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: | ||
| PV | $ ? | Yields $88,000 |
| I | 9% | |
| N | 5 | |
| PMT | $ 20,066.26 | |
| FV | $ 4,500 | |
| Type | 1 | |
(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)
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