CHAPTER 15 Leases 871 (concluded) Be aware of several points the amortization schedule reveals. First, the six periodic cash payments are now $92,931 as we calculated in Illustration 15–11 . Notice also that we now include the $60,000 BPO price as an additional lease payment. Despite the different composition of the minimum lease payments, their present value ($479,079) is the same as when we assumed $100,000 periodic payments and no residual value. However, the effective interest that will be recorded over the lease term (as interest expense by the lessee and interest revenue by the lessor) now is more: $138,507. (It was $120,921 before.) The higher interest reflects the fact that payments are farther in the future, causing the outstanding lease balances (and interest on those balances) to be higher during the lease term. Also, note that the total of the lease payments now is more: $617,586. (It was $600,000 before.) This total is referred to as the lessor’s gross investment in the lease and is disclosed in the lessor’s disclosure note about leases. Recording the exercise of the option is similar to recording the periodic rent payments. That is, a portion of the payment covers interest for the year, and the remaining portion reduces the outstanding liability/receivable balance (to zero with this last payment), as shown in Illustration 15–11B . Note that depreciation also is affected by the BPO. As pointed out earlier, the lessee normally depreciates a leased asset over the term of the lease. But if ownership transfers by contract or by the expected exercise of a bargain purchase option, the asset should be depreciated over the asset’s useful life. This reflects the fact that the lessee anticipates using the The lessor subtracts the PV of the BPO price to determine rental payments. The lessor’s gross investment in the lease is the total of periodic rental payments and any residual value. Lessor’s calculation of rental payments: Amount to be recovered (fair value) $479,079 Less: Present value of the BPO price ($60,000 3 .56447 *) (33,868 ) Amount to be recovered through periodic rental payments $ 445,211 Rental payments at the beginning of each of the next six years: $ 92,931 ($445,211 ÷ 4.79079 † ) *Present value of $1: n 5 6, i 5 10%. †Present value of an annuity due of $1: n 5 6, i 5 10%. The lease amortization schedule for CompuDec and Sans Serif when a BPO is included in the lease agreement is shown in Illustration 15–11A . Both the lessor and lessee view the BPO price ($60,000) as an additional cash payment. Payments Effective Interest Decrease in Balance Outstanding Balance (10% 3 Outstanding balance) 1/1/16 479,079 1/1/16 92,931 92,931 386,148 12/31/16 92,931 .10 (386,148) 5 38,615 54,316 331,832 12/31/17 92,931 .10 (331,832) 5 33,183 59,748 272,084 12/31/18 92,931 .10 (272,084) 5 27,208 65,723 206,361 12/31/19 92,931 .10 (206,361) 5 20,636 72,295 134,066 12/31/20 92,931 .10 (134,066) 5 13,407 79,524 54,542 12/31/21 60,000 .10 (54,542) 5 5,458* 54,542 0 617,586 138,507 479,079 *Adjusted for rounding of other numbers in the schedule. Illustration 15–11A Amortization Schedule— with BPO
Spiceland_Inter_Accounting8e_Ch15
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