Zoppas Leasing Corporation, which has a fiscal year end of October 31 and uses IFRS, signs an agreement on January 1, 2011, to lease equipment to Irvine Limited. The following information relates to the agreement.
1. The term of the non-cancellable lease is six years, with no renewal option. The equipment has an estimated economic life of eight years.
2. The asset’s cost to Zoppas, the lessor, is $305,000. The asset’s fair value at January 1, 2011, is $305,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $45,626, which is not guaranteed.
4. Irvine Limited, the lessee, assumes direct responsibility for all executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2011.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties about costs that have not yet been incurred by the lessor.
Instructions
Answer the following, rounding all numbers in parts (b) and (c) to the nearest cent.
(a) Assuming that Zoppas Leasing desires a 10% rate of return on its investment, use time value of money tables, a financial calculator, or computer spreadsheet functions to calculate the amount of the annual rental payment that is required. Round to the nearest dollar.
(b) Prepare an amortization schedule using a computer spreadsheet that would be suitable for the lessor for the lease term.
(c) Prepare all of the journal entries for the lessor for 2011 and 2012 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume that Zoppas prepares adjusting journal entries only at the end of the fiscal year.
(a)
Fair market value of leased asset to lessor $305,000.00
Less: Present value of unguaranteed
residual value $45,626 X .56447
(present value of 1 at 10% for 6 periods) 25,754.51
Amount to be recovered through lease payments $279,245.49
Six periodic lease payments $279,245.49 ÷ 4.79079* $58,288.00 **
*Present value of annuity due of 1 for 6 periods at 10%.
**Rounded to the nearest dollar.
| Excel formula =PMT(rate,nper,pv,fv,type) |
| Using a financial calculator: | ||
| PV | $ (305,000) | |
| I | 10% | |
| N | 6 | |
| PMT | $ ? | Yields $58,288 |
| FV | $ 45,626 | |
| Type | 1 | |
(b) Zoppas Leasing Corporation (Lessor)
Lease Amortization Schedule
| Date | | Annual Lease Payment Plus URV | | Interest (10%) on Net Investment | | Net Investment Recovery | | Balance of Net Investment |
| | | | | | | | | |
| 1/1/11 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 1/1/16 12/31/16 | | $ 58,288 58,288 58,288 58,288 58,288 58,288 45,626 $395,354 | | $24,671 21,310 17,612 13,544 9,070 4,147* $90,354 | | $ 58,288 33,617 36,978 40,676 44,744 49,218 41,479 $305,000 | | $305,000 246,712 213,095 176,117 135,441 90,697 41,479 0 |
* rounding of $1
(c)
1/1/11 Lease Payments Receivable.... 395,354
Equipment Purchased for Lease 305,000
Unearned Interest Income—
Leases................. 90,354
1/1/11 Cash .................. 58,288
Lease Payments Receivable 58,288
31/10/11 Unearned Interest Income—
Leases..................... 20,559
Interest Income—Leases... 20,559
($24,671 ÷ 12 X 10)
1/1/12 Cash .................. 58,288
Lease Payments Receivable 58,288
31/10/12 Unearned Interest Income—
Leases..................... 21,870
Interest Income—Leases... 21,870
($24,671 ÷ 12 X 2) + ($21,310 ÷ 12 X 10)
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