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Chapter 21: 16Q (page 1239)

How should changes in the estimated unguaranteed residual value be handled by the lessor?

Short Answer

Expert verified

The lessor must recognize a loss to the extent of the decline in the period of the decline.

Step by step solution

01

Meaning of Unguaranteed Residual Value

The value of a leased resource at the completion of the agreement's term that's not the lessee's duty is referred to as unguaranteed residual value. Unguaranteed residual values don't qualify as a lessee's monetary duty and don't contribute to the computation of the least lease payment.

02

Explaining how changes in the estimated unguaranteed residual value should be handled by the lessor

If the residual value estimate falls, the lessor must recognize the loss in the amount of the decline at the time of the decline. If taken literally, the lessor would have to revise the accounting for the entire transaction using the new estimate. Leases receivable is less than the amount of the decline in the estimated residual value. There is no upward revision in the anticipated residual value.

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Most popular questions from this chapter

The residual value is the estimated fair value of the leased property at the end of the lease term.

(b) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the lessor鈥檚 accounting for a direct-financing lease transaction?

Jana Kingston Corporation enters into a lease on January 1, 2017, that does not transfer ownership or contain a bargain-purchase option. It covers 3 years of the equipment鈥檚 8-year useful life, and the present value of the minimum lease payments is less than 90% of the fair value of the asset leased. Prepare Jana Kingston鈥檚 journal entry to record its January 1, 2017, annual lease payment of $35,000.

Use the information for Indiana Jones Corporation from BE21-9. Assume that for Lost Ark Company, the lessor, collectibility is reasonably predictable, there are no important uncertainties concerning costs, and the carrying amount of the equipment is \(202,921. Prepare Lost Ark鈥檚 January 1, 2017, journal entries.

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of \)40,000 each, beginning January 1, 2017. In addition, Indiana Jones guarantees the lessor a residual value of $20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones鈥� January 1, 2017, journal entries assuming an interest rate of 10%.

(Lessor Entries; Direct-Financing Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

  1. Jan Way Company has the option to purchase the equipment for \(16,000 upon termination of the lease.
  2. The equipment has a cost and fair value of \)160,000 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of \(16,000.
  3. Jan Way Company is required to pay \)5,000 each year to the lessor for executory costs.
  4. Castle Leasing Company desires to earn a return of 10% on its investment.
  5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Instructions

  1. Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.

Question: (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

*Rounding error is \)1.

(b) Assuming the lessee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 lessee鈥檚 balance sheet at December 31, 2018?
See all solutions

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