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Chapter 21: 11IFRS_a (page 1264)

A lease agreement between Lennox Leasing Company and Gill Company is described in IFRS21-10. Refer to the data in IFRS21-10 and do the following for the lessor.

Inception date: May 1, 2017

Annual lease payment due at the beginning of each year, beginning with May 1, 2017: \(18,829.49

Bargain-purchase option price at end of lease term: \)4,000.00

Lease term: 5 years

Economic life of leased equipment: 10 years

Lessor鈥檚 cost: \(65,000.00; fair value of asset at May 1, 2017, \)81,000.00

Lessor鈥檚 implicit rate: 10%; lessee鈥檚 incremental borrowing rate 10%

The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(a) Compute the amount of the lease receivable at the inception of the lease.

Short Answer

Expert verified

Answer

The lease receivable at inception is $81,000.00.

Step by step solution

01

Meaning of Sale-Type Lease

In a sales-type lease, the lessor is assumed to be selling a product to the lessee, which necessitates the reporting of a profit or loss on the sale. As a result, at the lease's start date, the following accounting is applied: (a) Recognize assets. (b)Recognize net investment.

02

Computation of lease receivables

Annual rental payment

$18,829.49

PV of an annuity-due of 1 for n = 5,i = 10%

脳4.16986

PV of periodic rental payments

$78,516.34

Bargain-purchase option

$ 4,000.00

PV of 1 for n = 5,i = 10%

脳0.62092

PV of bargain-purchase option

$ 2,483.68

PV of periodic rental payments

$78,516.34

PV of bargain-purchase option

+ 2,483.68

Lease receivable at inception

$81,000.00

Note:A bargain-purchase option is included in the lease agreement. From the perspective of the lessor, the lease qualifies as a finance lease.

The lease is a sales-type lease since the amount of the sale (which in this case equals the present value of the minimum lease payments, $81,000) exceeds the lessor's cost ($65,000).

The recurrent yearly rentals plus the bargain-purchase option make up the minimum lease payments for this lease. In this lease, there is no residual value that is significant to the lessor's accounting.

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Most popular questions from this chapter

Question: Lessee Entries; Capital Lease with Unguaranteed Residual Value) On January 1, 2017, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of \(8,668 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a \)5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke鈥檚 incremental borrowing rate is 10%, and the lessor鈥檚 implicit rate is unknown.

Instructions

(c) Prepare all necessary journal entries for Burke for this lease through January 1, 2018.

Lessee-Lessor Entries, Sales-Type Lease) Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2017. The following information relates to the lease agreement.

  1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
  2. The cost of the machinery is \(525,000, and the fair value of the asset on January 1, 2017, is \)700,000.
  3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $100,000. Jensen depreciates all of its equipment on a straight-line basis.
  4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
  5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. 6. Glaus desires a 10% rate of return on its investments. Jensen鈥檚 incremental borrowing rate is 11%, and the lessor鈥檚 implicit rate is unknown.

Instructions

(Assume the accounting period ends on December 31.)

  1. Discuss the nature of this lease for both the lessee and the lessor.

Question: (Balance Sheet and Income Statement Disclosure鈥擫essor) Assume the same information as in P21-4.

(Balance Sheet and Income Statement Disclosure鈥擫essee) The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.

Inception date

October 1, 2017

Lease term

6 years

Economic life of leased equipment

6 years

Fair value of asset at October 1, 2017

\(300,383

Residual value at end of lease term

鈥�0鈥�

Lessor鈥檚 implicit rate

10%

Lessee鈥檚 incremental borrowing rate

10%

Annual lease payment due at the beginning of each year, beginning with October 1, 2017

\)62,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to \(5,500 per year and are to be paid each October 1, beginning October 1, 2017. (This \)5,500 is not included in the rental payment of \(62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

Date

Annual lease payments/Receipt

Interest (10%)

On Unpaid liability/Receivable

Reduction of Lease Liability?

Receivable

Balance of Lease Liability/Receivable

10/01/17

\)300,383

10/01/17

\(62,700

\)62,700

237,683

10/01/18

\(62,700

\)23,768

38,932

198,751

10/01/19

\(62,700

19,875

42,825

155,926

10/01/20

\)62,700

15,593

47,107

108,819

10/01/21

\(62,700

10,882

51,818

57,001

10/01/22

\)62,700

5,699*

57,001

0

\(376,200

\)75,817

$300,383

b) Assuming the lessor鈥檚 accounting period ends on December 31, answer the following questions with respect to this lease agreement.

4. What items and amounts will appear on the lessor鈥檚 balance sheet at December 31, 2018?

Assume that IBM leased equipment that was carried at a cost of \(150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of \)30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM鈥檚 January 1, 2017, journal entries at the inception of the lease.

A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.

Inception date

May 1, 2017

Annual lease payment due at the beginning

of each year, beginning with May 1, 2017

\(21,227.65

Bargain-purchase option price at end of lease term

\) 4,000.00

Lease term

5 years

Economic life of leased equipment

10 years

Lessor鈥檚 cost

\(65,000.00

Fair value of asset at May 1, 2017

\)91,000.00

Lessor鈥檚 implicit rate

10%

Lessee鈥檚 incremental borrowing rate

10%

Instructions

(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.

(a) Compute the amount of the lease receivable at the inception of the lease.
See all solutions

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