On
January 1, 2011, Vick Leasing Inc., a lessor that uses IFRS, signed an
agreement with Rock Corporation, a lessee, for the use of a compression system.
The system cost $415,000 and was purchased from Manufacturing Solutions Ltd.
specifically for Rock Corporation. Annual payments are made each January 1 by
Rock. In addition to making the lease payment, Rock also reimburses Vick $4,000
each January 1 for a portion of the maintenance expenditures, which cost Vick
Leasing a total of $6,000 per year. At the end of the five-year agreement, the
compression equipment will revert to Vick and is expected to have a residual
value of $25,000, which is not guaranteed. Collectibility of the rentals is
reasonably predictable, and there are no important uncertainties surrounding
the costs that have not yet been incurred by Vick Leasing Inc.
Instructions
(a)
Assume that Vick Leasing Inc. has a required rate of return of 8%. Calculate
the amount of the lease payments that would be needed to generate this return
on the agreement if payments were made each:
1.
January 1
2.
December 31
(b)
Use a computer spreadsheet to prepare an amortization table that shows how the
lessor’s net investment in the lease receivable will be reduced over the lease
term if payments are made each:
1.
January 1
2.
December 31
(c)
Assume that the payments are due each January 1. Prepare all journal entries
and adjusting journal entries for 2011 and 2012 for the lessor, assuming that
Vick has a calendar year end. Include the payment for the purchase of the equipment
for leasing in your entries and the annual payment for maintenance.
(d)
Provide the note disclosure concerning the lease that would be required for
Vick Leasing Inc. at December 31, 2012.
Assume
that payments are due each January 1.
(a) Part 1. Annuity Due:
|
Fair market value of leased asset to lessor $415,000.00
Less:
Present value of unguaranteed
residual value $25,000 X .68058
(present value of 1 at 8% for 5 periods) 17,014.50
Amount to be recovered through lease payments $397,985.50
Five periodic lease payments $397,985.50 ÷ 4.31213* $92,294.41
*Present value of annuity due of 1 for 5 periods at
8%.
Excel formula =PMT(rate,nper,pv,fv,type)
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|
Using a financial calculator:
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||
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PV
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$
(415,000)
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|
|
I
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8%
|
|
|
N
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5
|
|
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PMT
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$
?
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Yields $92,294
|
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FV
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$
25,000
|
|
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Type
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1
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(a) Part 2. Ordinary Annuity:
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Fair market value of leased asset to lessor $415,000.00
Less:
Present value of unguaranteed
residual value $25,000 X .68058
(present value of 1 at 8% for 5 periods) 17,014.50
Amount to be recovered through lease payments $397,985.50
Five periodic lease payments $397,985.50 ÷ 3.99271* $99,678.04
*Present value of annuity due of 1 for 5 periods at
8%.
Excel formula =PMT(rate,nper,pv,fv,type)
|
|
Excel formula =PMT(rate,nper,pv,fv,type)
|
|
Using a financial calculator:
|
||
|
PV
|
$
(415,000)
|
|
|
I
|
8%
|
|
|
N
|
5
|
|
|
PMT
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$
?
|
Yields $99,678
|
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FV
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$
25,000
|
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Type
|
0
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(b) 1
Vick
Leasing Inc., (Lessor)
Lease
Amortization Schedule
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Date
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Annual
Lease
Payment
Plus URV
|
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Interest
(8%) on Net
Investment
|
|
Net
Investment
Recovery
|
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Balance
of Net
Investment
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||||||||
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Jan. 1,
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2011
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|
|
|
|
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$415,000.00
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||||||||
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Jan. 1,
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2011
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$92,294.00
|
|
|
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$92,294.00
|
|
322,706.00
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||||||||
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Jan. 1,
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2012
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92,294.00
|
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$25,816.48
|
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66,477.52
|
|
256,228.48
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||||||||
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Jan. 1,
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2013
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92,294.00
|
|
20,498.28
|
|
71,795.72
|
|
184,432.76
|
||||||||
|
Jan. 1,
|
2014
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92,294.00
|
|
14,754.62
|
|
77,539.38
|
|
106,893.38
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||||||||
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Jan. 1,
|
2015
|
92,294.00
|
|
8,551.47
|
|
83,742.53
|
|
23,150.85
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||||||||
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Jan. 1,
|
2016
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25,000.00
|
|
1,849.15
|
|
23,150.85
|
|
0
|
||||||||
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|
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$486,470.00
|
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$71,470.00
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$415,000.00
|
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||||||||
(b) 2
Vick
Leasing Inc., (Lessor)
Lease
Amortization Schedule
|
Date
|
|
Annual
Lease
Payment
Plus URV
|
|
Interest
(8%) on Net
Investment
|
|
Net
Investment
Recovery
|
|
Balance
of Net
Investment
|
|||||||||
|
Jan. 1,
|
2011
|
|
|
|
|
|
|
$415,000.00
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|||||||||
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Dec. 31,
|
2011
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$99,678.00
|
|
$33,200.00
|
|
$66,478.00
|
|
348,522.00
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|||||||||
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Dec. 31,
|
2012
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99,678.00
|
|
27,881.76
|
|
71,796.24
|
|
276,725.76
|
|||||||||
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Dec. 31,
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2013
|
99,678.00
|
|
22,138.06
|
|
77,539.94
|
|
199,185.82
|
|||||||||
|
Dec. 31,
|
2014
|
99,678.00
|
|
15,934.87
|
|
83,743.13
|
|
115,442.69
|
|||||||||
|
Dec. 31,
|
2015
|
99,678.00
|
|
9,235.31
|
|
90,442.69
|
|
25,000.00
|
|||||||||
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Dec. 31,
|
2015
|
25,000.00
|
|
-
|
|
25,000.00
|
|
0.00
|
|||||||||
|
|
|
$523,390.00
|
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$108,390.00
|
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$415,000.00
|
|
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(c)
1/1/11 Equipment
Purchased for Lease 415.000.00
Cash.................... 415,000.00
Lease
Payments
Receivable................. 486,470.00
Unearned
Interest
Income—Leases.......... 71,470.00
Equipment
Purchased for Lease 415,000.00
1/1/11 Cash ........................ 96,294.00
Maintenance
Expense..... 4,000.00
Lease
Payments
Receivable............. 92,294.00
during Maintenance
Expense.......... 6,000.00
2011 Cash.................... 6,000.00
12/31/11 Unearned
Interest Income—
Leases.................... 25,816.48
Interest
Income—
Leases............... 25,816.48
1/1/12 Cash ........................ 96,294.00
Maintenance
Expense..... 4,000.00
Lease
Payments
Receivable............. 92,294.00
during Maintenance
Expense.......... 6,000.00
2012 Cash.................... 6,000.00
12/31/12 Unearned
Interest Income—
Leases.................... 20,498.28
Interest Income—
Leases............... 20,498.28
(d) Note
X: (on Vick Leasing Inc.’s financial statements:)
The company's net
investment in a financing lease includes the following:
Total
minimum lease payments receivable $301,882
Unearned
income 45,654
$256,228
Future
minimum lease payments receivable under the financing
lease are as follows:
Year
ending December 31
2013 $92,294
2014 92,294
2015 92,294
Total minimum lease payments receivable 276,882
Unguaranteed residual value 25,000
$301,882
Vick Leasing would also need to disclose any
contingent rental income in the year, the allowance for doubtful receivables
and general information about their leasing arrangement with Rock Corporation.
