ADMS 3595 Lecture Notes - Lecture 6: Deferral, Current Liability, Unearned Income

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8 Jun 2018

School

York University

Department

Administrative Studies

Course

ADMS 3595

Professor

Yong Troy

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ADMS 3595 Solutions to Self Practice Questions

EXERCISE 20-1

(a) Initial Measurement of Right-of-Use Asset and Lease Liability

Contractual Rights and Obligations under Lease,

Jan. 1, 2017

Annual lease payment:

Yearly payment $73,580.00

Executory costs 2,470.29

Annual lease payment $71,109.71

Present value of lease payments

$71,109.71 X 6.32825 = $450,000.00

Excel formula =PV(rate,nper,pmt,fv,type)

Using a financial calculator:

$ ?

Yields $450,000

12%

PMT

$ (71,109.71)

$ 0

Type

1/1/17 Right-of-Use Asset ............................................ 450,000.00

Lease Liability .................................... 450,000.00

(b)

MALEKI CORP.

Lease Amortization Schedule

(Lessee)

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ADMS 3595 Solutions to Self Practice Questions

Date

Annual

Pmt. Excl.

Exec. Costs

Interest (12%)

on Unpaid

Liability

Reduction

of Lease

Liability

Balance

of Lease

Liability

$450,000.00

Jan. 1,

2017

$71,109.71

378,890.29

Jan. 1,

2018

71,109.71

$45,466.83

25,642.88

353,247.41

Jan. 1,

2019

71,109.71

42,389.69

28,720.02

324,527.39

Jan. 1,

2020

71,109.71

38,943.29

32,166.42

292,360.97

Jan. 1,

2021

71,109.71

35,083.32

36,026.39

256,334.58

Jan. 1,

2022

71,109.71

30,760.15

40,349.56

215,985.02

Jan. 1,

2023

71,109.71

25,918.20

45,191.51

170,793.51

Jan. 1,

2024

71,109.71

20,495.22

50,614.49

120,179.02

Jan. 1,

2025

71,109.71

14,421.48

56,688.23

63,490.79

Jan. 1,

2026

71,109.71

7,618.92

63,490.79

$711,097.10

$261,097.10

$450,000.00

(c)

1/1/17 Insurance Expense ........................................... 2,470.29

Lease Liability ................................................... 71,109.71

Cash .................................................. 73,580.00

12/31/17 Depreciation Expense ....................................... 45,000.00

Accumulated Depreciation—

Right-of-Use Asset ........................ 45,000.00

($450,000 ÷ 10)

12/31/17 Interest Expense ......................................... 45,466.83

Lease Liability .................................... 45,466.83

1/1/18 Insurance Expense ......................................... 2,470.29

Lease Liability ................................................. 71,109.71

Cash .................................................. 73,580.00

12/31/18 Depreciation Expense .................................... 45,000.00

Accumulated Depreciation—

Right-of-Use Asset ........................ 45,000.00

12/31/18 Interest Expense............................................. 42,389.69

Lease Liability ................................... 42,389.69

(d) Note X: The following is a schedule of future lease payments under a contract-based

lease liability expiring December 31, 2026 together with the balance of the lease liability.

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ADMS 3595 Solutions to Self Practice Questions

Year ending December 31

2019 $73,580

2020 73,580

2021 73,580

2022 73,580

2023 73,580

2024 and beyond 220,740

Total lease payments 588,640

Less amount representing executory costs 19,763

568,877

Less amount representing interest at 12% 215,630

Balance of the lease liability $353,247

EXERCISE 20-3

(a) Initial Measurement of Right-of-Use Asset and Lease Liability

Contractual Rights and Obligations under Lease,

July 1, 2017

$20,066.26Annual rental payment

X 4.23972 PV of annuity due of 1 for n = 5, i = 9%

$85,075.32PV of periodic rental payments

$ 4,500.00Bargain purchase option

X .64993 PV of 1 for n= 5, i = 9%

$ 2,924.69PV of bargain purchase option

$85,075.32PV of periodic rental payments

+ 2,924.69 PV of bargain purchase option

$88,000.01Net investment at inception of lease

Excel formula =PV(rate,nper,pmt,fv,type)

Using a financial calculator:

$ ?

Yields $ 88,000

PMT

$ (20,066.26)

$ (4,500)

Type

(b) The lease would be set up as a right-of-use asset and lease liability under IFRS 16 as it

would not qualify for a short-term or low-value exemption.

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Document Summary

42,389. 69 (d) note x: the following is a schedule of future lease payments under a contract-based lease liability expiring december 31, 2026 together with the balance of the lease liability. Initial measurement of right-of-use asset and lease liability. Pv of annuity due of 1 for n = 5, i = 9% Pv of 1 for n= 5, i = 9% 1 (b) the lease would be set up as a right-of-use asset and lease liability under ifrs 16 as it would not qualify for a short-term or low-value exemption. The lease agreement has a purchase option that is reasonably certain to be exercised. The collectability of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The present value of the minimum lease payments exceeds 90% of the fair value of the equipment.

Related Questions

Problem 15-16 Lessee-guaranteed residual value; third-party guaranteed residual value; unguaranteed residual value; executory costs; different interest rates for lessor and lessee [LO15-3, 15-5, 15-8, 15-9]

On December 31, 2013, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $35,000 for the truck. Its retail value is $59,816.

The lease agreement specified annual payments of $17,000 beginning December 31, 2013, the inception of the lease, and at each December 31 through 2016. Branch Motorsâ interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2017) the truck was expected to be worth $11,000. The estimated useful life of the truck is five years with no salvage value. Both companies use straight-line depreciation.

Yard Art guaranteed a residual value of $4,000. Guarantor Assurance Corporation was engaged to guarantee a residual value of $7,000, but with a deductible equal to any amount paid by the lessee ($7,000 reduced by any amount paid by the lessee). Yard Artâs incremental borrowing rate is 9%.

A $2,000 per year maintenance agreement was arranged for the truck with an outside service firm. As an expediency, Branch Motors agreed to pay this fee. It is, however, reflected in the $17,000 lease payments.

Collectibility of the lease payments by Yard Art is reasonably predictable and there are no costs to the lessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

How should this lease be classified by Yard Art Landscaping (the lessee)?

	Operating lease
	Capital lease: Sales-type lease
	Capital lease
	Capital lease: Direct financing lease

2.	Calculate the amount Yard Art Landscaping would record as a leased asset and a lease liability.(Round your intermediate calculations to the nearest dollar amount.)

3.	How should this lease be classified by Branch Motors (the lessor)?

	Operating lease
	Capital lease
	Capital lease: Sales-type lease
	Capital lease: Direct financing lease

4.	Show how Branch Motors calculated the $17,000 annual lease payments.

5.	Calculate the amount Branch Motors would record as sales revenue. (Round your intermediate calculations to the nearest dollar amount.)

6.	Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

7.	Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Yard Art.

8.	Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Branch Motors.

9.	Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.)

10.	Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2016 (the final lease payment). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.)

11.

Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2017 (the end of the lease term), assuming the truck is returned to the lessor and the actual residual value of the truck was $2,000 on that date. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.)

tanprairie-dog794

On December 31, 2016, Yard Art Landscaping leased a deliverytruck from Branch Motors. Branch paid $39,000 for the truck. Itsretail value is $42,382.

The lease agreementspecified annual payments of $13,000 beginning December 31, 2016,the inception of the lease, and at each December 31 through 2019.Branch Motorsâ interest rate for determining payments was 10%. Atthe end of the four-year lease term (December 31, 2020) the truckwas expected to be worth $11,000. The estimated useful life of thetruck is five years with no salvage value. Both companies usestraight-line depreciation.

Yard Art guaranteed a residualvalue of $5,000. Guarantor Assurance Corporation was engaged toguarantee a residual value of $8,000, but with a deductible equalto any amount paid by the lessee ($8,000 reduced by any amount paidby the lessee). Yard Artâs incremental borrowing rate is 9%.

A $3,000 per year maintenanceagreement was arranged for the truck with an outside service firm.As an expediency, Branch Motors agreed to pay this fee. It is,however, reflected in the $13,000 lease payments.

Collectibility of the lease payments byYard Art is reasonably predictable and there are no costs to thelessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriatefactor(s) from the tables provided.)

Required:

1.	How should this lease be classified by Yard Art Landscaping (thelessee)?
2.	Calculate the amount Yard Art Landscaping would record as aleased asset and a lease liability. (Round yourintermediate calculations to the nearest dollaramount.)
3.How should this lease be classified by Branch Motors (thelessor)?

	Operating lease
	Capital lease: Sales-type lease
	Capital lease
	Capital lease: Direct financing lease

4.Show how Branch Motors calculated the $13,000 annual leasepayments.

Lessor's Calculation of Lease PaymentsAmount to be recovered(fair value

Less:Present value of the residual value

Amount to be recovered through periodic lease payments

Lease payments at the beginning of each of the next fouryear

Add: Executory costs1,000Lease payments including executorycosts

5.	Calculate the amount Branch Motors would record as salesrevenue. (Round your intermediate calculations to thenearest dollar amount.)

6.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount

Â·
1.

Record the lease for Yard Art.

Â· 2.

Record the lease payment for Yard Art.

Â· 3.

Record the lease for Branch Motors.

Â· 4.

Record cash received by Branch Motors

7. Prepare an amortization schedule that describes the patternof interest expense over the lease term for Yard Art.

8.	Prepare an amortization schedule that describes the pattern ofinterest revenue over the lease term for Branch Motors.
9.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2017. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field. Round your intermediate calculations to the nearestdollar amount.)
Â· 1. Record the maintenance expense for Yard Art. 2. Record the lease payment for Yard Art. 3. Record the depreciation expense for Yard Art. 4. Record the cash received on lease by Branch Motors.

10.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2019 (the final lease payment). (Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field. Round your intermediatecalculations to the nearest dollar amount.)

Â· 1.

Record the maintenance expense for Yard Art.

Â· 2.

Record the lease payment for Yard Art.

Â· 3.

Record the depreciation expense for Yard Art.

Â· 4.

Record the cash received on lease by Branch Motors.

11.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2020 (the end of the lease term), assuming thetruck is returned to the lessor and the actual residual value ofthe truck was $3,000 on that date. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field. Round your intermediate calculations to thenearest dollar amount.)

Â· 1.

Record the maintenance expense for Yard Art.

Â· 2.

Record the depreciation expense for Yard Art.

Â· 3.

Record the last payment on lease for Yard Art.

Â· 4.

Record the last cash receipt on lease and settlement of lease byBranch Motors.

ADMS 3595 Lecture Notes - Lecture 6: Deferral, Current Liability, Unearned Income

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