problem set 3 fair leased asset $195,000

value
of __

1. Operating Lease: Lessee. Mac Sullivan Company leases nonspecialized medical equipment with a fair value of $195,000 from
RehabCo. The lease term is for 5 years and commences on January 1, 2022. The estimated economic life of the equipment is 10 lease term → s
years
years. Mac Sullivan prepaid the first rental payment of $20,000 on December 15, 2021 (the inception date) and received
$28,800 from RehabCo on the inception date to terminate a lease from another lessor. Mac Sullivan must pay five additional
rental fees of $20,000 each year beginning on January 1, 2022. The second payment is due on December 31, 2022. Thereafter,
prepaid /ease payments -_

$20,000
each payment is due on December 31. The implicit rate in the lease is 4%. Mac Sullivan incurred initial direct costs prior to the lease incentives __
$28,800
lease commencement of $3,500 that it originally recorded as prepaid initial direct costs. The lease agreement does not contain a
transfer of ownership or a purchase option. Mac Sullivan has determined that none of the Group I criteria are met, so the
company classifies the lease as an operating lease. prepaid initial costs __
$3,500
At what amount should the lessee measure and record the lease liability and the right-of-use asset? Provide the necessary implicit rate __
4%

t.ee?..*2O#yOYa6,c$aqooo
journal entries for 2021, 2022, and the final journal entry on December 31, 2026.
commencement
Show work when necessary, and consider using Excel to check your work across all years (if not done by hand).
i.
"""" ($20k) ($20k) ($20k ) ($20k)
)
" ($20k)
%r¥f= 50%8751
)
cooperating lease ☐
pyaa
YH
. .

prof remaining lease

payments __
$20,000 *
factory :S ,i=y%; annuity)
lakaiease liability) =
$20,000 * 4.62990 dnt
In-C1assNOtes_
=
$92,598 Use Asset
* components from Right of
-
-

Right of use Asset

-

of liability
-

not part lease

lease liability defined as the present value of the lease
remainingpayments initial costs erase incentives
+ prepaid lease payments
+ Lessee 's initial direct cost
Enos :
Lease Incentives compared to economic life
-

•
lease term
•

Prof remaining lease payments

Right of - -
use Asset -_
$921598 - $20100043,500 $28,800 -

=
$87,298 lease payment __ 9*208%800
made before lease begins Test I '
90%
@ payment $195,000
12µm prepaid lease Payment 201000
Decemtoer2027-C.ir
Dr .

#
Cash .

Prepay :($20,000 20,000 )

there
1,0€ .
: [$3,500) should be
a strong
12µg , Dr . cash zqgoo yn-eenn.ms :
$gg,# conman
.

btwn the 2

er .
Liability for lease Incentive
28,800 → $5,300 netcash inflow
(the btwn R.o.cl Asset
difference .

and lease
liability)
1211421 Dr Prepaid Initial Direct Costs 3,500
[email protected]
.

3,500Cash

1oyr.li/-e1H22Dr.Right-of-nseAsset
.

87,298
Drtiabilityforlease Incentive 29,800
er
.
Prepaid lease payment 20,000 •
reverse the 3 entries
from
cr .
Prepaid Initial Direct Costs 3,500 December and fold them into

cr . lease liability 92,598 R.o.ir Asset .

on San 1.2022

would still record the same way if

•

1µm lease liability 20,000 cash flows occurred in Jancinsteadoftec) .

cash 20,000
subsequent measurement reasonability

(
Total Payments $921598 1/1/22
Annual payments 1820,000*5 years) $1001000 42-12220,000
Lease payment on 12/15/21 201000
Lease Incentive (2%800)
Initial Direct costs 3,5002
Total payments $94,700

② straight-Line Expense
Total Payment $941700
Divided by years /lease term ) 5

Annual lease expense $18,940

?⃝
 ③ 440 lease liability
Date Payment Interest;) Reduction in
Balance
ease commencement)
(a) Lease
Liability
1/1/22 92,598
1/1/22 20,000 0 20,000 72,598
12/31/22 20,000 2,904 17,096 55,502
12/31/23 20,000 2,220 17,780 37,722

12/31/24 201000 1,509 18,491 19,231

12/31/25 201000 -
769 19,2-31 0
7,402 r9hÉ# sum of these is
$100,000/payments
totem

Amortization Table -

Right of- -

Use Asset
Date Lease Expense Interest Tuabor) Amortization

12/31/22 $18,940 2,904 $16,036

12/31/23 $18,940 2/220 16,720
12/31/24 18,940 11509 17,431

12/31/25 181940 769 18,171

12/31/26 1%9402 D- 18,94£
$qyµ, $7,402 $87,298
expense in this #
Journal Entries pinterest interest eamortitation
12131/22 lease Expense 18,940=2,9041161036
17,096
{
Lease Liability
Accumulated Amortization -
Right -

of -
use
16,036

§
Asset
cash 20,000

12/31/26 lease Expense 18,940 Amortization is

Accumulated Amortization -

Right -

of Use Asset
-

,gyy, lease expense less interest

thot on
straight-line basis )
12/31/26 Accumulated Amortization -

Right of - -
Use Asset 87,298 *finance leases are

right of Use Asset 87,298 straight line #

-
- -
 2. Finance Lease: Lessee (class example: no interest accrual needed). On January 1,
2022, Berg Manufacturing leased a nonspecialized piece of machinery for use in its
North American operations from Borko Bank. The lease agreement was signed on
FV of leased asset -_
$75,000
January 1 and the equipment was provided to Berg on the same day. The 9-year, lease term → 9 years
noncancellable lease requires annual lease payments of $12,000, beginning January 1,
2022, and at each December 31 thereafter through 2029. The lease agreement does not
transfer ownership of the machinery, nor does it contain a purchase option. The
annual lease payments
-_
$12,000
machinery has a fair value of $75,000 and an estimated life of 10 years. Borko Bank’s
implicit rate is not known to Berg. Berg’s incremental borrowing rate is 11%. Berg initial direct costs -_
$3,000
incurs initial direct costs of $3,000 on January 1, 2022.
incremental borrowing rate :
11%
Is the lease an operating or finance lease for Berg? Why? Provide the journal entries
for Berg for 2022.

Show work when necessary, and consider using Excel to check your work across all
years (if not done by hand)

* theleasetermldyearslisamajorpartoftheassetiseionomich.fi /10 years ) 190% > 75%1

therefore itisdfinanaleasebecunseitmeetsoneofthefwupicriten.cl
,

PV of remaining lease
payments
__
$12,000 * factoring,i=11% pvofannwitydne ) ,

=
$121000 * 6.14612
a-
$73,753.44 lease payment test
use Asset
Journal Entries Right of
-
-

P¥=7,?÷%f
> 90%
$73,753 -98.3%
liability
-

lease
1/1/22 Prepaid Initial Costs 3,000
cash yooo
tinitialdireitiost-t.gg?jYg0-
1/1/12 Right Of
73,753T
- -
Use Asset 76,753
lease liability
prepaid Initial costs
g. ooo p¥ vs. Operating
effective
•

straight-line .

no straight-line
* toauonnttorleaseasafinuneeleasesmnstcompuleinlerestontheleaseusingimerestrateno
method • NO lease •
lease expense accounts
uasewabintyTablem3
www reduction in
expense for both
interest 1

d
qq.IE?e-an!eemen,Paym-entnterest-i*--H4iease-iabiity Balance lease liability
111121 $73,573 interest e

1/1/12 $12,000 $0 $121000 $61,573 lease liability

12131/22 $12,000 $6,793 $5,207 $56,546 recorded
1431123 $12,000 6,220 5,780 50,766 separately
1431114 $12,000 5,584 6,416 44,350
÷ : : : : → study them side-by-side
$14000 1,189
12/31/29 10,811 0

first tease payment

1111 lease liability
121000,2 ,ooo}%atrhe%gPI.ba?eYYoFFiYasnForoperating
"
lease
,asn
second lease payment
1431122 5,207 expense for finance least
ggNI
lease liability lease
toward 13074 liability
6,793,2
lease
g payment goes
Interest expense
cash ,oo, and interest

straight-line Expense / Amortization

t%EfP.IE?eFeY-m--$7YYr?--- $8,528/ yr → Amortization :
tneprocessofpayingoffadebt overtime

through
regularly scheduledpayments
Amonizetneleasedassetorertneleasetermllvotusetnllil) → amortize the asset

Right of Asset "" / depreciate it ?)

1431122
use don't
Amortization Expense why you
-
- -

Accum Amortization Right of -

Use
qgz ,
- -

.
 3. Finance Lease: Lessee (fiscal year end interest accrual needed). On January 1, 2021, 100 Rock Corp. leased a fleet of vehicles
that had a fair value of $275,000. The lease terms are as follows:

on January 1, 2022 and so on.

• The lease term is 5 years.
• The economic life of the asset is 5 years.
↳
• Annual rental payments of $57,900 are due on January 1 of each year, beginning on January 1, 2021. The second payment is paid

credit interest payable accumulated interest

that has yet to be } paid
↳ pay for '22 interest in 23
'
• There is no residual value and no purchase option.
• The lessee’s incremental borrowing rate is 5% and the lessee does not know the lessor’s implicit rate.
Will 100 Rock classify this lease as a finance lease or operating lease? Prepare the journal entries at lease commencement (January
1, 2021); December 31, 2021; and January 1, 2022.

Show work when necessary, and consider using Excel to check your work across all years (if not done by hand).
①
interfaith
Étui 12/31/4
1/1/21 1/1/11 d
.

• interest
accrued

otleasetermlesyrs ) is 100% of its economic life oftheassetlsyrs / → finance lease

Prof remaining lease payments =

$57,900 factoring,i=s% )
#

=
$57,900 -1×4.54595

=
$263,210.505 I
$263,211
Use Asset
also what we value the Right of
- -

↳
initial costs,or prepaid payments
.

since there are no incentives,

AMortizationtdblEM e?#mencementPaY-M
1/1/21
-Ét¥% ) EÉiÉity Balances
$263,211
$57,900 $0 57,900 205,311
1/1/21
57,900 47,634 157,677
1/1/22 10,166

1/1/23 57,900 7,984 50,016 107,661

1/1/24 57,900 5,383 52,517 55,144
57,900 2,756 55,144 0
1/1/25
:$
}%h¥ $52,642 / yr
-

Annual Amortization Expense

-

jonrnalenIMM.fi/u
Right of
- -
Use Asset $263,211
$263,211
lease liability

/
$57,900
1/1/21 lease liability 1st payment
cash $57,900
$10,266
12/11/11 Interest Expense
$10,266
Interest payable
Use Asset $52,642
12/31/21 Amortization Expense Right of
- - -

Asset $52,6Bn
Amortization Right of .nu
-
-

Adam .

/
11,1oz Interest payable 10,266
lease liability 47,634
2nd payment
cash ,
gym
.­
m­
 7<601 .

4. Operating Lease: Lessor. On January 1 of the current year, Joseph Botti AutoWorld, Inc. leases a SUV
that it carries-
in its inventory to Cava Company. The lease term is 4 years with no renewal options, and the
economic life of the SUV is 7 years. The fair value of the automobile is $45,000, and Joseph Botti’s cost or
-
carrying value is also $45,000. There are no lease incentives. The lease requires monthly payments of $600
at the end of each month. Botti incurs initial direct costs of $2,400 on January 1. The implicit rate in the
lease is 5%. There is no transfer of ownership at the end of the lease term. Lease payment collection is
probable. lease term test 7¥ -_
571<751 .

=%gj,< 90%
How should the lessor classify the lease? Provide the journal entries for January of the current year for the
lessor.
µ lease
payment lest $26101
$45,000
•
lessor should classify tense as an operating b/c it does not meet Group -1 criteria

A. 12 months # 4 years :nI , -1--5%112=0.41671 .

Prof remaining payments -_

$600 # fawrln.uqi.o.net/.)@oAyasineieaii+inseendoftnemon1-nlbnttypicallyforleasesnse
$26,054 ↳
payments one
=

@ beginning of
capitalized asset
each period
as an
jan.it prepaid Initial Directions 2,400 →
[ deferred expense )
cash 2,400
$2140T =
$50/month directions that will be expensedeath month
nimonth ↳ initial if the lease
payment was dnl

Join .tt cash 600 on Jan , 1st

ltst Payment ) 50
Initial Direct cost expense Dr . Cash $600
Rent Revenue 600 Cr unearned Revenue
.
$600
Prepaid Initial Direct Cost
go

then on fan , 31 :

Dr . Unearned Revenue $600

Cr . Revenue $600

Dr .
Expense
-
1. D. C. $50
a. Prepaid 1. D- C.
$50

* Record rerennensyongo
* lessor don't remove Svr
lasse.tl/nomtneacconms
record
↳ both lesseeelessor
asset /sur ) in the balance
sheet
* NI depreciation b/c recorded
as
inventory

capitalize 1- D- Ccmelthln

expense it overtime
5. Sales-type Lease: Lessor. On January 1, 2022, Carney Brothers Equipment Manufacturers agreed to lease a piece
of heavy equipment to Greenbaum Shipping Associates. The equipment is not specialized and was delivered on
January 1, 2022. Carney Brothers paid $800,000 to produce the machine and carries it at this amount in inventory.
Carney Brothers incurred initial direct costs of $5,000. The lease terms are below: www.ot#carryinF
▪ Annual rental payments of $188,692 are due on January 1, 2022, and December 31 of every year from 2022 through
2026. not ↳ deferred
▪ Lease term is 6 years.
▪ No transfer of the asset at the end of the lease term and no purchase option.
▪ The economic life of the asset is 6 years.
▪ Carney Brothers’ implicit rate is 9%. ↳ 100% lease term Of
▪ Collectability of rental payments is probable.
▪ The fair value (current selling price) of the machine is $922,638. ↳ revenue recognition
▪ There is no residual value guarantee, nor does Carney anticipate a residual value for the asset.

How does Carney Brothers, the lessor, classify this lease? What journal entries does it make on January 1, 2022?
What journal entries are required on December 31, 2022 and December 31, 2023?
+ rather than having a lease

liability ,
the lessor has a lease
Show work when necessary, and consider using Excel to check your work across all years (if not done by hand). receivable

•
the Carney Brothers classify tnisleaseassales-tujpe-blotheleasetermisto.li of the
asset 's economic life, so Group 7- criteria satisfied and control of asset given to lessee

revenue
recognition
mmmm

Prof lease receivables __

$188,692 *
factoring,i=9%,AD )

_|rµs ¥a
=
$188,692 #
4.88965--51922,638 ( NII -

ST ) $184692
↳ * Also
eqnultot-vofmachinex-ass-tre.me
Cost Of Goods sold __
cvofleusedassetlnonngnaranteed residual value or deferred initial costs) Annnitydhe
↳ no residual
-

$800,000 included
d
dnb
valneinthis
→ not
payments
Journal Entries please
receivable eres¥dvaMemth"Q @ beginning question ,

gross profit
-
-

$122,638 of each period especially b/c

1/1/22 Net Investment in the lease ST
922,638
-

800,000 )
lease term
-_

cost of foods sold asset 's

useful life
sales Revenue 922,638
Inventory 800,000
→ didn't actually
1/1/22 Initial Direct costs 5,000 sell the asset, but acts like
record Goose
cash sooo yondid →
remove inventory from
* allocates the first payment to principal byrednoingtne.net investment in the lease accounts
carney
by interest
dccrnesonlywiththepassageoftimelanditisonlysan.it/Yoamsemeniement )
→
if there was residual
111111 cash $111692 raine , loose
Net Investments in the lease .se $188,692 revenue
would be
reduced to account
the lessor allocates lease payments tofirstcorertheinterestandtnentorednutneNT-l.SI residual rattle
for
•

Amortizationtolblbhh
hmmm
* for stunts , when there's a

profit @ lease commencement,

RIini-ENgy.gg?,gg-ance
Date Payment Interest-19%1
recommence
record initial direct
filament
-

the

$184692 $0 $188,692 $733,946 @ commencement

1/1/12 costs

12131122 188,692 $66,055 $122,637 $611,309 I

1431123 $55,018 $133,674 $477,635 different from other leaks 1.b/c
14311M typically they expense D.C .

the lease term

143112s over

12/31/26
JOnrnale-ntn.es
12/31/22 Cash $188,692
NIL -57 $122,637
Interest Revenue $66,055

12/31/23 Cash $188,692

NIL ST -

$133,674
Interest revenue 55,018
6. Leases in Practice. The figure below presents companies’ total lease liabilities—i.e.,
finance and operating lease liabilities—as of the 2019 fiscal year-end, which was the first
year companies were required to implement the new lease accounting rules issued by the
FASB. The amounts are reported in billions of U.S. dollars (source: SEC 10-K filings).

What types of assets does Amazon lease?

For Amazon’s fiscal year ending on December 31, 2021:

1. What amount did Amazon recognize for its operating lease liabilities?
2. What amount did Amazon recognize for its finance lease liabilities?
3. What were the (average) discount rates used to compute the present value of lease
liabilities?

Note: you will need to review the notes to the financial statements (i.e., “Note 4 –
Leases”) contained in Amazon’s 2021 10-K to obtain the answers. As you will see,
Amazon’s Balance Sheet presents only aggregate information, which is not sufficient for
answering the above questions.

① Amazon recognized $51,981 1in minions )

lease liabilities
for its
operating

② Amazon recognized $15,670 1in millions

lease liabilities
for its finance
NWA
③ for operating leases , discount rate was 2.2%

for finance leases, WA discount rate

was 2.0%