In class lease examples with ifrs f08

Acct. 414 – Journal Entry Examples: Leases

Prof. Teresa Gordon

Introduction
ACCOUNTING FOR LEASES
FASB 13 (as amended)
Synopsis:
A lease that transfers substantially all of the benefits and risks of ownership should be accounted for
as the acquisition of an asset and the incurrence of an obligation by the lessee and as a sale or
financing by the lessor.
The chart below includes the BASIC criteria you must learn to classify leases. We will also do
more complicated examples that will require FARS research.

U.S. GAAP
CRITERIA FOR CAPITALIZATION:
FOR LESSEE AND LESSOR: (must meet at least one)
A1 - TITLE TRANSFERS. The lease transfers ownership of the property to the lessee by the end
of the lease term.
A2 - BARGAIN PURCHASE OPTION. The lease contains an option to purchase the leased
property at a bargain price.
A3 – ECONOMIC LIFE. The lease term is equal to or greater than 75% of the estimated economic
life of the leased property.
A4 – RECOVERY OF INVESTMENT. The present value of the minimum lease payments equals
or exceeds 90% of the fair value of the leased property less any investment tax credit retained
by the lessor.
FOR LESSOR ONLY: (must meet both)
B1 - COLLECTIBILITY. Collectibility of the minimum lease payments is reasonably predictable.
B2 - NO UNCERTAINTIES. No important uncertainties surround the amount of unreimburseable
costs yet to be incurred by the lessor under the lease.
We will work through a variety of examples. In some cases, we will classify the lease and do
journal entries. Those examples are contained in this file. In other cases, we will just classify the
lease. These classification examples are generally in the PowerPoint lecture slides and not included
in this file. We will not necessarily work examples in numeric order but you can find all the
solutions on the course web page.

in-classleaseexampleswithifrsf08-140102042555-phpapp01.doc

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Prof. Teresa Gordon

Introductory Examples – Lease 1A – Operating Lease
To illustrate accounting for lease transactions, we will use a simple case involving three parties:
1.
2.
3.

Farview Farms needs a small tractor (Model SX). These tractors have an expected useful life of six years with
no salvage value.
Idaho First Bank & Trust which is currently charging 12% interest on long-term equipment loans.
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:
Farview Farms

Debit

Credit

Troy Tractors

Debit

Credit

Rent expense
Cash

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.


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Prof. Teresa Gordon

Installment Purchase Arrangement
SITUATION 1B: PURCHASE WITH LONG-TERM BANK FINANCING
Assume Farview Farms decides to purchase the tractor and borrows 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 for five years. Again, the journal entries
follow the normal pattern:
Farview Farms

Debit

Credit

Troy Tractors

Debit

Credit

Idaho First Bank & Trust

Debit

Credit

Cash
Note Payable to Bank
Equipment
Cash (to Troy Tractors)

At year end:
Interest expense
Interest payable

Cash
Sales
Cost of goods sold
Inventory

Note Receivable
Cash

At year end
Interest receivable
Interest revenue

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Prof. Teresa Gordon

SITUATION 1C - DIRECT FINANCING LEASE
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.

0
1
2
3
4
5

----------------------------------------------------------------DATE
LEASE
INTEREST
REDUCTION
LEASE
PAYMENT
LEASE
RECBL/LIAB
50,001.85
RECBL/LIAB
BALANCE
----------------------------------------------------------------01/01/12
0.00
0.00
0.00
50,000.00
12/31/12
13,871.00
6,000.00
7,871.00
42,129.00
12/31/13
13,871.00
5,055.48
8,815.52
33,313.48
12/31/14
13,871.00
3,997.62
9,873.38
23,440.10
12/31/15
13,871.00
2,812.81
11,058.19
12,381.91
12/31/16
13,871.00
1,489.09
12,381.91
0.00

Farview Farms

Debit

Credit

Troy Tractors

Debit

Credit


Debit

Credit

Farm Equipment
Lease obligation
At year end:
Interest expense
Lease obligation
Cash

Cash
Sales
Cost of goods sold
Inventory

Equipment held for lease
Cash
Net investment in lease
Cash
Interest revenue


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Prof. Teresa Gordon

SITUATION 1D - SALES TYPE LEASE
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]

Farview Farms

Debit

Credit

Debit

Credit

Farm Equipment
Lease obligation
At year end:
Interest expense
Lease obligation
Cash
Troy Tractors
Sales
Cost of goods sold
Inventory
At year end:
Cash
Interest revenue


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Prof. Teresa Gordon

Introductory Example – Lease 1E - BARGAIN PURCHASE OPTION
1.
2.

Inception date: 1/1/12
Lessor: Troy Tractors Inc.

3.

Fair value of tractor at 1/1/12: $50,000

4.

Cost to manufacture tractor: $40,000

5.

Estimated fair value at end of lease is $10,000

6.

Fixed non-cancelable lease term: 5 years.

7.

First payment due on 12/31/12

8.

Lessee: Farview Farms

9.

Incremental borrowing rate (lessee): 12%

10. Implicit interest rate (known to lessee): 12%
11. Option to buy at end of lease term for $5,000
12. Estimated useful life of tractor: 8 years

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:
Date
Payment
Interest
"Principal"

Farview Farms

Balance

Debit

Credit

Debit

Credit

At inception:
Farm Equipment
Lease liability
At year end:
Interest expense
Lease liability
Cash
Troy Tractors
At inception:

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Prof. Teresa Gordon

Lease Receivable
Sales
Cost of Goods Sold
Inventory
At year end:
Cash
Lease Receivable
Interest revenue


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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
the following terms:
1.
2.

Inception date: 1/1/12
Lessor: Troy Tractors Inc.

6.
7.

Lessee: Farview Farms
Fixed non-cancelable lease term: 6 years.

3.

Fair value of tractor at 1/1/12: $50,000

8.

Option to buy at end of lease term for $2,000

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
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:
Date
Payment
Interest
"Principal"

Farview Farms

Debit

Balance

Credit

At inception:
Farm Equipment
Lease liability
Cash
At year end:
Interest expense
Lease liability


8

Troy Tractors
At inception:
Cash
Lease Receivable
Sales
Cost of Goods Sold
Inventory
At year end:
Lease Receivable
Interest revenue


Prof. Teresa Gordon
Debit

Credit

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Prof. Teresa Gordon

International Financial Reporting Standards (IFRS)
Leases (IAS17)
A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incidental to ownership. A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incidental to ownership.
Classification depends on the substance of the transaction rather than the form of the contract.
Examples of situations that individually or in combination would normally lead to a lease being
classified as a finance lease are:
a) the lease transfers ownership of the asset to the lessee by the end of the lease term.
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable for it to be reasonably
certain, at the inception of the lease, that the option will be exercised.
c) the lease term is for the major part of the economic life of the asset even if title is not
transferred.
d) at the inception of the lease the present value of the minimum lease payments amounts to at
least substantially all of the fair value of the leased asset.
e) the leased assets are of such a specialized nature that only the lessee can use them without
major modifications.
Other indications that it is a finance lease include:
a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are
borne by the lessee.
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for
example, in the form of a rent rebate equalling most of the sales proceeds at the end of the
lease)
c) the lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.
The examples and indicators (above) are not always conclusive. If it is clear from other features that
the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is
classified as an operating lease.


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Prof. Teresa Gordon

Lease Example #3
On January 1, 2012, Andrewson Consulting and Sun Computers sign a lease with the following terms:
1.
3.
5.
7.
9.

Term: 3 years
Implicit interest rate (known to lessee) 10%
Fair value of asset $130,000
Incremental borrowing rate: 15%
Estimated useful life of asset: 4 years

2. Payments of $47,523
4. Lessor retains ownership of asset at end of lease
6. Cost of asset $100,000
8. First payment due 1/1/12
10. No collection or cost uncertainties for lessor

FIND PRESENT VALUE OF MINIMUM LEASE PAYMENTS:

Type of lease for

Lessor

Lessee

US GAAP
IFRS

0
1
2

Date
1/01/12
1/01/12
1/01/13
1/01/14
Lessee

Lease Payment

Interest
0
8,248
4,320
12,568

47,523
47,523
47,523
142,569
Debit

Credit


Principal
47,523
39,275
43,203
130,001

Balance
130,000
82,477
43,202
0
0

Lessor

Debit

Credit

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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.
2.
3.
4.
5.
6.
7.

Inception of lease: March 30, 2012
Term: 3 years
Implicit interest rate (not known to lessee) 10%
Purchase option at end of lease: $2,500

8.
9.
10.
11.
12.
13.

Payments of ______________
Est. fair value of asset at end of lease $5,000
Cost of asset $100,000
First payment due 3/30/12
No collection or cost uncertainties for lessor
Both parties have calendar-year fiscal years.

FIND THE PAYMENT WHICH IDAHO FIRST BANK SHOULD ASK TO EARN THE IMPLICIT INTEREST
RATE LISTED ABOVE:

PVMLP for Lessee:

PVMLP for Lessor:

Type of lease for

Lessor

Lessee

US GAAP
IFRS
Explain:


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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.
Date
0
1
2
3

03/30/12
03/30/12
03/30/13
03/30/14
03/30/15

Lease
Payment

Interest

35,869
35,869
35,869
2,500

0
7,488
4,082
266

Principal
35,869
28,381
31,787
2,234

Genessee Engineering Inc.

3/30/12

Balance
98,270
62,401
34,020
2,234
0
Debit

Credit

Leased Asset
Lease obligation
Cash

12/31/12

35,869

Interest expense
Interest payable

3/30/13

Interest expense
Interest payable
Lease obligation
Cash

12/31/13

35,869

Interest expense
Interest payable


13


Lease #5

3/30/14

Genessee Engineering Inc.

Prof. Teresa Gordon

Debit

Credit

Interest expense
Interest payable
Lease obligation
Cash

12/31/14

35,869

Interest expense
Interest payable

3/30/15

Interest expense
Interest payable
Lease obligation
Cash

12/31/15

2,500


12/31/15


3/30/17

Acc'd Depreciation


Lease Liability

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Prof. Teresa Gordon

Example 5 – Lessor Accounting (Direct Financing Lease with BPO)
Date
0
1
2
3

03/30/12
03/30/12
03/30/13
03/30/14
03/30/15

Lease
Payment

Interest

35,869
35,869
35,869
2,500
110,107

0
6,413
3,468
226
10,107

03/30/12

Cash

Principal
35,869
29,456
32,401
2,274
100,000

Balance
100,000
64,131
34,675
2,274
0

Debit

Credit
35,869

Equipment purchased for lease
12/31/12

Interest receivable
Interest revenue

3/30/13

Cash

35,869

Interest receivable
Interest revenue
12/31/13

Interest receivable
Interest revenue

3/30/14

Cash

35,869

Interest receivable
Interest revenue
12/31/14

Interest receivable
Interest revenue

12/31/15

Cash

2,500

Interest receivable
Interest revenue


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Prof. Teresa Gordon

Example 5 – FASB Style J E s - Lessor
Date
0
1
2
3

Lease
Payment

03/30/12
03/30/12
03/30/13
03/30/14
03/30/15

Interest

35,869
35,869
35,869
2,500
110,107

0
6,413
3,468
226
10,107

Principal
35,869
29,456
32,401
2,274
100,000


3/30/12

Lease Payments Receivable
(or Gross investment in lease)

Balance
100,000
64,131
34,675
2,274
0

Debit

Credit

110,107

Unearned interest revenue
Cash

35,869

12/31/12

Interest revenue

3/30/13

Cash

35,869

Interest revenue
Continue as above for the following dates
12/31/13
3/30/14
12/31/14
3/30/15


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Prof. Teresa Gordon

COMMENTS ON APPLYING CRITERIA (US GAAP)
LEASE TERM:
Always ends at a bargain purchase option (including ordinary renewal periods up to BPO).
Includes renewal periods
under bargain renewal options
if there is a penalty large enough to assure renewal
if renewal or extensions is at option of lessor
during which lessee guarantees lessor's debt related to property
during which there is a loan from lessee to the lessor
Lease must be cancelable only under remote contingency, with permission of lessor, or if
lessee enters into new lease with lessor, or with there is a large penalty for cancellation that
makes cancellation unlikely.

MINIMUM LEASE PAYMENTS:
Excludes contingent rentals
Excludes executory costs paid by lessor:
maintenance
property taxes
insurance
Excludes all rental payments past date of bargain purchase option
Includes all rental payments up to date of bargain purchase option
Includes bargain purchase option
Includes renewal penalties not large enough to assure continuation of lease
Includes rents during renewal periods covered by:
bargain renewal options
nonrenewal penalty large enough to assure continuation of lease
Includes guaranteed residual value of property If guaranteed by lessee
If guaranteed by third party, only lessor includes as part of minimum lease payments

Note:
Never record the leased asset at more than its fair value!
The asset should be recorded at the lower of the PVMLP or the FMV.


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Prof. Teresa Gordon

Lease Example #7
On January 1, 2012, Harris Manufacturing (lessee) and Accel Engines sign a lease with the following terms:
1.
3.
5.
7.
9.
10.

Term: 4 years
Implicit interest rate (known to lessee) 10%
Est. fair value of asset at end of lease: $10,000

2.
4.
6.
8.
10.
11.

PVMLP for Lessee:

Payments of $84,079
Lessor retains ownership of asset at end of lease
The residual value is NOT guaranteed by lessee

PVMLP for Lessor:

Type of lease for

Lessor

Lessee

US GAAP
IFRS
Explain:

Lessee
Date
0
1
2
3

01/01/12
01/01/12
01/01/13
01/01/14
01/01/15

Lease
Payment
84,079
84,079
84,079
84,079

Interest
0
20,909
14,592
7,644

Lessor

Principal

Balance

84,079
63,170
69,487
76,435

Lessee – Harris Manufacturing


293,171
209,092
145,922
76,435
0

Lease
Payment

Interest

84,079
84,079
84,079
84,079
10,000

0
21,593
15,344
8,470
909

Debit

Principal
84,079
62,486
68,735
75,609
9,091

Balance
300,000
215,921
153,435
84,700
9,091
0

Credit

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Prof. Teresa Gordon

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Prof. Teresa Gordon

Lease # 7 - Lessor Accounting for Sales-Type Lease when there is an
Unguaranteed Residual Value
Date
0
1
2
3
4

Lease
Payment

01/01/12
01/01/12
01/01/13
01/01/14
01/01/15
01/01/16
Totals

84,079
84,079
84,079
84,079
10,000
346,316

Lessor – Accel Engines

Interest

Principal

0
21,593
15,344
8,470
909
46,316
Debit

84,079
62,486
68,735
75,609
9,091
300,000

Balance
300,000
215,921
153,435
84,700
9,091
0
0
Credit

1/1/12
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
12/31/12
Interest receivable
Interest Revenue
1/1/13
Cash
Interest Receivable


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Prof. Teresa Gordon

UNGUARANTEED RESIDUAL VALUES JOURNAL ENTRY FORMAT FOR LESSOR
(As illustrated by FASB -- use of Gross rather than Net investment in lease is optional.
Net investment in lease = GIIL - unearned income)

DIRECT FINANCING LEASE:
Gross Investment in Lease (MLP + Unguaranteed Residual Value + initial direct costs)
Equipment (Cost or carrying amount)
Unearned Income (GIIL - cost or carrying amount)

SALES TYPE LEASE:
Gross Investment in Lease (MLP + Unguaranteed Residual Value)
Cost of Sales (Cost of asset - PV of Unguaranteed Residual Value)
Inventory/Equipment (Cost of asset)
Unearned Income (GIIL -PVMLP)
Sales Revenue (PVMLP)

Where MLP = minimum lease payments exclusive of executory costs paid by the lessor
GIIL = gross investment in lease
PVMLP = present value of MLP

The “easier” method:

DIRECT FINANCING LEASE:
Net Investment in Lease (PVMLP + PV of Unguaranteed Residual Value + initial direct costs)
Equipment (Cost or carrying amount)

SALES TYPE LEASE:
Net Investment in Lease (PVMLP + PV of Unguaranteed Residual Value)
Cost of Sales (Cost of asset - PV of Unguaranteed Residual Value)
Inventory/Equipment (Cost of asset)

Sales Revenue (PVMLP)


21


Prof. Teresa Gordon

Lease Example #9
On January 1, 2012, Hamford Ritz Inc. and Cisco Leasing sign a lease with the following terms:
1.
3.
5.
7.
9.
11.
13.

Term: 4 years
Implicit interest rate (not known to lessee) 10%
The lessor incurred initial direct costs of $1,848
related to the lease

2.
4.
6.
8.
10.
12.

Payments of $81,140
The residual value is NOT guaranteed by lessee


Type of lease for

Lessor

Lessee

US GAAP
IFRS
Explain:

Lessee
0
1
2
3

Date
01/01/12
01/01/12
01/01/13
01/01/14
01/01/15

Lease Payment
81,140
81,140
81,140
81,140

Hamford Ritz Inc. (Lessee)


Interest

Principal

12%
0
23,386
16,456
8,694
Debit

81,140
57,754
64,685
72,447

Balance
276,026
194,886
137,131
72,447
0
Credit

22



Prof. Teresa Gordon

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Prof. Teresa Gordon

Lease Example #9 – Lessor Accounting for Initial Direct
Costs with a Direct Financing Lease
How to arrive at adjusted interest rate:

0
1
2
3
4

Date
01/01/12
01/01/12
01/01/13
01/01/14
01/01/15
01/01/16

Lease Payment
81,140
81,140
81,140
81,140
25,000

Interest
9.56%
0
21,100
15,360
9,072
2,182

Cisco Leasing Co. (Lessor)

1/1/12

Initial Direct Costs – Leases

Principal

Balance
301,848
220,708
160,667
94,887
22,818
0

81,140
60,040
65,780
72,069
22,818
Debit

Credit

1,848

Cash

1,848
300,000

Cash

1/1/12

300,00


300,000

Initial direct costs - leases

Cash

1,848

81,140

12/31/12

Interest revenue

1/1/13

Cash


81,140

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Prof. Teresa Gordon


12/31/15

Interest revenue

1/1/16

Used Equipment
Loss on Leased Asset

The last “payment” the lessor will receive is the returned equipment. It should be recorded at the lower of fair value or
original estimated residual value. In other words, it may be necessary to record a loss. Lessors are supposed to evaluate
the residual values at each balance sheet date and recognize any losses in anticipated value.


25


Prof. Teresa Gordon

Lease Example #10
On May 1, 2012, SlumberJay, Inc. and Omaha Oscillators, Inc. sign a lease with the following terms:
1.
3.
5.
7.
9.
10.
12.

Term: 4 years
Implicit interest rate (NOT known to lessee) 10%
Est. fair value of asset at end of lease: $0
Initial direct costs incurred by lessor $1,000

2.
4.
6.
8.
10.
11.

Payments of $82,434
There are collection uncertainties for lessor
The payments include $5,000 for insurance to be
paid by the lessor


Type of lease for
Lessor

Lessee

US GAAP
IFRS

0
1
2
3

Date
05/01/12
05/01/12
05/01/13
05/01/14
05/01/15

Lease Payment

Interest

77,434
77,434
77,434
77,434

0
19,257
13,439
7,040

Lessor – Omaha Oscillators, Inc.

Principal
77,434
58,177
63,995
70,394

Balance
270,000
192,566
134,389
70,394
0

Debit

Credit

05/01/12 Initial direct costs – deferred
Cash
05/01/12 Cash
Unearned rental income
Prepaid Insurance

82,434

12/31/12 Rental costs
Initial direct costs - deferred
Insurance expense
Prepaid insurance
Rental income


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Prof. Teresa Gordon

Accumulated Depreciation


27


Lessor – Omaha Oscillators, Inc.
05/01/13 Cash
Prepaid Insurance

Prof. Teresa Gordon

Debit

Credit

82,434

12/31/13 Rental costs
Initial direct costs - deferred
Insurance expense
Prepaid insurance
Rental income


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Prof. Teresa Gordon

Lease Example #10 - Lessee
0
1
2
3

Date
05/01/12
05/01/12
05/01/13
05/01/14
05/01/15

Lease Payment

Interest

77,434
77,434
77,434
77,434

SlumberJay, Inc. - Lessee
05/01/12 Leased Asset
Prepaid Insurance
Lease Obligation
Cash

0
22,318
15,704
8,296

Principal
77,434
55,116
61,730
69,138

debit

Balance
263,417
185,983
130,867
69,137
0

credit

82,434

12/31/12 Depreciation Expense
Insurance expense
Prepaid insurance
Interest Expense
Interest Payable
05/01/13 Lease Obligation
Interest Payable
Insurance expense
Cash

82,434

12/31/13 Depreciation Expense
Insurance expense
Prepaid insurance
Interest Expense
Interest Payable
01/01/14 Lease Obligation
Interest Payable
Prepaid Insurance
Cash


82,434

29


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.
3.
5.
7.

Term: 4 years
Interest rate used to compute payments = 12%
(Lessee does not know implicit interest rate)
Initial direct costs to arrange lease: $3,000

9.
11.
13.

2.
4.
6.
8.

Payments of $61,924
The lessee can purchase asset for $10,000 at end
of lease, otherwise, asset is returned to lessor.
The payments include $5,000 for maintenance.

10.
12.


Type of lease for
Lessor

Lessee

US GAAP
IFRS
Explain:

Lessee’s Amortization Schedule
0
1
2
3

Date
06/01/12
06/01/12
06/01/13
06/01/14
06/01/15

Lease Payment
56,924
56,924
56,924
56,924

Fantasia Funnels Inc. (Lessee)


Interest
14%
0
18,502
13,123
6,991
Debit

Principal
56,924
38,422
43,801
49,933

Balance
189,081
132,157
93,735
49,933
0

Credit

30


Prof. Teresa Gordon

Lease Example #11
Date

Lease
Payment

Interest

Principal

Balance

6/01/12

203,000

0

6/01/12

56,924

1

6/01/13

56,924

2

6/01/14

56,924

3

6/01/15

56,924

4

6/01/16

10,000

Note: This problem is similar to Lease #9. It requires you to compute a new interest rate for the lessor so
that the initial direct costs are amortized over the life of the lease. Note that the residual value MUST be
included because the asset’s value at the end of the lease is important to the lessor since there is no title
transfer or bargain purchase option.
Remember that the lessor’s amortization table includes residual values (whether or not they are guaranteed)
if the lessor expects the leased asset to be returned at end of lease (in other words, no title transfer and no
bargain purchase option).

Idaho First Bank. (Lessor)


Debit

Credit

31



Prof. Teresa Gordon

32


Prof. Teresa Gordon

LEASE Example #12
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
3.
4.
5.
6.
7.
8.
9.
10.
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 ARE THE MINIMUM LEASE PAYMENTS?

FIND PRESENT VALUE:

LESSOR - Washington Leasing Co.

Date

Payment

Interest

Lessor - Washington Leasing Co.

"Principal"

Debit

Balance

Credit

Lease Example 12 (continued)

33


Prof. Teresa Gordon

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
3.
4.
5.
6.
7.
8.
9.
10.
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 ARE THE MINIMUM LEASE PAYMENTS?

FIND PRESENT VALUE:

LESSEE - Hells Gate Jet Boats

Date

Payment

Interest

Lessee - Hells Gate Jet Boats

"Principal"

Debit

Balance

Credit

Lease #12 – continued


34


Prof. Teresa Gordon

What if the lessee decided that the penalty was large enough that they would renew the lease? How
would you classify the lease in this situation?

LESSEE - Hells Gate Jet Boats

Date

Payment

Interest

Lessee - Hells Gate Jet Boats

"Principal"

Debit

Balance

Credit

Note that the implicit interest rate for the lessor would also have to be re-computed if the lessor also decided that the
penalty was going to be large enough. A new table would be required. It would still be direct financing lease since
lease term would exceed 75% of economic life.


35


Prof. Teresa Gordon

LEASE Example #13
On October 1, 2012, Knightco (lessee) and Jack Dear Corp. sign a lease with the following terms:
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
5.
6.
7.
8.
9.
10.
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.

LESSOR AMORTIZATION TABLE
Date
Payment

Interest

"Principal"

Balance

LESSEE AMORTIZATION TABLE
Date
Payment

Interest

"Principal"

Balance


36


Prof. Teresa Gordon

Lease #13
Lessee – Knightco Inc.

Debit

Credit

Lessor – Jack Dear Corp.

Debit

Credit


37

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