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

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)

Using a financial calculator:
PV	$  (415,000)
I	8%
N	5
PMT	$  ?	Yields $92,294
FV	$  25,000
Type	1

 (a) Part 2.  Ordinary Annuity:

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	$  ?	Yields $99,678
FV	$  25,000
Type	0

 (b) 1

               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
Jan. 1,	2011		$92,294.00							$92,294.00				322,706.00
Jan. 1,	2012		92,294.00					$25,816.48		66,477.52				256,228.48
Jan. 1,	2013		92,294.00					20,498.28		71,795.72				184,432.76
Jan. 1,	2014		92,294.00					14,754.62		77,539.38				106,893.38
Jan. 1,	2015		92,294.00					8,551.47		83,742.53				23,150.85
Jan. 1,	2016		25,000.00					1,849.15		23,150.85				0
			$486,470.00					$71,470.00		$415,000.00

(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
Dec. 31,	2011				$99,678.00				$33,200.00			$66,478.00			348,522.00
Dec. 31,	2012				99,678.00				27,881.76			71,796.24			276,725.76
Dec. 31,	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
Dec. 31,	2015				25,000.00				-			25,000.00			0.00
			$523,390.00						$108,390.00			$415,000.00

(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.