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Assignment 3 - Solutions

This document contains solutions to assignment questions about accounting for leases. For Question 1, it provides the journal entries a lessee and lessor would make at the start and end of the first year of an operating lease. For Question 2, it calculates lease payments for an operating lease and provides the lessee's journal entries. For Question 3, it analyzes a lease as a finance lease from the lessor's perspective and provides the lessor's initial journal entries.

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Esther Liu
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68 views

Assignment 3 - Solutions

This document contains solutions to assignment questions about accounting for leases. For Question 1, it provides the journal entries a lessee and lessor would make at the start and end of the first year of an operating lease. For Question 2, it calculates lease payments for an operating lease and provides the lessee's journal entries. For Question 3, it analyzes a lease as a finance lease from the lessor's perspective and provides the lessor's initial journal entries.

Uploaded by

Esther Liu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ACCT3103 - Intermediate Financial Accounting II

Assignment 3- Solutions

Question 1
1. Lessee (Rock Company) – to record lease at the beginning of the lease term
Present value of lease payments
= 7,500 + 7,500 x PV annuity (3, 6%) + 20,000 x PV (4, 6%)
= 7,500 + 7,500 x 2.6730 + 20,000 x 0.7921
= 43,390

1/1/2021
Dr. Right-of-use asset 43,390
Cr. Lease liability 43,390

Dr. Lease liability 7,500


Cr. Cash 7,500

2. Lessee (Rock Company) – to record the lease on Dec 31, 2021


31/12/2021
Dr. Lease liability (bal.fig) 5,347
Dr. Interest expense (43,390– 7,500) x 6% 2,153
Cr. Cash 7,500

Dr. Depreciation expense –Right-of-use asset 7,232


Cr. Right-of-use asset 7,232
($43,390 / 6 years)
Question 2
1. Annual rental payment (P)
Present value of lease payments = Cost of asset
P + P x PV annuity (4, 4%) + $90,000 x PV (5, 4%) = $880,000
P + P x 3.6299 + $90,000 x 0.8219 = $880,000
P x 4.6299 = $806,029
P = $174,092

2. Lessee (B&J Furniture) – to record lease for the year 2021


Expected residual value $35,000 is lower than guaranteed residual value $90,000, differences
$55,000 ($90,000 - $35,000) should be included in lessee’s lease liability.
Lessee’s lease liability = $174,092 + $174,092 x PV annuity (4, 4%) + $55,000 x PV (5, 4%)
= $851,234

1/1/2021
Dr. Right-of-use asset 851,234
Cr. Lease liability 851,234

Dr. Lease liability 174,092


Cr. Cash 174,092

31/12/2021
Dr. Lease liability (bal.fig) 147,006
Dr. Interest expense (851,234–174,092) x 4% 27,086
Cr. Cash 174,092

The asset reverts to lessor at the end of the lease term, lease assets should be fully amortized.
Dr. Depreciation expense –Right-of-use asset 170,247
Cr. Right-of-use asset 170,247
($851,234 / 5 years)
3. Lessor (Winning Leasing) – to record the lease for the year 2021
1/1/2021
Dr. Lease payment receivable 880,000
Cr. Lease equipment 880,000

Dr. Cash 174,092


Cr. Lease payment receivable 174,092

31/12/2021
Dr. Cash 174,092
Cr. Lease payment receivable 145,856
Cr. Interest revenues (880,000 – 174,092) x 4% 28,236
Question 3
1. Nature of lease
To the lessor, this lease is a finance lease. First of all, the facts that the lease is noncancelable,
the lease term is greater than 75% of the economic life of the lease asset, and the present value of
the lease payments ($305,740) is greater than 90% of the fair value of the leased asset, classify
the lease as a finance lease. Furthermore, reasonably predictable collectibility of minimum lease
payments and absence of important uncertainties surrounding amount of unreimburseable costs
yet to be incurred by lessor qualify the lease as direct financing or sales-type lease to lessor. It is
sales-type lease as it gives rise to manufacturer’s profit to lessor in addition to having other
attributes of direct financing lease

2. Lessor (No. 1 Leasing Company)


Dr. Initial direct costs 10,000
Cr. Cash 10,000

Dr. Lease payment receivable* 320,000


Dr. Cost of goods sold (260,000 – 14,260**) 245,740
Cr. Sales revenue 305,740
Cr. Initial direct costs 10,000
Cr. Inventory of equipment 250,000

* 305,740 + 20,000  0.7130


** present value of $1: n=5, i=7%

Dr. Cash (lease payment) 69,689


Cr. Lease payment receivable 69,689

3. Total amount of lase-related income for lessor

Gross profit from lease


Sales $305,740
Less: Cost of goods sold (245,740) $60,000
Interest revenue [(320,000 – 69,689)  7%] $17,522
Total $77,522

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