CHAPTER 15 Leases 873 S u ppose the equipment leased in Illustration 15–11 was expected to be worth $60,000 at the end of the six-year lease term. Should this influence the lessor’s (CompuDec) calculation of periodic rental payments? Other than the possible influence on rental payments, should the lessee (Sans Serif Publishers) be concerned with the residual value of the leased asset? The answer to both questions is maybe. We’ll use Illustration 15–12 to see why. ● LO15–8 On January 1, 2016, Sans Serif Publishers, Inc., leased printing equipment from CompuDec Corporation at a price 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 estimated useful life of the equipment is seven years. On December 31, 2021, at the end of the six-year lease term, the equipment is expected to be worth $60,000. CompuDec manufactured the equipment at a cost of $300,000* and its interest rate for financing the transaction is 10%. *This provision is for consistency with Illustration 15–8 , which described a sales-type lease. However, our discussion of the effect of a residual value would be precisely the same if our illustration were of a direct financing lease (for instance, if the lessor’s cost is $479,079) except that neither sales revenue nor cost of goods sold would be recorded in a direct financing lease. We consider the lessee first. Effect on the Lessee of a Residual Value Should the lessee view the residual value as an additional “payment” by the lessee as it did for the BPO price in the previous section? That depends on whether the lessee guarantees the residual value to be a particular amount at the end of the lease term. GUARANTEED RESIDUAL VALUE. Sometimes the lease agreement includes a guarantee by the lessee that the lessor will recover a specified residual value when custody of the asset reverts back to the lessor at the end of the lease term. This not only reduces the lessor’s risk but also provides incentive for the lessee to exercise a higher degree of care in maintaining the leased asset to preserve the residual value. The lessee promises to return not only the property but also sufficient cash to provide the lessor with a minimum combined value. In effect, the guaranteed residual value is an additional lease payment that is to be paid in property, or cash, or both. As such, it is included in the minimum lease payments and affects the amount the lessee records as both a leased asset and a lease liability, as shown in Illustration 15–12A . The guaranteed residual value is considered an additional lease payment that is to be paid in property, or cash, or both. You should recognize this as the same calculation we used in the previous section when we had a BPO, and so the BPO price was considered an additional lease payment. In fact, the amortization schedule is precisely the same as in Illustration 15–11A on page 871 when we had a BPO. A question you might have at this point is: Earlier, when we had a BPO, why didn’t we also view the residual value at the end of the lease term as an additional payment when calculating the present value of lease payments? The reason is obvious when you recall an If the lessee obtains title, the lessor’s computation of rental payments is unaffected by any residual value. Present value of periodic rental payments ($92,931 3 4.79079 * ) $445,211 Plus: Present value of the residual value ($60,000 3 .56447 † ) 33,868 Present value of minimum lease payments (recorded as a leased asset and a lease liability) $479,079 *Present value of an annuity due of $1: n 5 6, i 5 10%. †Present value of $1: n 5 6, i 5 10%. Illustration 15–12 Residual Value Illustration 15–12A Lessee’s Calculation of the Present Value of Minimum Lease Payments Including a Guaranteed Residual Value
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