CHAPTER 15 Leases 863 Illustration 15–6 Capital Leases Using Excel, enter: 5 PMT(.10,6,479079,1) Output: 100000 Using a calculator: enter: BEG mode N 6 I 10 PV – 479079 FV Output: PMT 100000 Notice that the lessor’s entries are the flip side or mirror image of the lessee’s entries. The first lease payment reduces the balances in the lease payable and the lease receivable by $100,000 to $379,079. LESSEE Lease Payable $479,079 (100,000) $379,079 (62,092) $316,987 LESSOR Lease Receivable $479,079 (100,000) $379,079 (62,092) $316,987 On January 1, 2016, Sans Serif Publishers, Inc., leased printing equipment from First LeaseCorp. First LeaseCorp purchased the equipment from CompuDec Corporation at a cost of $479,079. The lease agreement specifies annual payments beginning January 1, 2016, the inception of the lease, and at each December 31 thereafter through 2020. The six-year lease term ending December 31, 2021, is equal to the estimated useful life of the equipment. First LeaseCorp routinely acquires electronic equipment for lease to other firms. The interest rate in these financing arrangements is 10%. Since the lease term is equal to the expected useful life of the equipment (>75%), the transaction must be recorded by the lessee as a capital lease.18 If we assume also that collectibility of the lease payments and any costs to the lessor that are yet to be incurred are reasonably predictable, this qualifies also as a direct financing lease to First LeaseCorp. To achieve its objectives, First LeaseCorp must (a) recover its $479,079 investment as well as (b) generate interest revenue at a rate of 10%. So, the lessor determined that annual rental payments would be $100,000: $479,079 4 4.79079* 5 $100,000 L e cs osos tr ’s p aR yemn etan lt s *Present value of an annuity due of $1: n 5 6, i 5 10%. Of course, Sans Serif Publishers, Inc., views the transaction from the other side. The price the lessee pays for the equipment is the present value of the rental payments: $100,000 3 4.79079* 5 $479,079 p aR yemn etan lt s L e cs oseste ’s *Present value of an annuity due of $1: n 5 6, i 5 10%. Direct Financing Lease (January 1, 2016) Sans Serif Publishers, Inc. (Lessee) Leased equipment (present value of lease payments) ..................... 479,079 Lease payable (present value of lease payments) ........................ 479,079 First LeaseCorp (Lessor) Lease receivable (present value of lease payments) ........................ 479,079 Inventory of equipment (lessor’s cost) ........................................ 479,079 First Lease Payment (January 1, 2016)* Sans Serif Publishers, Inc. (Lessee) Lease payable ................................................................................ 100,000 Cash..... ...................................................................................... 100,000 First LeaseCorp (Lessor) Cash ............................................................................................... 100,000 Lease receivable ........................................................................ 100,000 *Of course, the entries to record the lease and the first payment could be combined into a single entry since they occur at the same time. Second Lease Payment (December 31, 2016) Sans Serif Publishers, Inc. (Lessee) Interest expense 10% 3 ($479,079 2 100,000) .......................... 37,908 Lease payable (difference) ............................................................. 62,092 Cash (lease payment) .................................................................. 100,000 First LeaseCorp (Lessor) Cash (lease payment) ...................................................................... 100,000 Lease receivable ........................................................................ 62,092 Interest revenue 10% 3 ($479,079 2 100,000) ...................... 37,908 Illustration 15–6A Journal Entries for the Second Lease Payment Notice that the outstanding balance is reduced by $62,092—the portion of the $100,000 payment remaining after interest is covered. 18The fourth criterion also is met. The present value of lease payments ($479,079) is 100% (>90%) of the fair value of the equipment ($479,079). Meeting any one of the four criteria is sufficient.
Spiceland_Inter_Accounting8e_Ch15
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