Income Statement

Interest expense $60,000 Depreciation expense ($41,667 – 8,333) 33,334

$93,334

Portion of Amortization Schedule – not required, but verifies several amounts:

Lease Amortization Schedule

Effective Decrease Outstanding Date Payments Interest in Balance Balance 12% x Outstanding Balance

1/1/11 500,000

12/31/11 88,492 .12 (500,000) = 60,000 28,492 471,508

12/31/12 88,492 .12 (471,508) = 56,581 31,911 439,597

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Problem 15-21

Requirement 1

Since the fair value of the land ($400,000) is more than 25% of the combined fair value ($1,450,000), both the lessee and the lessor treat the land and building as two separate leases. The land lease is an operating lease, and the building lease is, in this case, a capital lease. Since land could be rented without the building for $59,000, the portion of the annual rental attributable to the building is $200,000 – 59,000 = $141,000.

Present value of lease payments ($141,000 x 6.75902^**) $953,022

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

January 1, 2011

Leased building (calculated above) 953,022 Lease liability (calculated above) 953,022 Rent expense (given) 59,000 Lease liability (difference) 141,000 Cash (annual lease payment) 200,000

December 31, 2011

Depreciation expense ($953,022 ÷ 10 years) 95,302 Accumulated depreciation–leased building 95,302 Interest expense ([$953,022 – 141,000] x 10%) 81,202 Interest payable 81,202

Problem 15-21 (continued)

Requirement 2

Since the fair value of the land ($200,000) is less than 25% of the combined fair value ($1,450,000), it is in effect ignored and the land and building are treated as a single unit. The “single” leased asset is depreciated as if land were not involved.

Present value of lease payments ($200,000 x 6.75902^**) = $1,351,804

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

January 1, 2011

Leased property(calculated above) 1,351,804 Lease liability (calculated above) 1,351,804 Lease liability 200,000 Cash (annual lease payment) 200,000

December 31, 2011

Depreciation expense ($1,351,804 ÷ 10 years) 135,180 Accumulated depreciation–leased property 135,180 Interest expense ([$1,351,804 – 200,000] x 10%) 115,180 Interest payable 115,180

Problem 15-22

Requirement 1

Under U.S. GAAP, land and building elements generally are accounted for as a single unit, unless land represents more than 25% of the total fair value of the leased property. This was the case in Requirement 1 so the land and buildings elements are recorded separately. Under IAS No. 17, land and buildings elements are considered separately unless the land element is not material. So, IFRS would produce the same results in Requirement 1:

Since the fair value of the land ($400,000) is more than 25% of the combined fair value ($1,450,000), both the lessee and the lessor treat the land and building as two separate leases. The land lease is an operating lease, and the building lease is, in this case, a capital lease. Since land could be rented without the building for $59,000, the portion of the annual lease payment attributable to the building is $200,000 – 59,000 = $141,000.

Present value of lease payments ($141,000 x 6.75902^**)= 953,022

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

January 1, 2011

Leased building (calculated above) 953,022 Lease liability (calculated above) 953,022 Rent expense (given) 59,000 Lease liability (difference) 141,000 Cash (annual lease payment) 200,000

December 31, 2011

Depreciation expense ($953,022 ÷ 10 years) 95,302 Accumulated depreciation–leased building 95,302 Interest expense ([$953,022 – 141,000] x 10%) 81,202 Interest payable 81,202

Problem 15-22 (continued)

Requirement 2

Under U.S. GAAP, land and building elements generally are accounted for as a single unit, unless land represents more than 25% of the total fair value of the leased property. In Requirement 2, the land and buildings accounted for as a single unit because the fair value of the land ($200,000) is less than 25% of the combined fair value ($1,450,000). Under IAS No. 17, land and buildings elements are recorded separately unless the land element is not material. So, unless the $200,000 is not considered material, IFRS would produce the following:

Under IFRS, both the lessee and the lessor treat the land and building as two separate leases. The land lease is an operating lease, and the building lease is, in this case, a capital lease. Since land could be rented without the building for $30,000, the portion of the annual lease attributable to the building is $200,000 – 30,000 = $170,000.

Present value of lease payments ($170,000 x 6.75902^**) 1,149,033

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

January 1, 2011

Leased property(calculated above) 1,149,033 Lease liability (calculated above) 1, 149,033 Rent expense (given) 30,000 Lease liability (difference) 170,000 Cash (annual lease payment) 200,000

December 31, 2011

Depreciation expense ($1,149,033 ÷ 10 years) 114,903 Accumulated depreciation–leased building 114,903 Interest expense ([$1,149,033 – 170,000] x 10%) 97,903 Interest payable 97,903

CASES