886 SECTION 3 Financial Instruments and Liabilities cash flows, then, the lessee reports the interest portion as a cash outflow from operating activities and the principal portion as a cash outflow from financing activities. On the other side of the transaction, the lessor in a direct financing lease reports the interest portion as a cash inflow from operating activities and the principal portion as a cash inflow from investing activities. Both the lessee and lessor report the lease at its inception as a noncash investing/ financing activity. SALES-TYPE LEASES. A sales-type lease differs from a direct-financing lease for the lessor in that we assume the lessor is actually selling its product. Consistent with reporting sales of products under installment sales agreements rather than lease agreements, the lessor reports cash receipts from a sales-type lease as cash inflows from operating activities. Cash receipts from a sales-type lease are cash flows from operating activities. Concept Review Exercise VARIOUS LEASE ACCOUNTING ISSUES (This is an extension of the previous Concept Review Exercise.) United Cellular Systems leased a satellite transmission device from Satellite Technology Corporation on January 1, 2017. Satellite Technology paid $500,000 for the transmission device. Its retail value is $653,681. Terms of the Lease Agreement and Related Information: Lease term 3 years (6 semiannual periods) Semiannual rental payments $123,000 at the beginning of each period Economic life of asset 4 years Implicit interest rate 12% (Also lessee’s incremental borrowing rate) Unguaranteed residual value $40,000 Regulatory fees paid by lessor $3,000/twice each year (included in rentals) Lessor’s initial direct costs $4,500 Contingent rental payments Additional $4,000 if revenues exceed a specified base Required: 1. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for United Cellular Systems. 2. Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Satellite Technology. 3. Prepare the appropriate entries for both United Cellular Systems and Satellite Technology on January 1 and June 30, 2017. 4. Prepare the appropriate entries for both United Cellular Systems and Satellite Technology on December 31, 2019 (the end of the lease term), assuming the device is returned to the lessor and its actual residual value is $14,000 on that date. Solution: 1. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for United Cellular Systems. Calculation of the Present Value of Minimum Lease Payments: Present value of periodic rental payments excluding executory costs of $3,000: ($120,000 3 5.21236*) 5 $625,483 *Present value of an annuity due of $1: n 5 6, i 5 6%. Note: The unguaranteed residual value is excluded from minimum lease payments for both the lessee and lessor.
Spiceland_Inter_Accounting8e_Ch15
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