Lessor’s Calculation of Lease payments

Amount to be recovered (fair value) $365,760

Less: Present value of the unguaranteed residual value ($25,000 x .68301^*) (17,075)

Amount to be recovered through periodic lease payments $348,685

_____________________

Lease payments at the beginning 

of each of four years: ($348,685 ÷ 3.48685^**) $100,000

Plus: Executory costs 4,000

Lease payments including executory costs $104,000

^* present value of $1: n=4, i=10%

^** present value of an annuity due of $1: n=4, i=10%

Problem 15-9 (continued)

Requirement 2

The lessee’s incremental borrowing rate (12%) is more than the lessor’s implicit rate (10%). So, both parties’ calculations should be made using a 10% discount rate:

Application of Classification Criteria

1 Does the agreement specify that ownership of the asset transfers to the lessee? NO 2 Does the agreement contain a bargain purchase option? NO 3 Is the lease term equal to 75% or more of the expected NO economic life of the asset? {4 yrs < 75% of 6 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the YES fair value of the asset? {$348,685^a>90% of $365,760}^a See calculation below.

Present Value of Minimum Lease Payments

Present value of periodic lease payments excluding executory costs of $4,000 ($100,000^*x 3.48685^**) $348,685

^** present value of an annuity due of $1: n=4, i=10%

^* Since the residual value is not guaranteed, it is excluded from both the lessor’s and the lessee’s minimum lease payments and therefore does not affect the 90% of fair value test.

Problem 15-9 (continued)

(a) by Western Soya Co. (the lessee)

Since at least one criterion is met, this is a capital lease to the lessee. Western Soya records the present value of minimum lease payments as a leased asset and a lease liability.

(b) by Rhone-Metro (the lessor)

Since the fair value exceeds the lessor’s carrying value, the equipment is being “sold” at a profit, making this a sales-type lease:

Fair value $365,760

minus

Carrying value (300,000)

equals

Dealer’s profit $ 65,760

Requirement 3

December 31, 2011

Western Soya Co. (Lessee) Leased equipment (calculated above) 348,685 Lease payable (calculated above) 348,685 Lease payable 100,000 Prepaid operating expense(2012 expenses) 4,000 Cash(lease payment) 104,000 Rhone-Metro (Lessor) Lease receivable (fair value) 365,760 Cost of goods sold ($300,000 – [$25,000 x .68301]) 282,925 Sales revenue ($365,760 – [$25,000 x .68301]) 348,685 Inventory of equipment (lessor’s cost) 300,000 Cash(lease payment) 104,000 Payable (maintenance, insurance, etc.) 4,000 Lease receivable 100,000

Problem 15-9 (continued)

Requirement 4

Lessee (unguaranteed residual value excluded):

Lease Amortization Schedule

Effective Decrease Outstanding Dec. Payments Interest in Balance Balance 31 10% x Outstanding Balance

2011 348,685

2011 100,000 100,000 248,685

2012 100,000 .10 (248,685) = 24,869 75,131 173,554

2013 100,000 .10 (173,554) = 17,355 82,645 90,909

2014 100,000 .10 (90,909) = 9,091 90,909 0

400,000 51,315 348,685

Lessor (unguaranteed residual value included):