Solution manual intermediate accounting by robles empleo 1 answers chapter 4 vol 2 2009

Chapter 4 – Leases

CHAPTER 4
LEASES
PROBLEMS
4-1.

(Hope Manufacturing Company and Charity Co.)
(a)
Lessor’s Books
2009
Jan. 1
Machinery For Lease
2,200,000
Cash
1

1

Cash
Rent Revenue
Unearned Rent Revenue
2 M/5 = 400,000
2 M x 30% = 600,000
Machinery For Lease
Cash

Dec.

Depreciation Expense

600,000

2,200,000
400,000
200,000

60,000
60,000
212,000

3
1
Accumulated Depreciation
Machinery for Lease
(2.2 M – 200,000)/10
200,000
60,000 / 5 years
12,000
Total
212,000

200,000
12,000

2010

Jan. 1

Cash
Rent Revenue

2,000,000 x 20%

400,000

Dec.

Depreciation Expense

212,000

3
1

Accumulated Depreciation
Machinery for Lease

400,000

200,000
12,000

Lessee’s Books
2009

Jan. 1

Rent Expense
Prepaid Rent
Cash

400,000
200,000

Rent Expense
Cash

400,000

600,000

2010

Jan. 1
(b)

36

400,00


Chapter 4 – Leases
Income Statement:
Rent Revenue
Depreciation Expense
Rent Expense
Statement of Financial Position
Machinery for Lease, net of Accum.
Depreciation
Unearned Rent Revenue
Prepaid Rent

4-2.

(Blessed Realty)
a.
7,500 x 4
10,000 x 3
12,000 x 3
15,000 x 2
Total

b.

mos.
mos.
mos.
mos.

Hope
400,000
212,000

Charity
400,000
Charity

Hope
2,048,000
200,000

200,000

30,000
30,000
36,000
30,000
126,000
÷ 12 mos.

Monthly rent expense
No. of mos. From Sept. 1 – Dec. 31, 2005
Rent Expense for 2006

10,500

Rent Expense for 2006
Rent payments made during 2006
Rent Payable at December 31, 2006

42,000
30,000
12,000

4-3.

(Faith Company)
(a)
Monthly rental payment
No. of payments (60-6 mos free)
Total payments

Rent Expense for 2009 (540,000 x 4/60)
36,000
or
Monthly rental
Less lease bonus (60,000/60 mos.)
(1,000)
Rent Expense per month
No. of months for Sept. 1- Dec. 31
x4
Rent Expense for 2009

x

4

42,000

10,000
x 54
540,000

10,000
9,000
36,000

Rent Expense for 2010 (9,000 x 12)
108,000
(b)
Faith Company
2009

Dec.
31

Rent Expense

36,000

Rent Payable
2010

Mar. 1
-

36,000

Dec. 1 monthly entry
Rent Expense
Cash

10,000
10,000

37


Chapter 4 – Leases
Dec.
31

Rent Expense

8,000

Rent Payable

8,000

Rent expense for 2009:
540,000 x 12/60
108,000
Payments in 2007
100,000
Increase in rent payable
8,000

Love Corporation
2009

Dec.
31

Rent Receivable

36,000

Rent Revenue

36,000

2010

Mar. 1
-

Dec. 1 monthly entry
Cash
Rent Revenue

Dec.
31

Rent Receivable

10,000
8,000

Rent Revenue
4-4.

(Way Company)
a.
Fixed annual rental
Additional rent 5% (6 M – 5 M)
Amortization of lease bonus
125,000/10 yrs.
Rent Expense for 2007
b.
Prepaid Rent Expense
125,000 – 12,500

Security Deposit
(discounted for 4 more years at 10%)
150,000 x .68301 =

(Truth Corporation)
a.
Rent Revenue (920,000 x 9/12)
Depreciation Expense
3,500,000/6 = 583,333
583,333 x 9/12
Maintenance and other related costs
( 50,000)
Income before income tax
202,500
b.
Rent Expense
690,000

10,000

8,000
960,000
50,000
12,500
1,022,500
112,500
102,452

4-5.

4-6.

690,000
(437,500)

(Provident Company)
Lessor’s Books
2009

July 1

Equipment For Lease
Cash

1,500,000
1,500,000

38


Chapter 4 – Leases
Oct. 1
1
Nov. 1
Dec. 1
31

31

Cash

Rent Revenue

54,000

Cash
Rent Revenue

20,000

Cash
Rent Revenue

20,000

Cash
Rent Revenue

20,000

Rent Revenue
Unearned Rent Revenue
54,000 x 33/36 = 49,500

49,500

Depreciation Expense
Accumulated Depreciation
(1,500,000 / 10) x 6/12

75,000

54,000
20,000
20,000
20,000
49,500

75,000

Lessee’s Books
2009

Oct. 1
1
Nov. 1
Dec. 1
31

4-7.

Rent Expense
Cash

54,000

Rent Expense
Cash

20,000

Rent Expense
Cash
Rent Expense
Cash

20,000

Prepaid Rent
Rent Expense

49,500

(Generous, Inc.)
260,000 x 4.24
1,102,400
200,000 x 0.65
Total capitalized cost
(a)

54,000
20,000
20,000
20,000
20,000
49,500

130,000
1,232,400

Amortization Table

Date

Total Annual
Payment

01/01/09
01/01/09
01/01/10
01/01/11
01/01/12

260,000
260,000
260,000
260,000

Interest
Expense
87,516
71,992
55,072

39

Reduction in
Principal
260,000
172.484
188,008
204,928

Lease
Obligation
1,232,400
972,400
799,916
611,908
406,980


Chapter 4 – Leases
01/01/13
260,000
36,628
223,372
12/31/14
200,000
16,392*
183,608
*Adjusted; difference is due to rounding off.

183,608
-

(b)

2009

Jan. 1
1

Dec.

3
1

Leased Automobile
Finance Lease Obligation

1,232,400

Finance Lease Obligation
Cash

1,232,400

260,000
260,000

Interest Expense

87,516

Interest Payable

87,516

Depreciation Expense

206,480

3
1
Accumulated Depreciation
(1,232,400-200,000)/5

206,480

2010

Jan. 1

Dec.

3
1

Finance Lease Obligation
Interest Payable
Cash

172,484
87,516
260,000

Interest Expense

71,992

Interest Payable

71,992

Depreciation Expense

206,480

3
1
Accumulated Depreciation

206,480

(c)
Dec. 31

d.

Dec. 31

4-8.

Accumulated Depreciation
Interest Expense
Finance Lease Obligation
Leased Automobile

1,032,400
16,392
183,608

Loss on Finance Lease
Accumulated Depreciation
Interest Expense
Finance Lease Obligation
Leased Automobile
Cash

50,000
1,032,400
16,392
183,608

(Diana Corporation)
(a)
86,680 x 4.1699

=

40

1,232,400

1,232,400
50,000

361,447 361,456


Chapter 4 – Leases

(b)

Amortization Table
Total Annual
Payment

Interest
Date
Expense
01/01/09
01/01/09
86,680
01/01/10
86,680
27,477
01/01/11
86,680
21,556
01/01/12
86,680
15,044
01/01/13
86,680
7,876*
*Adjusted; difference is due to rounding off.

Reduction in
Principal
86,680
59,203

65,124
71,636
78,804

Lease
Obligation
361,447
274,767
215,564
150,440
78,804
-

(c)
2009

Jan

1

Leased Machine

361,447

Finance Lease Obligation
Finance Lease Obligation
1
Dec.

361,447

86,680

Cash

86,680

Interest Expense

27,477

3
1
Interest Payable
3
1

27,477

Depreciation Expense

72,289

Accumulated Depreciation
361,447/5 years

72,289

2010

Jan. 1

Dec.

3
1

Finance Lease Obligation
Interest Payable
Cash

59,203
27,477

Interest Expense

21,556

86,680

Interest Payable

21,556

Depreciation Expense

72,289

3
1
Accumulated Depreciation

(d)
Statement of Financial Position
Property, Plant and Equipment
Leased Machine
Accumulated Depreciation
Current Liabilities:
Interest Payable
Finance Lease Obligation
Noncurrent Liabilities:

41

72,289
2009

2010

361,447
72,289

361,447
144,578

27,477
59,203

21,556
65,124

Chapter 4 – Leases
Finance Lease Obligation

215,564

150,440

27,477
72,289

21,556
72,289

Income Statement
Interest Expense
Depreciation Expense
4-9.

(Riza, Inc.)
(a)
1,011,840/135,000 = 7.4951 PV of an annuity due for 12
periods
From Table VI across 12 periods, 7.4951 is under 10% interest
rate.
(b)
Date

Total Annual
Payment

12/31/09
12/31/09
12/31/10
12/31/11

135,000
135,000
135,000

Interest
Expense
87,684
82,952

(c)
(1,011,840 – 40,000) / 15 years
(d)
12/31/09 Leased Equipment
Finance Lease Obligation
12/31/09
12/31/10

Reduction in
Principal

Lease
Obligation

135,000
47,316

52,048

1,011,840
876,840
829,524
777,476

=

64,789
1,011,840
1,011,840

Finance Lease Obligation
Cash

135,000

Finance Lease Obligation
Interest Expense
Cash

47,316
87,684

135,000

135,000

12/31/10

(e)

Depreciation Expense
64,789
Accumulated Depreciation
64,789
(1,011,840 – 40,000) / 15
Lease Obligation as of December 31, 2010:
Current portion
52,048
Noncurrent portion

777,476
4-10. (Shirley Corporation)
(a)
150,000 x 4.037
240,000 x 0.567
Total capitalized cost

605,550
136,080
741,630

(b)
Date
01/01/09
01/01/09
01/01/10
01/01/11
01/01/12

01/01/13

Total
Annual
Payment
150,000
150,000
150,000
150,000
150,000

Interest
Expense

Reduction
in Principal

Lease
Obligation

70,996
61,515
50,897
39,005

150,000
79,004
88,485
99,103
110,995

741,630
591,630
512,626
424,141
325,038
214,043

42


Chapter 4 – Leases
12/31/13
240,000
25,957*
214,043
*Adjusted; difference is due to rounding off.
(c)

741,630 / 15 years

=

-

49,442

(d)
2009

Jan. 1
1
Dec.

3
1

Dec.

Leased Machinery
Finance Lease Obligation

741,630

Finance Lease Obligation
Cash

150,000

Interest Expense

741,630
150,000
70,996

Interest Payable

70,996

Depreciation Expense

49,442

3
1
Accumulated Depreciation
2010

Jan. 1

Dec.

49,442

Finance Lease Obligation
Interest Payable
Cash

79,004
70,996

Interest Expense

61,515

150,000

3
1
Interest Payable

3
1
(e)
Dec.

61,515

Depreciation Expense

49,442

Accumulated Depreciation
Interest Expense

49,442
25,957

3
1

(f)2013
Dec.
3
1

Finance Lease Obligation
Accumulated Depreciation
Machinery
Leased Machinery
Cash

Interest Expense

214,043
247,210
494,420

741,630
240,000

25,957

Finance Lease Obligation
Accumulated Depreciation
Loss on Finance Lease
Leased Machinery

43

214,043
247,210
254,420
741,630


Chapter 4 – Leases

4-11. (Joy Company-lESSOR)
a.
2009

Aug. 1

Dec.

Finance Lease Receivable
Equipment for Lease
Unearned Interest Revenue

1

Unearned Interest Revenue
Cash

1

Cash
Finance Lease Receivable

3
1

605,000

1,900

480,000
125,000
1,900

100,000

100,000

Unearned Interest Revenue

15,913

Interest Revenue
38,192 x 5/12

15,913

Partial Amortization Table
Date
08/01/09
08/01/09
08/01/10

(b)

Periodic
Payment
100,000
100,000

Interest
38,192

As of December 31, 2009:

current

Total

Reduction in
Principal
100,000
61,808

Current

Balance of
Principal
481,920
381,920
320,112

Non-

Finance Lease Receivable
P505,000
P100,000
P405,000
Unearned Interest Revenue
107,187
22,279
84,908
P397,813
P 77,721
P320,092
Current portion:

Principal due in 2010
P
61,808
Accrued interest, 12/31/09
15,913
P 77,721
4-12. (Glad Manufacturing Company)
(a)

44


Chapter 4 – Leases
2009

Apr. 1

Finance Lease Receivable
Cost of Sales
Unearned Interest Revenue
Sales
Finished Goods Inventory

1,500,000
893,350

175,000 x 8 = 1,400,000
1,400,000 + 100,000 =
1,500,000
940,000–(100,000

x0.4665)=893,350
175,000 x 5.8684 = 1,026,970
100,000 x 0.4665 = 46,650
1,026,970 + 46,650 = 1,073,620
1,500,000 – 1,073,620 = 426,380

Cash
1
Dec.

3
1

426,380
1,026,970
940,000

175,000

Finance Lease Receivable
Unearned Interest Revenue

175,000
67,397

Interest Revenue
(1,073,620-175,000) x 10% x
9/12

67,397

2010

Jan. 1

Interest Revenue
Unearned Interest Revenue

Apr. 1

Cash
Unearned Interest Revenue
Finance Lease Receivable
Interest Revenue

67,397
175,000
89,862

1,073,620-175,000=898,620
898,620 x 10% = 89,862

Dec.

3
1

Unearned Interest Revenue

175,000

89,862

61,011

Interest Revenue

61,011

898,620-175,000+89,862
=813,482
813,482 x 10% x 9/12 = 61,011

*The compound entry may also be presented as follows:
Apr. 1
Finance Lease Receivable
1,400,000
Sales
Unearned Interest Revenue
1

Cost of Sales
Finished Goods Inventory

940,000

1

Finance Lease Receivable
Cost of Sales
Unearned Interest Revenue

100,000

45

67,397

1,026,970
373,030
940,000
46,650
53,350


Chapter 4 – Leases
(b)

(i)

893,350
(ii)

(c)
940,000

1,026,970

Gross Profit on Sales

133,620

67,397

Sales
Cost of Sales (940,000 – 46,650)

Interest Revenue for 2006 (see journal entries)

Sales (1,026,970 + 46,650)
Cost of Sales (cost of the asset)

1,073,620

4-13. (Prudent Company)
(a)
Sales price
Cost of machine
Gross profit

1,011,840
784,500
227,340

(b)
Gross investment (135,000 x 12)
1,620,000
Sales
Total financial revenue
(c)
43,842

1,011,840
608,160

Interest Revenue for 2009
(1,011,840 – 135,000) x 10% x 6/12

(d)
Finance Lease Receivable
1,485,000
Less Unearned Interest Revenue
564,318
Net Finance Lease Receivable, December 31, 2009
4-14. (Jackie Chan and Chris Tucker)

920,682

Annual Lease Payment:

24,836
÷4.1699

Fair value of asset
PV of BPO = 40,000 x .6209

P600,000

PV of periodic payment
PV factor (Annuity due for 5 years at 10%)

P575,164

Periodic payment

P137,932

Date
Jan. 1, 2009
Jan. 1, 2009
Jan. 1, 2010
Jan. 1, 2011

Periodic
Payment

Interest

P137,932
137,932
137,932

P46,207
37,034

Reduction in
Principal
P137,932
91,725
100,898

Depreciable cost = P600,000 – P20,000 = P580,000

2009 Depreciation = P580,000 x 6/21 = P165,714
2010 Depreciaiton = P580,000 x 5/21 = 138,095

46

Balance of
Principal
P600,000
462,068
370,343
269,445


Chapter 4 – Leases

(a)
Books of Chris Tucker
2009
Jan. 1 Leased Equipment
Finance Lease Obligation
1 Finance Lease Obligation
Cash
Dec 31
46,207

Interest Expense
Interest Payable

600,000
600,000

137,932

137,932
46,207

31 Depreciation Expense – Leased Equipment
165,714
Accumulated Depreciation – Leased Equipment
165,714
2010
Jan. 1 Finance Lease Obligation
Interest Payable
Cash
Dec 31 Interest Expense
Interest Payable

91,725
46,207
137,932
37,034

37,034

Depreciation Expense
138,095
Accumulated Depreciation – Leased Equipment
138,095

(b) Books of Jackie Chan
2009

Jan. 1 Finance Lease Receivable
Equipment for Lease
600,000
Unearned Interest Revenue
129,660
Cash

729,660

137,932

Finance Lease Receivable
137,932
Dec 31
46,207

Unearned Interest Revenue
Interest Revenue

46,207

2010
Jan. 1 Cash

137,932

47


Chapter 4 – Leases

Finance Lease Receivable
137,932
Dec 31
37,034

Unearned Interest Revenue
Interest Revenue

4.15

37,034

Ruby Company
a.

Manufacturer’s or dealer’s lease

b.
Present value of MLP = 850,365 x 4.6048
P3,914,080
Present value of Residual value = 166,300 x .5066
84,248
Total present value
P3,998,328
Carrying value of leased asset
3,200,000
Gross Profit
P 798,328
Lease arrangement cost (initial direct cost)
(

85,000)
Interest income 3,998,328 x 12% x 3/12
119,950
Total profit in 2009
P 833,278
c.

Amortization Table

Date
Oct. 1, 2009
Oct. 1, 2009
Oct. 1, 2010
Oct. 1, 2011

Periodic
Payment

Interest

P850,365
850,365
850,365

P377,756
321,042

Reduction in
Principal
P850,365

472,609
529,323

2009
Oct. 1 Finance Lease Receivable (850,365 x 6) + 166,300
Cost of Goods Sold (3,200,000 – 84,248)
Inventory
Sales
Unearned Interest Revenue
1,270,162
Oct. 1 Selling Expense
Cash
Oct. 1 Cash

Balance of
Principal
P3,998,328
3,147,963
2,675,354
2,146,031

5,268,490
3,115,752
3,200,000
3,914,080

85,000

Finance Lease Receivable

85,000

850,365

850,365
Dec. 31

Unearned Interest Revenue
Interest Revenue

2010
Oct. 1 Cash

94,349
94,349
850,365

48


Chapter 4 – Leases
Finance Lease Receivable
850,365
Dec 31

d.

Unearned Interest Revenue
Interest Revenue
(377,756 – 94,439) + (321,042 x 3/12)

Amortization Table
Date
Oct. 1, 2009
Oct. 1, 2009
Oct. 1, 2010
Oct. 1, 2011

Periodic
Payment
850,365
850,365
850,365

Interest

367,646
309,720

2009
Oct. 1 Leased Equipment
Finance Lease Obligation
Finance Lease Obligation
Cash

Reduction in
Principal

Balance of
Principal

P3,914,080
3,063,715
2,580,996
2,040,351

850,365
482,719
540,645

3,914,080
3,914,080
850,365

Dec 31 Interest Expense
Interest Payable
367,646 x 3/12 = 91,912
31 Depreciation Expense
Accumulated Depreciation
163,087
3,914,080/6 x 3/12
2010
Oct. 1 Interest Payable
Interest Expense 367,646 – 91,912
Finance Lease Obligation
Cash
Dec31

363,578
363,578

Interest Expense
Interest Payable
309,720 x 3/12

91,912
91,912
163,087

91,912
275,734
482,719
850,365
77,430

Depreciation Expense
Accumulated Depreciation
652,347

850,365

77,430

652,347

4-16. (Legend Company)
(a)
Selling price of the machinery (150,000 x 4.0373)
605,595
(b)
Deferred gain on January 1, 2009

605,595 – 411,750
193,845
(c)
Depreciation Expense for 2009

49


Chapter 4 – Leases
605,595 / 5 years
121,119
(d).
Interest Expense for 2009
(605,595 – 150,000) x 12%
(e)
Gain on sale-leaseback for 2009
193,845 / 5 years
38,769

54,671

4-17. (Honest Company)
(a)
2009

July

1

Cash

540,000

Accumulated Depreciation
Equipment
Gain on Sale Leaseback

350,000

Rent Expense

800,000
90,000
80,000

1
Cash
Dec.

3
1

80,000

Prepaid Rent

40,000

Rent Expense

40,000

(b)

50


Chapter 4 – Leases
2009

July

1

Cash

540,000

Accumulated Depreciation
Equipment
Gain on Sale Leaseback
Unearned Profit on Sale
Leaseback

350,000

Rent Expense

800,000
50,000

40,000
80,000

1
Cash
Dec.

3
1

80,000

Prepaid Rent

40,000

Rent Expense

40,000

Unearned Profit on Sale Leaseback

5,000

3
1
Profit on Sale Leaseback

5,000

(40,000/4) x 6/12

(c)
2009

July
1

Cash

400,000

Accumulated Depreciation
Loss on Sale Leaseback
Equipment

350,000
50,000

Rent Expense
1
Dec.

800,000

80,000

Cash

80,000

Prepaid Rent

40,000

3
1
Rent Expense

40,000

51


Chapter 4 – Leases
(d)

2009

July

1

1

Cash

350,000

Accumulated Depreciation

Deferred Loss on Sale Leaseback
Equipment

350,000
100,000

Rent Expense

800,000
80,000

Cash
Dec.

3
1

80,000

Prepaid Rent

40,000

Rent Expense

40,000

Rent Expense

Deferred Loss on Sale Leaseback

100,000 x 6/48 = 12,500

12,500

12,500

MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
MC6
MC7
MC8
MC9
MC10
MC11
MC12

B
A
C
D
D
D
A
C
C

A
C
A

MC13
MC14
MC15
MC16
MC17
MC18
MC19
MC20
MC21
MC22
MC23
MC24

B
B
A
C
C
A
C
C
C
A
A
C

Problems
MC25
MC26
MC27
MC28
MC29
MC30

C
C
D
D
C
B

MC31
MC32

B
D

MC33
MC34

A
B

MC35
MC36
MC37

MC38

B
D
A
D

MC39
MC40

C
A

900,000 + (500,000 / 5 yrs) = 1,000,000
40,000 + (125,000 x 4) = 540,000; 540,000 / 5 yrs = 108,000
This is an operating lease; thus, there is no interest expense involved.
240,000 x 6/12 = 120,000
3,600,000 / 3 yrs = 1,200,000
3,600,000 x 2/3 = 2,400,000; 600,000 + 900,000 = 1,500,000
2,400,000 – 1,500,000 = 900,000
500,000 x 4.61 = 2,305,000
2,305,000 – 500,000 – 283,400 = 1,521,600; 500,000 – (12% x
1,805,000)=283,400
2,305,000 / 6 = 384,167
1,350,000-200,000=1,150,000; 1,150,000 x 10% = 115,000
200,000-115,000 = 85,000
400,000 x 5.95 = 2,380,000
(2,400,000 – 200,000) / 8 yrs = 275,000
100,000 x 6 = 600,000
100,000 x 4.8 = 480,000; 480,000 – 100,000 = 380,000

380,000 x 10% x 5/12 = 15,833
3,520,000 – 2,800,000 = 720,000
3,520,000 – 600,000 = 2,920,000; 2,920,000 x 10% x 6/12 = 146,000

52


Chapter 4 – Leases
MC41

A

In the absence of any statement, the sales price is assumed to be at fair
value.
323,400 / 4.312 = 75,000; 75,000 x 5 = 375,000; 375,000 – 323,400 =
51,600
4,800,000 – 3,600,000 = 1,200,000
1,200,000 /12 x 6/12 = 50,000
150,000 – 100,000 = 50,000; 50,000 x 9/10 = 45,000
98,512 x 10% = 9,851; 30,000-9,851 =20,149; 98,512-20,149=78,363
78,363 x 10% = 7,836
(98,512-5,000) / 4 = 23,378
(30,000 x 2) + 5,000 = 65,000

MC42

A

MC43
MC44

MC45
MC46

A
B
B
D

MC47
MC48
MC49
MC50
Theory:

C
D
C
A
24 + 4 = 28 + 22 x 2 = 44 +28 = 72 +3 = 75

53