Idaho Equipment Lease Agreement

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Idaho Equipment Lease Agreement Powered By Docstoc
					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
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
Acct 414                                                 a8c4b564-ff8f-403d-af26-58c0022559ec.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                           n=
  2.   Lessor: Troy Tractors Inc.                            8.    Lessee: Farview Farms
                                                                                                                           i=
  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=
  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                                                           9/12/2011 5:47 PM                                                       Page 6
Acct 414                                   a8c4b564-ff8f-403d-af26-58c0022559ec.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                                             9/12/2011 5:47 PM                                   Page 7
Acct 414                                                    a8c4b564-ff8f-403d-af26-58c0022559ec.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=
                                                                                                                                i=
       1.      Inception date: 1/1/12                            6.      Lessee: Farview Farms
       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              PMT =
       5.      First payment due on 1/1/12                       10.     Desired rate of return for lessor and incremental
                                                                 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
   7        01/01/18


Lease Ex. 1F                                                                  9/12/2011 5:47 PM                                                             Page 8
Acct 414                                          a8c4b564-ff8f-403d-af26-58c0022559ec.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                                                  9/12/2011 5:47 PM                             Page 9
Acct 414                                             a8c4b564-ff8f-403d-af26-58c0022559ec.xls                                     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.

                                                                                                                             For IFRS:
                                                                                                                      Find implied interest rate
                                                                                                                             n=
LEASE AMORTIZATION SCHEDULE                                                                                                  PMT =
        Amount of BPO or GRV =                                                                                               PV=
        PV OF MLP:              0.00 INCEPTION DATE:                                       03/30/12                          FV=
        INTEREST RATE:                ANNUAL     LAST PMT:                                 03/30/11                          i=
        PAYMENT:                     TERM IN YRS
        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                                                                         Lessee table starts with PVMLP unless > FMV
        0              03/30/12                                                                         If > FMV, start with FMV
        1              03/30/13
        2              03/30/14
        3              03/30/15
        4              03/30/16

                                             0.00             0.00             0.00             0.00
                                                                      ok
Example #5 - LESSEE                                                        debit           credit
 03/30/12 Plant, property and equipment
          Lease obligation

            Lease obligation
            Cash

 12/31/12 Depreciation expense
            Accumulated depreciation

            Interest expense
            Interest payable

 03/30/13 Interest payable
              Interest expense 3 months
          Cash
          Lease obligation

 12/31/13 Depreciation expense
          Acc'd depr

            Interest expense
            Interest payable

                                                                 ok            0.00             0.00




Lease Ex. 5-Lessee                                                 9/12/2011 5:47 PM                                                           Page 10
Acct 414                                                a8c4b564-ff8f-403d-af26-58c0022559ec.xls                                     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                  0% Reduction in               Lease
                       Date               Payment          Interest     Lease                 Receivable
                                                           Revenue    Receivable              BALANCE
                          03/30/12                                                                             FMV + IDC for Direct Finance Lease
           0              03/30/12
           1              03/30/13
           2              03/30/14
           3              03/30/15
           4              03/30/16

                                                 0.00              0.00              0.00        TRUE
                                                                           ok
Lease #7 - LESSOR                                                                debit            credit
  3/30/2012 Net Investment in Lease
            Cash
              Asset held for lease

  12/31/2012 Interest receivable
               Interest Revenue

   3/30/2013 Cash
               Interest revenue
               Interest Receivable
               Net Investment in Lease
                                                                                     0.00              0.00 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                                             0.00
               Unearned income (interest)                                                       10,107.00
               Asset held for lease                                                            100,000.00

               Cash                                                             84,079.00
               Gross investment in lease                                                        84,079.00
                                                                                84,079.00      194,186.00




Lease Ex. 5-Lessor                                                   9/12/2011 5:47 PM                                                            Page 11
Acct 414                                         a8c4b564-ff8f-403d-af26-58c0022559ec.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 =                   Lessee does not include because not guarnateed
        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                       Liability
                                                                     Expense     Liability                   BALANCE
                              01/01/12
           0                  01/01/12
           1                  12/31/12
           2                  12/31/13
           3                  12/31/14
           4                  12/31/15

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




                                                                                 ok               0.00                 0.00



Lease Ex. 7-Lessee                                                 9/12/2011 5:47 PM                                                     Page 12
Acct 414                                                   a8c4b564-ff8f-403d-af26-58c0022559ec.xls                                          Prof. Teresa Gordon




                                                                                                                                  Find PVMLP
                                             Lease Example #7                                                                           n=
 On January 1, 2012, Harris Manufacturing (lessee) and Accel Engines sign a lease with the following terms:                             PMT =
                                                                                                                                        FV=
 1.    Term: 4 years                                         2.   Payments of $84,079                                                   i=
 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
 7.    Incremental borrowing rate: 12%                       8.   First payment due 1/1/12                                              PV=
 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 =
         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                                                                                      Lessor always starts with FMV
             0                  01/01/12                                                                                      for a sales type lease
             1                  12/31/12
             2                  12/31/13
             3                  12/31/14
             4                  12/31/15

                                                           0.00               0.00                 0.00          TRUE
                                                                                       ok
Lease #7 - LESSOR                                                                            debit               credit
   1/1/2012 Net Investment in Lease
                    (PVMLP + PV of Unguaranteed RV)
plug             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                                                          9/12/2011 5:47 PM                                                            Page 13
Acct 414                                        a8c4b564-ff8f-403d-af26-58c0022559ec.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:                                                       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                                              9/12/2011 5:47 PM                                                      Page 14
Acct 414                                                 a8c4b564-ff8f-403d-af26-58c0022559ec.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                  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                                                      9/12/2011 5:47 PM                                                               Page 15
Acct 414                                         a8c4b564-ff8f-403d-af26-58c0022559ec.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                                                9/12/2011 5:47 PM                                                           Page 16
Acct 414                                             a8c4b564-ff8f-403d-af26-58c0022559ec.xls                                           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                                                  9/12/2011 5:47 PM                                                              Page 17
Acct 414                                   a8c4b564-ff8f-403d-af26-58c0022559ec.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                                         9/12/2011 5:47 PM                                                    Page 18
Acct 414                                   a8c4b564-ff8f-403d-af26-58c0022559ec.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                                         9/12/2011 5:47 PM                                                    Page 19
Acct 414                                      a8c4b564-ff8f-403d-af26-58c0022559ec.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


          Lessee - Knightco                                               Debit              Credit




Lease Ex 13 - Lessee                                            9/12/2011 5:47 PM                                                           Page 20
Acct 414                                      a8c4b564-ff8f-403d-af26-58c0022559ec.xls                                            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                                            9/12/2011 5:47 PM                                                          Page 21

				
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Description: Idaho Equipment Lease Agreement document sample