A
lease agreement between Hebert Corporation and Russell Corporation is described
in E20-17.
In
E The following facts are for a non-cancellable lease agreement between Hebert
Corporation and Russell Corporation, a lessee:
Inception
date July 1, 2011
Annual
lease payment due at the
beginning
of each year, starting July 1, 2011 $20,066.26
Bargain
purchase option price at end of lease term $
4,500.00
Lease
term 5 years
Economic
life of leased equipment 10 years
Lessor’s
cost $60,000.00
Fair
value of asset at July 1, 2011 $88,000.00
Lessor’s
implicit rate 9%
Lessee’s
incremental borrowing rate 9%
Instructions
Provide
the following for Hebert Corporation, the lessor, rounding all numbers to the
nearest cent.
(a)
Calculate the amount of gross investment at the inception of the lease.
(b)
Calculate the amount of net investment at the inception of the lease.
(c)
Prepare a lease amortization schedule using a computer spreadsheet for Hebert
Corporation for the five-year lease term.
(d)
Prepare the journal entries to reflect the signing of the lease and to record
the receipts and income related to this lease for the years 2011, 2012, and
2013. The lessor’s accounting period ends on December 31, and Hebert Corporation
does not use reversing entries.
The lease agreement has a bargain purchase option. The
collectability of the lease payments is reasonably predictable, and there are
no important uncertainties surrounding the costs yet to be incurred by the
lessor. The lease also qualifies as a capital lease from the viewpoint of the
lessee.
Due to the fact that the initial amount of net investment
(which in this case equals the present value of the minimum lease payments,
$88,000) exceeds the lessor’s cost ($60,000), the lease is a sales-type lease.
(a) Gross investment =
Minimum lease payments + any unguaranteed residual value.
The minimum lease payments associated with
this lease are the periodic annual rents plus the bargain purchase option.
There is no residual value relevant to the lessor’s accounting in this lease.
Calculation: 5 X $20,066.26 =$100,331.30
+ 4,500.00
Gross
investment at inception $104,831.30
(b) The net investment equals the present value of
the components of the gross investment calculation.
Net
investment calculation:
$20,066.26 Annual rental payment
X 4.23972 PV
of annuity due of 1 for n = 5, i = 9%
$85,075.32 PV
of periodic rental payments
$ 4,500.00 Bargain
purchase option
X .64993 PV
of 1 for n = 5, i = 9%
$ 2,924.69 PV of bargain
purchase option
$85,075.32 PV of periodic rental payments
+ 2,924.69 PV
of bargain purchase option
$88,000.01 Net
investment at inception
|
Excel formula =PV(rate,nper,pmt,fv,type)
|
|
Using a financial calculator:
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||
|
PV
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$
?
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Yields $88,000
|
|
I
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9%
|
|
|
N
|
5
|
|
|
PMT
|
$ 20,066.26
|
|
|
FV
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$
4,500
|
|
|
Type
|
1
|
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(c)
Herbert Leasing Corporation (Lessor)
Lease Amortization
Schedule
|
Date
|
|
Annual
Lease
Payment
Plus BPO
|
|
Interest (9%)
on Net
Investment
|
|
Net Investment
Recovery
|
|
Balance
Net
Investment
|
|
|
|
|
|
|
|
|
|
|
|
7/1/11
7/1/11
7/1/12
7/1/13
7/1/14
7/1/15
6/30/16
|
|
$ 20,066.26
20,066.26
20,066.26
20,066.26
20,066.26
4,500.00
$104,831.30
|
|
*$ 6,114.04*
* 4,858.34*
* 3,489.62*
* 1,997.73*
* 371.58*
*$16,831.30*
|
|
$20,066.26
13,952.22
15,207.92
16,576.64
18,068.53
4,128.42
$88,000.00
|
|
$88,000.00
67,933.74
53,981.52
38,773.59
22,196.96
4,128.42
0.00
|
*Rounding error is $.02 cents.
(d)
7/1/11 Lease
Payments
Receivable................. 104,831.30
Cost of
Goods Sold........... 60,000.00
Sales................... 88,000.00
Unearned
Interest
Income—Leases.......... 16,831.30
Inventory............... 60,000.00
7/1/11 Cash ........................ 20,066.26
Lease
Payments
Receivable............. 20,066.26
12/31/11 Unearned
Interest Income—
Leases..................... 3,057.02
Interest
Income—
Leases................. 3,057.02
($6,114.04 X 6/12 = $3,057.02)
7/1/12 Cash ........................ 20,066.26
Lease
Payments
Receivable............. 20,066.26
7/1/12 Unearned
Interest Income—
Leases..................... 3,057.02
Interest
Income—Leases.. 3,057.02
($6,114.04 – $3,057.02)
12/31/12 Unearned
Interest Income—
Leases..................... 2,429.17
Interest
Income—Leases.. 2,429.17
($4,858.34 X 6/12 = ($2,429.17)
7/1/13 Cash ........................ 20,066.26
Lease
Payments
Receivable............. 20,066.26
Unearned
Interest Income—
Leases..................... 2,429.17
Interest
Income—Leases.. 2,429.17
($4,858.34 – $2,429.17)
12/31/13 Unearned
Interest Income—
Leases..................... 1,744.81
Interest
Income—Leases.. 1,744.81
($3,489.62 X 6/12 =
$1,744.81)
