Introductory Examples (1A, 1B)
To illustrate accounting for lease transactions, we will use a simple case
involving three parties:
1. Farview Farms needs a small tractor (Model SX). These tractors have an expected useful
life of six years with no salvage value.
2. Idaho First Bank & Trust which is currently charging 12% interest on long-term equipment
loans.
3. Troy Tractors, Inc., which manufactures the Model SX tractor at a cost of $40,000 and then
sells them for $50,000. It also has a few units for trial use which rent for $500 per week.
If Farview Farms rents a tractor for one week from Troy Tractors, the
journal entries would follow the usual pattern for a rental:
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
To illustrate accounting for lease transactions, we will use a simple case
involving three parties:
1. Farview Farms needs a small tractor (Model SX). These tractors have an
expected useful life of six years with no salvage value.
2. Idaho First Bank & Trust which is currently charging 12% interest on long-
term equipment loans.
3. Troy Tractors, Inc., which manufactures the Model SX tractor at a cost of
$40,000 and then sells them for $50,000. It also has a few units for trial use
which rent for $500 per week.
Assume Farview Farms decides to purchase the tractor and borrow the full
purchase price of $50,000 from Idaho First Bank & Trust at 12% interest
on the unpaid balance of the loan. The borrower agrees to make annual
payments of $10,000 per year for five years.
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
40,000
6 years
6,667 annual depr
52 weeks
128
50,000
6 years
8,333
12% 50,000 6,000
Lease Example 1C - DIRECT FINANCING LEASE
To illustrate accounting for lease transactions, we will use a simple case involving three parties:
1. Farview Farms needs a small tractor (Model SX). These tractors have an expected useful life of six
years with no salvage value.
2. Idaho First Bank & Trust which is currently charging 12% interest on long-term equipment loans.
3. Troy Tractors, Inc., which manufactures the Model SX tractor at a cost of $40,000 and then sells
them for $50,000. It also has a few units for trial use which rent for $500 per week.
For various reasons either (or both) Farview Farms and Idaho First Bank & Trust might prefer a lease
arrangement to an outright purchase/long-term loan. Assume that the bank agrees to purchase the tractor
from Troy Tractors for $50,000. It then computes the payment on the lease required for it to earn its desired
rate of 12% interest if the lease is written for five years with the first payment coming at the end of the first
year (after harvest). [PVA = 50,000, n = 5, i = 12%, pymt = 13,871]. The lease agreement specifies that
Farview Farms gets to keep the tractor at the end of the lease.
-----------------------------------------------------------------
DATE LEASE INTEREST REDUCTION LEASE
PAYMENT LEASE RECBL/LIAB
50,001.85 RECBL/LIAB BALANCE
-----------------------------------------------------------------
0 01/01/12 0.00 0.00 0.00 50,000.00
1 12/31/12 13,871.00 6,000.00 7,871.00 42,129.00
2 12/31/13 13,871.00 5,055.48 8,815.52 33,313.48
3 12/31/14 13,871.00 3,997.62 9,873.38 23,440.10
4 12/31/15 13,871.00 2,812.81 11,058.19 12,381.91
5 12/31/16 13,871.00 1,489.09 12,381.91 0.00
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
Title transfer at end of lease
5 year lease
(50,000) pv of the asset (FMV)
12% desired rate of return
- fv (no BPO or GRV)
- ord annuity
13,870 Sovle for payment
this is a direct financing lease under US GAAP (finance lease under IFRS)
Lease payable
Use 6 year life because the farm keeps tractor at end
Lease receivable
Lease Example 1D - SALES TYPE LEASE
To illustrate accounting for lease transactions, we will use a simple case involving three parties:
1. Farview Farms needs a small tractor (Model SX). These tractors have an expected useful life of six
years with no salvage value.
2. Idaho First Bank & Trust which is currently charging 12% interest on long-term equipment loans.
3. Troy Tractors, Inc., which manufactures the Model SX tractor at a cost of $40,000 and then sells
them for $50,000. It also has a few units for trial use which rent for $500 per week.
Farview Farms may also be able to arrange a similar or better lease arrangement with the
manufacturer of the Model SX tractor. We will assume that the lease terms are the same for
purposes of illustration.
NOTE: The first step in doing lease accounting involves finding the present value of the cash
flows that are transferred between the lessee and lessor. This "present value of the minimum lease
payments" [PVMLP] will give you the SALES amount for the lessor (assuming a sales-type lease)
and the ASSET amount for the lessee.
COMPUTE PVMLP: [n = 5, i = 12%, pymt = 13,871]
n
i
pmt
fv
type
Farview Farms Debit Credit PVMLP=
Farm Equipment 50,000.00
-------------------------
Lease obligation 50,000.00 DATE LEASE
PAYMENT
50,001.85
At year end: 0
-------------------------
01/01/12 0.00
Depreciation expense 8,333.00 1
2
12/31/12
12/31/13
13,871.00
13,871.00
Accumulated depreciation 8,333.00 3 12/31/14 13,871.00
4 12/31/15 13,871.00
Interest expense 6,000.00 5 12/31/16 13,871.00
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
ee parties:
eful life of six
ment loans.
d then sells
nt with the
me for
lue of the cash
nimum lease
es-type lease)
-----------------------------------------------------------------
DATE LEASE INTEREST REDUCTION LEASE
PAYMENT LEASE RECBL/LIAB
50,001.85 RECBL/LIAB BALANCE
-----------------------------------------------------------------
0 01/01/12 0.00 0.00 0.00 50,000.00
1 12/31/12 13,871.00 6,000.00 7,871.00 42,129.00
2 12/31/13 13,871.00 5,055.48 8,815.52 33,313.48
3 12/31/14 13,871.00 3,997.62 9,873.38 23,440.10
4 12/31/15 13,871.00 2,812.81 11,058.19 12,381.91
5 12/31/16 13,871.00 1,489.09 12,381.91 0.00
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 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Introductory Example – Lease 1E - BARGAIN PURCHASE OPTION
Find Payment:
1. Inception date: 1/1/12 7. First payment due on 12/31/12 n= 5.00
2. Lessor: Troy Tractors Inc. 8. Lessee: Farview Farms
i= 0.12
3. Fair value of tractor at 1/1/12: $50,000 9. Incremental borrowing rate (lessee): 12%
4. Cost to manufacture tractor: $40,000 10. Implicit interest rate (known to lessee): 12% PV= (50,000.00)
5. Estimated fair value at end of lease is $10,000 11. Option to buy at end of lease term for $5,000 FV= 5,000.00 BPO )bargaon purchase option
6. Fixed non-cancelable lease term: 5 years. 12. Estimated useful life of tractor: 8 years PMT = 13,083.44
ord 0.00
To earn its desired return of 12%, at what amount should Troy Tractors set the annual payments?
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 2/12/2012 8:01 AM Page 9
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.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 2/12/2012 8:01 AM Page 10
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Introductory Example – Lease 1F - ANNUITY DUE
Assume that Troy Tractors and Farview Farms sign a lease agreement on a SX Tractor with Find Payment:
the following terms: n= 6.00
i= 0.12
1. Inception date: 1/1/12 6. Lessee: Farview Farms
2. Lessor: Troy Tractors Inc. 7. Fixed non-cancelable lease term: 6 years. PV= (50,000.00)
3. Fair value of tractor at 1/1/12: $50,000 8. Option to buy at end of lease term for $2,000 FV= 2,000.00
4. Estimated fair value at end of lease is $10,000 9. Estimated useful life of tractor: 8 years PMT = 10,638.25
5. First payment due on 1/1/12 10. Desired rate of return for lessor and incremental
borrowing rate for lessee: 12%
ann due 1.00
With these lease terms, how much should Troy Tractors ask for the annual payments?
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 2/12/2012 8:01 AM Page 11
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.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 2/12/2012 8:01 AM Page 12
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Example 5 – Lessee Accounting (Capital Lease with BPO)
On March 30, 2012, Genessee Engineering, Inc. and Idaho First Bank sign a lease with the following terms:
1. Term: 3 years 2. Payments of 35,869
3. Implicit interest rate (not known to lessee) 10% 4. Est. fair value of asset at end of lease $5,000
5. Fair value of asset $100,000 6. Cost of asset $100,000
7. Incremental borrowing rate: 12% 8. First payment due 3/30/12
9. Estimated useful life of asset: 5 years 10. No collection or cost uncertainties for lessor
11. Purchase option at end of lease: $2,500 12. Both parties have calendar-year fiscal years.
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 2/12/2012 8:01 AM Page 13
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Example 5 – Lessee Accounting (Capital Lease with BPO)
On March 30, 2012, Genessee Engineering, Inc. and Idaho First Bank sign a lease with the following terms:
1. Term: 3 years 2. Payments of 35,869
3. Implicit interest rate (not known to lessee) 10% 4. Est. fair value of asset at end of lease $5,000
5. Fair value of asset $100,000 6. Cost of asset $100,000
7. Incremental borrowing rate: 12% 8. First payment due 3/30/12
9. Estimated useful life of asset: 5 years 10. No collection or cost uncertainties for lessor
11. Purchase option at end of lease: $2,500 12. Both parties have calendar-year fiscal years.
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 2/12/2012 8:01 AM Page 14
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Lease Example #7
On January 1, 2012, Harris Manufacturing (lessee) and Accel Engines sign a lease with the following terms:
1. Term: 4 years 2. Payments of $84,079
3. Implicit interest rate (known to lessee) 10% 4. Lessor retains ownership of asset at end of lease
5. Fair value of asset $300,000 6. Cost of asset $250,000 i 0.10
7. Incremental borrowing rate: 12% 8. First payment due 1/1/12 n 4.00
9. Estimated useful life of asset: 6 years 10. No collection or cost uncertainties for lessor pmt 84,079.00
10. Est. fair value of asset at end of lease: $10,000 11. The residual value is NOT guaranteed by lessee 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 2/12/2012 8:01 AM Page 15
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Lease Example #7 Find PVMLP
n= 4.00
On January 1, 2012, Harris Manufacturing (lessee) and Accel Engines sign a lease with the following terms: PMT = 84,079.00
FV= 0.00 never include UnGRV
1. Term: 4 years 2. Payments of $84,079 i= 0.10
3. Implicit interest rate (known to lessee) 10% 4. Lessor retains ownership of asset at end of lease
5. Fair value of asset $300,000 6. Cost of asset $250,000 type 1.00
7. Incremental borrowing rate: 12% 8. First payment due 1/1/12 PV= (293,171.03)
9. Estimated useful life of asset: 6 years 10. No collection or cost uncertainties for lessor
10. Est. fair value of asset at end of lease: $10,000 11. The residual value is NOT guaranteed by lessee
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 2/12/2012 8:01 AM Page 16
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Lease Example #9
On January 1, 2012, Hamford Ritz Inc. and Cisco Leasing sign a lease with the following terms:
1. Term: 4 years 2. Payments of $81,140
3. Implicit interest rate (not known to lessee) 10% 4. Lessor retains ownership of asset at end of lease
5. Fair value of asset $300,000 6. Cost of asset $300,000
7. Incremental borrowing rate: 12% 8. First payment due 1/1/12
9. Estimated useful life of asset: 5 years 10. No collection or cost uncertainties for lessor
11. Est. fair value of asset at end of lease: $25,000 12. The residual value is NOT guaranteed by lessee
13. The lessor incurred initial direct costs of $1,848
related to the lease
LEASE AMORTIZATION SCHEDULE
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 06/01/12
1 06/01/13
2 06/01/14
3 06/01/15
4 06/01/16
0.00 0.00 0.00 TRUE
ok
Example #7 - LESSEE debit credit
ok 0.00 0.00
Lease Ex. 9-Lessee 2/12/2012 8:01 AM Page 17
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Lease Example #9 Find implied interest rate
n=
On January 1, 2012, Hamford Ritz Inc. and Cisco Leasing sign a lease with the following terms: PMT =
PV=
1. Term: 4 years 2. Payments of $81,140
3. Implicit interest rate (not known to lessee) 10% 4. Lessor retains ownership of asset at end of lease
FV=
5. Fair value of asset $300,000 6. Cost of asset $300,000 i=
7. Incremental borrowing rate: 12% 8. First payment due 1/1/12
9. Estimated useful life of asset: 5 years 10. No collection or cost uncertainties for lessor
11. Est. fair value of asset at end of lease: $25,000 12. The residual value is NOT guaranteed by lessee
13. The lessor incurred initial direct costs of $1,848
related to the lease
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: 06/01/11
PAYMENT: TERM IN YRS
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 06/01/12
1 06/01/13
2 06/01/14
3 06/01/15
4 06/01/16
5 06/01/17
6 06/01/18
0.00 0.00 0.00 TRUE
ok
Lease #7 - LESSOR debit credit
1/1/2012 Initial Direct Costs – Leases
Cash
Equipment held for lease
Cash
1/1/2012 Net investment in lease
Equipment purchased for lease
Initial direct costs - leases
Cash
Net investment in lease
12/31/2012 Net investment in lease
Interest revenue
1/1/2013 Cash
Net investment in lease
12/31/2015 Net investment in lease
Interest revenue
1/1/2016 Used Equipment
Net investment in lease
Loss on Leased Asset
- - TRUE
Lease Ex. 9-Lessor 2/12/2012 8:01 AM Page 18
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Lease Example #11
On June 1, 2012, Fantasia Funnels, Inc. and Idaho First Bank sign a lease with the following terms:
1. Term: 4 years 2. Payments of $61,924
3. Interest rate used to compute payments = 12% 4. Cost of asset $200,000
5. Fair value of asset $200,000 6. First payment due 6/1/12
7. Incremental borrowing rate: 14% 8. The lessee can purchase asset for $10,000 at end
(Lessee does not know implicit interest rate) of lease, otherwise, asset is returned to lessor.
9. Estimated useful life of asset: 6 years 10. The payments include $5,000 for maintenance.
11. Est. fair value of asset at end of lease: $10,000 12. No collection or cost uncertainties for lessor
13. Initial direct costs to arrange lease: $3,000
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 2/12/2012 8:01 AM Page 19
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. Teresa Gordon
Find implied interest rate
Lease Example #11 n=
On June 1, 2012, Fantasia Funnels, Inc. and Idaho First Bank sign a lease with the following terms:
PMT =
1. Term: 4 years 2. Payments of $61,924
3. Interest rate used to compute payments = 12% 4. Cost of asset $200,000 PV=
5. Fair value of asset $200,000 6. First payment due 6/1/12 FV=
7. Incremental borrowing rate: 14% 8. The lessee can purchase asset for $10,000 at end i=
(Lessee does not know implicit interest rate) of lease, otherwise, asset is returned to lessor.
9. Estimated useful life of asset: 6 years 10. The payments include $5,000 for maintenance.
11. Est. fair value of asset at end of lease: $10,000 12. No collection or cost uncertainties for lessor
13. Initial direct costs to arrange lease: $3,000
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 2/12/2012 8:01 AM Page 20
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. T. Gordon
LEASE Example #12 Inputs:
i=
On August 1, 2012, Hells Gate Jet Boats and Washington Leasing Co. sign a lease with the following terms:
1. Term: 4 years with possible renewal (see #11) 2. Payments of $49,523
n=
3. Implicit interest rate (NOT known to lessee) 10% 4. Lessor retains ownership of asset at end of lease pmt=
5. Fair value of asset $200,000 6. Cost of asset $200,000 fv=
7. Incremental borrowing rate: 14% 8. First payment due 8/1/12 pv=
9. Estimated useful life of asset: 6 years 10. No collection or cost uncertainties for lessor
11. At the end of the lease, HGJB can renew for one 12. The residual value is NOT guaranteed by lessee,
more year at same annual amount of $49,523. This is asset is expected to be worth $25,000 at end of 4
certainly no bargain. There is a $15,000 penalty for years, and $15,000 at end of 5 years.
non-renewal of the lease. However, this amount is
probably not large enough to assure that HGJB will
renew.
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 2/12/2012 8:01 AM Page 21
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. T. Gordon
LEASE Example #12 Inputs:
i=
On August 1, 2012, Hells Gate Jet Boats and Washington Leasing Co. sign a lease with the following terms:
1. Term: 4 years with possible renewal (see #11) 2. Payments of $49,523
n=
3. Implicit interest rate (NOT known to lessee) 10% 4. Lessor retains ownership of asset at end of lease pmt=
5. Fair value of asset $200,000 6. Cost of asset $200,000 fv=
7. Incremental borrowing rate: 14% 8. First payment due 8/1/12 pv=
9. Estimated useful life of asset: 6 years 10. No collection or cost uncertainties for lessor
11. At the end of the lease, HGJB can renew for one 12. The residual value is NOT guaranteed by lessee,
more year at same annual amount of $49,523. This is asset is expected to be worth $25,000 at end of 4
certainly no bargain. There is a $15,000 penalty for years, and $15,000 at end of 5 years.
non-renewal of the lease. However, this amount is
probably not large enough to assure that HGJB will
renew.
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 2/12/2012 8:01 AM Page 22
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. T. Gordon
LEASE Example #13 Inputs:
i=
On October 1, 2012, Knightco (lessee) and Jack Dear Corp. sign a lease with the following terms: n=
1. Term: 4 years, with possible renewal (see #11) 2. Payments of $68,565
pmt=
3. Implicit interest rate (NOT known to lessee) 10% 4. Lessor retains title to the asset at end of lease
5. Fair value of asset $260,000 6. Cost of asset $200,000 fv=
7. Incremental borrowing rate: 12% 8. First payment due 10/1/12 pv=
9. Estimated useful life of asset: 6 years 10. No collection or cost uncertainties for lessor
11. Lease can be renewed for one more year at 12. Est. fair value of asset at end of original lease term is
$17,000. The actual value is probably $25,000. $35,000. It should be worth $15,000 at the end of 5
13. There are no guarantees of residual value years.
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 2/12/2012 8:01 AM Page 23
Acct 414 3b7f4737-8b0d-43ce-ae98-29be45238285.xlsx Prof. T. Gordon
Inputs:
LEASE Example #13 i=
On October 1, 2012, Knightco (lessee) and Jack Dear Corp. sign a lease with the following terms: n=
1. Term: 4 years, with possible renewal (see #11) 2. Payments of $68,565 pmt=
3. Implicit interest rate (NOT known to lessee) 10% 4. Lessor retains title to the asset at end of lease
fv=
5. Fair value of asset $260,000 6. Cost of asset $200,000
7. Incremental borrowing rate: 12% 8. First payment due 10/1/12 pv=
9. Estimated useful life of asset: 6 years 10. No collection or cost uncertainties for lessor
11. Lease can be renewed for one more year at 12. Est. fair value of asset at end of original lease term is
$17,000. The actual value is probably $25,000. $35,000. It should be worth $15,000 at the end of 5
13. There are no guarantees of residual value years.
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 2/12/2012 8:01 AM Page 24