Debit Credit
Lease Ex 12 - Lessor 12/4/2011 10:46 PM Page 19
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. T. Gordon
Inputs:
i=
n=
pmt=
fv=
pv=
What type of lease is this?
Date Payment Interest "Principal" Balance
0
1 Explain:
2
3
4
5
6
Lessee - Knightco Debit Credit
Lease Ex 13 - Lessee 12/4/2011 10:46 PM Page 20
Acct 414 d64aa540-6ea5-4e05-ade9-9c2669e5e23d.xlsx Prof. T. Gordon
Inputs:
i=
n=
pmt=
fv=
pv=
What type of lease is this?
Date Payment Interest "Principal" Balance
0
1 Explain:
2
3
4
5
6
Lessor - Jack Dear Corp. Debit Credit
Lease Ex 13 - Lessor 12/4/2011 10:46 PM Page 21