Idaho Equipment Lease Agreement by zdi16487

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									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
  Cash




                     Troy Tractors                                      Debit            Credit
Cash
  Rental Income

Depreciation expense
  Accumulated depreciation


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
Note Payable to Bank
Equipment
Cash (to Troy Tractors)

At year end:
Depreciation expense
   Accumulated depreciation
Interest expense
   Interest payable

                    Troy Tractors                                 Debit           Credit
Cash
  Sales
Cost of goods sold
  Inventory

          Idaho First Bank & Trust                                Debit           Credit
Note Receivable
Cash

At year end
Interest receivable
   Interest revenue
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
   Lease obligation

At year end:
Depreciation expense
   Accumulated depreciation
Interest expense
Lease obligation
   Cash

                Troy Tractors                                  Debit                  Credit
Cash
  Sales
Cost of goods sold
  Inventory

       Idaho First Bank & Trust                                Debit                  Credit
Equipment held for lease
   Cash
Net investment in lease
  Equipment held for lease

Cash
  Interest revenue
  Net investment in lease
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
                                                                                                   --------------------------
    Lease obligation                                                                                   DATE         LEASE
                                                                                                                         PAYMENT
                                                                                                                         50,001.85
At year end:                                                                                         0
                                                                                                         --------------------------
                                                                                                             01/01/12         0.00
Depreciation expense                                                                                 1
                                                                                                     2
                                                                                                             12/31/12
                                                                                                             12/31/13
                                                                                                                         13,871.00
                                                                                                                         13,871.00
   Accumulated depreciation                                                                          3       12/31/14    13,871.00
                                                                                                     4       12/31/15    13,871.00
Interest expense                                                                                     5       12/31/16    13,871.00
Lease obligation
   Cash

             Troy Tractors                             Debit                Credit
Net investment in lease
  Sales
Cost of goods sold
  Inventory

At year end:
Cash
   Interest revenue
   Net investment in lease
e parties:
ful life of six

ment loans.
then sells

nt with the
me for

 ue of the cash
nimum lease
s-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
Acct 414                                                 186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                 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
 2.    Lessor: Troy Tractors Inc.                           8.    Lessee: Farview Farms                                   n=
 3.    Fair value of tractor at 1/1/12: $50,000             9.    Incremental borrowing rate (lessee): 12%                i=
 4.    Cost to manufacture tractor: $40,000                 10.   Implicit interest rate (known to lessee): 12%           PV=
 5.    Estimated fair value at end of lease is $10,000      11.   Option to buy at end of lease term for $5,000
                                                                                                                          FV=
 6.    Fixed non-cancelable lease term: 5 years.            12.   Estimated useful life of tractor: 8 years
                                                                                                                          PMT =
 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) =                                                   -
    PV OF MLP:
    INCEPTION DATE:                                                                                    40,909
    INTEREST RATE:
    LEASE TERM IN YEARS
    PAYMENT:                                         ANNUAL
    DATE OF FIRST PAYMENT:                                                                             41,274
    IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0
    Economic life of leased asset
LEASE AMORTIZATION SCHEDULE                     Depreciate over                                                   years

          Date    Lease Payment                      Interest              Principal              Balance
   0     01/01/12                                                                                        -
   1     12/31/12
   2     12/31/13
   3     12/31/14
   4     12/31/15
   5     12/31/16


Lease Ex. 1E                                                           7/5/2011 11:46 AM                                                      Page 6
Acct 414                                   186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls              Prof. Teresa Gordon

                               -                 -                    -               -
                                                         ok

                                         Farview Farms
     Date                                                     Debit          Credit
       1/1/2012 Farm Equipment
                Lease liability

     12/31/2012 Interest expense
                Lease liability
                Cash
                Depreciation expense
                Accumulated depreciation
                                                                      -               -   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                                             7/5/2011 11:46 AM                                   Page 7
Acct 414                                                 186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                            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=
    1.     Inception date: 1/1/12                            6.      Lessee: Farview Farms                                   i=
    2.     Lessor: Troy Tractors Inc.                        7.      Fixed non-cancelable lease term: 6 years.               PV=
    3.     Fair value of tractor at 1/1/12: $50,000          8.      Option to buy at end of lease term for $2,000           FV=
    4.     Estimated fair value at end of lease is $10,000   9.      Estimated useful life of tractor: 8 years
    5.     First payment due on 1/1/12                       10.     Desired rate of return for lessor and incremental       PMT =
                                                             borrowing rate for lessee: 12%

    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

          Date    Lease Payment                   Interest                Principal              Balance
   0     01/01/12                                                                                           -
   1     01/01/12
   2     01/01/13
   3     01/01/14
   4     01/01/15
   5     01/01/16
   6     01/01/17



Lease Ex. 1F                                                               7/5/2011 11:46 AM                                                             Page 8
Acct 414                                       186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls          Prof. Teresa Gordon


                                -                 -                   -               -
                                                         ok

                                         Farview Farms
     Date                                                     Debit          Credit
       1/1/2012 Farm Equipment
                Lease liability
                Cash

     12/31/2012 Interest expense
                Accrued interest payable
                Depreciation expense
                Accumulated depreciation

           1/1/2013 Lease liability
                    Accrued interest payable
                    Cash
                                                                      -               -   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                                                  7/5/2011 11:46 AM                              Page 9
Acct 414                                  186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                       Prof. Teresa Gordon




                                          Lease Example #5
 On March 30, 2012, Genessee Engineering, Inc. and Idaho First Bank sign a lease with the
 following terms:

    1.   Inception of lease: March 30, 2012                       8.   Payments of ______________
    2.   Term: 3 years                                            9.   Est. fair value of asset at end of lease $5,000
    3.   Implicit interest rate (not known to lessee) 10%        10.   Cost of asset $100,000
    4.   Fair value of asset $100,000                            11.   First payment due 3/30/12
    5.   Incremental borrowing rate: 12%                         12.   No collection or cost uncertainties for lessor
    6.   Estimated useful life of asset: 5 years                 13.   Both parties have calendar-year fiscal years.
    7.   Purchase option at end of lease: $2,500


LEASE AMORTIZATION SCHEDULE
         Amount of BPO or GRV =                  0.00
         PV OF MLP:                0.00 INCEPTION DATE:                                                     03/30/12
         INTEREST RATE:                  ANNUAL       LAST PMT:                                             03/31/14
         PAYMENT:                       TERM IN YRS                3
         IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0                                                            1
                               Lease               0% Reduction in                                        Lease
                Date         Payment       Interest       Lease                                          Liability
                                          Expense        Liability                                      BALANCE
                   03/30/12                                                                                    0.00
      0            03/30/12        0.00          0.00          0.00                                            0.00
      1            03/30/13        0.00          0.00          0.00                                            0.00
      2            03/30/14        0.00          0.00          0.00                                            0.00
      3            03/30/15        0.00          0.00          0.00                                            0.00
                                   0.00          0.00          0.00                                       TRUE
                                                       ok
Example #5 - LESSEE
           Genessee Engineering Inc.                                                   Debit               Credit
  3/30/12 Leased Asset
            Lease obligation
            Cash

 12/31/12 Depreciation expense
            Accumulated depreciation

             Interest expense
                Interest payable

  3/30/13 Interest expense
          Interest payable
          Lease obligation
             Cash

 12/31/13 Depreciation expense
             Accumulated depreciation
          Interest expense
             Interest payable                                                                0.00                 0.00




Lease Ex. 5 Lessee                                          7/5/2011 11:46 AM                                                       Page 10
Acct 414                           186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls            Prof. Teresa Gordon


 Lease #5   Genessee Engineering Inc.                             Debit       Credit
  3/30/14 Interest expense
          Interest payable
          Lease obligation
             Cash

 12/31/14 Depreciation expense
             Accumulated depreciation
          Interest expense
             Interest payable

  3/30/15 Interest expense
          Interest payable
          Lease obligation
             Cash

 12/31/15 Depreciation expense
            Accumulated depreciation

 12/31/15 Depreciation expense
            Accumulated depreciation

  3/30/17 Depreciation expense
            Accumulated depreciation




Lease Ex. 5 Lessee                            7/5/2011 11:46 AM                                   Page 11
Acct 414                                                                                                186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls         Prof. Teresa Gordon




                                                                                                                                   Needed for IFRS?
 Example 5 – Lessee Accounting (Capital Lease with BPO)
                                                                                                                            Find implied interest rate
 On March 30, 2012, Genessee Engineering, Inc. and Idaho First Bank sign a lease with the following terms:                         n=
  1. Term: 3 years                                            2. Payments of 35,869                                                PMT =
  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                                            PV=
  7. Incremental borrowing rate: 12%                          8. First payment due 3/30/12                                         FV=
  9. Estimated useful life of asset: 5 years                 10. No collection or cost uncertainties for lessor                    i=
 11. Purchase option at end of lease: $2,500                 12. Both parties have calendar-year fiscal years.


LEASE AMORTIZATION SCHEDULE
         Amount of BPO =                   2,500.00
         PV OF MLP:          99,999.27 INCEPTION DATE:                                                      03/03/12
         INTEREST RATE:        10.000% ANNUAL        LAST PMT:                                              03/03/14
         PAYMENT:            35,869.00 TERM IN YRS               3
         IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0                                                            1
                              Lease              10% Reduction in                                         Lease
                Date         Payment      Interest      Lease                                            Liability
                                         Expense       Liability                                        BALANCE
                  03/03/12                                                                               99,999.27
       0          03/03/12   35,869.00          0.00   35,869.00                                         64,130.27
       1          03/03/13   35,869.00     6,413.03    29,455.97                                         34,674.30
       2          03/03/14   35,869.00     3,467.43    32,401.57                                          2,272.73
       3          03/03/15    2,500.00       227.27     2,272.73                                               0.00
                            110,107.00   10,107.73     99,999.27                                          TRUE

            Idaho First Bank & Trust                                                    Debit              Credit
            "Easier Style"
    3/30/12 Cash                                                                        35,869.00
            Net investment in lease
            Equipment purchased for lease

   12/31/12 Interest receivable
            Interest revenue

    3/30/13 Cash                                                                        35,869.00
            Interest receivable
            Interest revenue
            Net investment in lease

   12/31/13 Interest receivable
            Interest revenue

    3/30/14 Cash                                                                        35,869.00
            Interest receivable
            Interest revenue
            Net investment in lease

   12/31/14 Interest receivable
            Interest revenue

   12/31/15 Cash                                                                         2,500.00
            Interest receivable
            Interest revenue
            Net investment in lease

                                 FASB STYLE JOURNAL ENTRIES
            Idaho First Bank & Trust                      Debit                                            Credit
    3/30/12 Lease Payments Receivable
               (or Gross investment in lease)            110,107.00
              Equipment purchased for lease
              Unearned interest revenue
            Cash                                          35,869.00
              Lease Payments Receivable
               (or Gross investment in lease)

   12/31/12 Unearned interest revenue
             Interest revenue

    3/30/13 Cash                                                                        35,869.00
            Unearned interest revenue
             Interest revenue
             Lease Payments Receivable
               (or Gross investment in lease)

                Continue as above for the following dates
   12/31/13




    3/30/14




   12/31/14




    3/30/15




Lease Ex. 5 Lessor                                                                                                     7/5/2011 11:46 AM                            Page 12
Acct 414                                          186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                    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
  7.   Incremental borrowing rate: 12%                        8.   First payment due 1/1/12
  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




LEASE AMORTIZATION SCHEDULE
        Amount of BPO or GRV =               0.00
        PV OF MLP:              0.00 INCEPTION DATE:                                                             01/01/12
        INTEREST RATE:                ANNUAL      LAST PMT:                                                      01/01/12
        PAYMENT:                     TERM IN YRS
        IF FIRST PYMT DUE AT INCEPTION, 1, OTHERWISE 0

                                                  Lease                   0.00% Reduction in                   Lease
                          Date                   Payment             Interest      Lease                      Liability
                                                                     Expense      Liability                  BALANCE
                              01/01/12                                                                              0.00
           0                  01/01/12                     0.00               0.00                 0.00             0.00
           1                  01/01/13                     0.00               0.00                 0.00             0.00
           2                  01/01/14                     0.00               0.00                 0.00             0.00
           3                  01/01/15                     0.00               0.00                 0.00             0.00
           4                  01/01/16                     0.00               0.00                 0.00             0.00

                                                           0.00               0.00                 0.00         TRUE
                                                                                       ok
Example #7 - LESSEE                                                                          debit              credit




                                                                                  ok               0.00                0.00



Lease Ex. 7-Lessee                                                 7/5/2011 11:46 AM                                                     Page 13
Acct 414                                                  186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                      Prof. Teresa Gordon




                                            Lease Example #7                                                                    Find implied interest rate
                                                                                                                                       n=
On January 1, 2012, Harris Manufacturing (lessee) and Accel Engines sign a lease with the following terms:                             PMT =
                                                                                                                                       PV=
 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
                                                                                                                                       FV=
 5.   Fair value of asset $300,000                          6.    Cost of asset $250,000                                               i=
 7.   Incremental borrowing rate: 12%                       8.    First payment due 1/1/12
 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




LEASE AMORTIZATION SCHEDULE
         Amount of BPO or RV =                0.00
         PV OF MLP:               0.00 INCEPTION DATE:                                                            01/01/12
         INTEREST RATE:                 ANNUAL     LAST PMT:                                                      01/01/11
         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
                               01/01/12                                                                             0.00
            0                  01/01/12                                        0.00                 0.00            0.00
            1                  01/01/13                                        0.00                 0.00            0.00
            2                  01/01/14                                        0.00                 0.00            0.00
            3                  01/01/15                                        0.00                 0.00            0.00
            4                  01/01/16                                        0.00                 0.00            0.00

                                                           0.00                0.00                 0.00         TRUE
                                                                                        ok
Lease #7 - LESSOR               sales-type lease                                              debit               credit
   1/1/2012 Net Investment in Lease
                    (PVMLP + PV of Unguaranteed RV)
                Cost of Sales
                    (Cost of asset - PV of Unguaranteed RV)
                Inventory/Equipment
                     (Cost of asset)
                Sales Revenue
                     (PVMLP)

                Cash
                Net Investment in Lease

  12/31/2012 Interest receivable
                Interest Revenue

      1/1/2013 Cash
                Interest Receivable
                Net Investment in Lease                                                                                         0.00
                                                                                                    0.00              0.00 ok




Lease Ex. 7-Lessor                                                        7/5/2011 11:46 AM                                                          Page 14
Acct 414                                       186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                    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:                                                       01/01/12
        INTEREST RATE:                ANNUAL      LAST PMT:                                                01/01/12
        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
                            01/01/12                                                                          0.00
          0                 01/01/12                   0.00             0.00                0.00              0.00
          1                 01/01/13                   0.00             0.00                0.00              0.00
          2                 01/01/14                   0.00             0.00                0.00              0.00
          3                 01/01/15                   0.00             0.00                0.00              0.00
          4                 01/01/16                   0.00             0.00                0.00              0.00

                                                       0.00             0.00                0.00          TRUE
                                                                                 ok
Example #7 - LESSEE                                                                   debit               credit




                                                                            ok              0.00                 0.00



Lease Ex. 9-Lessee                                            7/5/2011 11:46 AM                                                       Page 15
Acct 414                                                 186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                           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                                                                          0.00
            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 #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                                                       7/5/2011 11:46 AM                                                               Page 16
Acct 414                                        186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                    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                                             7/5/2011 11:46 AM                                                      Page 17
Acct 414                                             186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                          Prof. Teresa Gordon




                                      Lease Example #11                                                                      Find implied interest rate
                                                                                                                                    n=
  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                                        PMT =
    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
          (Lessee does not know implicit interest rate)                  of lease, otherwise, asset is returned to lessor.
                                                                                                                                    i=
    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                                                   7/5/2011 11:46 AM                                                            Page 18
Acct 414                                    186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                         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                                         7/5/2011 11:46 AM                                                        Page 19
Acct 414                                    186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                         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                                         7/5/2011 11:46 AM                                                        Page 20
Acct 414                                      186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                            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
 3.    Implicit interest rate (NOT known to lessee) 10% 4.     Lessor retains title to the asset at end of lease                pmt=
 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                                            7/5/2011 11:46 AM                                                          Page 21
Acct 414                                      186b2f68-a1f4-4e5f-b93b-a79dbdfccd9e.xls                                            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


          Lessor - Jack Dear Corp.                                        Debit              Credit




Lease Ex 13 - Lessor                                            7/5/2011 11:46 AM                                                          Page 22

								
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