Solution Ch21 of Intermediate Accounting PDF

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CHAPTER 21Accounting for LeasesASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)Topics QuestionsBrief Exercises Exercises ProblemsConcepts for Analysis1. Rationale for leasing. 1, 2, 32. Concepts, andmeasurement ofleases by lessees.4, 5, 6, 7, 8,9, 10, 11, 12,13, 14, 15, 231, 2, 3, 4,5, 6, 9, 15,17, 18, 19...

Description

CHAPTER 21 Accounting for Leases ASSI GNMENTCLASSI FI CATI ONTABLE( BYTOPI C) Brief Exercises

Exercises

Problems

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 23

1, 2, 3, 4, 5, 6, 9, 15, 17, 18, 19

1, 2, 3, 4, 7, 8, 9, 10, 12, 14, 15, 16

1, 2, 3, 4, 1, 2, 3, 4,5 5, 8, 9, 10, 11, 12, 13, 14, 15

11, 15, 16, 17, 18, 19, 20, 21, 22, 23

7, 8, 9, 10, 11, 12, 13, 14, 16, 20

5, 7, 8, 9, 11, 12, 13, 17

6, 7, 9, 11, 2, 5 12, 13, 14, 15

26, 27

15, 16, 21, 22, 23, 24, 25

9, 16, 17

6, 7, 8, 12, 3, 4, 5 13, 14

28, 29

26, 27

18, 19

Topics

Questions

1.

Rationale for leasing.

1, 2, 3

2.

Concepts, and measurement of leases by lessees.

3.

Finance / Sales – Type Leases.

4.

Special Issues Other lease costs; initial direct costs, presentation and disclosure.

*5.

Sale-leaseback.

Concepts for Analysis

6

*This material is dealt with in an Appendix to the chapter.

Copyright © 2018 Wiley       Kieso, IFRS, 3/e, Solutions Manual       (For Instructor Use Only)

21-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives 1. Describe the environment related to leasing transactions.

Questions

Concepts for Analysis

Brief Exercises

Exercises

Problems

1, 2, 3

2. Explain the accounting for leases by lessees.

4, 5, 6, 7, 8, 9, 10, 11, 12, 21

1, 2, 3, 4, 5, 6, 9, 14, 15, 16, 17, 18, 19

1, 2, 3, 4, 7, 8, 9, 10, 12, 13, 14, 18, 19, 20

1, 2, 3, 4, 1, 2, 3, 4 5 5, 6, 8, 10, 11, 12, 13, 14, 15

3. Explain the accounting for leases by lessors.

11, 13, 14, 15, 16, 17, 18, 19, 20, 22

6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 20

5, 6, 7, 8, 9, 10, 11, 12, 13, 17

6, 7, 9, 2, 5 11, 12, 13, 14, 15

4. Discuss the accounting and reporting for special features of lease arrangements.

10, 21, 23, 26, 27

22, 23, 24, 25

6, 9, 10, 11, 12, 14, 16, 17

1, 2, 7, 8, 3, 4, 5 12, 13, 14

28, 29

26, 27

18, 19

*5.

Describe the lessee’s accounting for sale-leaseback transactions.

6

*This material is dealt with in an Appendix to the chapter.

21-2

Copyright © 2018 Wiley       Kieso, IFRS, 3/e, Solutions Manual       (For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE

Item

Description E21.1 Lessee Entries; No Residual Value E21.2 Lessee Entries; Lease with Unguaranteed Residual Value E21.3 Lessee Computations and Entries; Lease with Guaranteed Residual Value E21.4 Lessee Entries; Lease and Unguaranteed Residual Value E21.5 Computation of Rental; Journal Entries for Lessor E21.6 Lessor Entries; Sales-Type Lease with Option to Purchase E21.7 Type of Lease; Amortization Schedule E21.8 Lessor Entries; Sales-Type Lease E21.9 Lessee Entries; Initial Direct Costs E21.10 Lessee Entries with Bargain-Purchase Option E21.11 Lessor Entries with Bargain-Purchase Option E21.12 Lessee-Lessor Entries; Sales-Type Lease with a Bargain Purchase Option E21.13 Lessee-Lessor Entries; Sales-Type Lease; Guaranteed Residual Value E21.14 Lessee Entries; Initial Direct Costs E21.15 Amortization Schedule and Journal Entries for Lessee. E21.16 Lessee Accounting E21.17 Lessor Accounting for an Operating Lease *E21.18 Sale-Leaseback *E21.19 Lessee-Lessor, Sale-Leaseback P21.1 P21.2 P21.3 P21.4 P21.5 P21.6 P21.7

Lessee Entries. Lessee Entries and Statement of Financial Position Presentation. Lessee Entries and Statement of Financial Position Finance Lease. Lessee Entries, Lease with Monthly Payments. Basic Lessee Accounting with Difficult PV Calculation Lessee-Lessor Entries, Finance Lease with a Guaranteed Residual Value. Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value.

Copyright © 2018 Wiley       Kieso, IFRS, 3/e, Solutions Manual       (For Instructor Use Only)

Level of Difficulty Moderate Moderate

Time (minutes) 15–20 15–20

Moderate

20–25

Moderate

20–30

Simple Moderate

15–25 20-25

Moderate Moderate Moderate Moderate Moderate Moderate

15-20 15-20 20–25 20-30 20–30 20-25

Moderate

20-25

Simple Moderate

20-25 20–30

Moderate Moderate Moderate Moderate

20–25 25-30 20-30 20–30

Simple Simple

20–25 20–30

Moderate

35–45

Moderate Moderate Simple

30–40 40-50 25–35

Complex

30-40

21-3

P21.8 P21.9 P21.10 P21.11 P21.12 P21.13 P21.14 P21.15 CA21.1 CA21.2 CA21.3 CA21.4 CA21.5 *CA21.6

21-4

Lessee Computations and Entries, Lease with Guaranteed Residual Value. Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value. Lessee Computations and Entries, Finance Lease with Unguaranteed Residual Value. Lessee-Lessor Accounting for Residual Values. Lessee-Lessor Entries, Statement of Financial Position Presentation, Finance and Sales-Type Lease. Statement of Financial Position and Income Statement Disclosure—Lessee. Operating lease. Lessee-Lessor Entries, Operating Lease with an Unguaranteed Residual Value. Lessee accounting and reporting. Lessor and lessee accounting and disclosure. Lessee accounting. Lease capitalization, bargain-purchase option. Short-Term lease vs. finance lease. Sale-Leaseback.

Complex

30–40

Complex

30-40

Complex

30–40

Complex Moderate

30–40 35-45

Moderate

35–45

Moderate Moderate

30–40 30–40

Moderate Moderate Moderate Moderate Moderate Moderate

15–25 25–35 20–30 20–25 20–30 15–25

Copyright © 2018 Wiley       Kieso, IFRS, 3/e, Solutions Manual       (For Instructor Use Only)

ANSWERS TO QUESTIONS 1.

The major lessor groups in the United States are banks, captives, and independents. Banks are the largest players in the leasing business. Captives are subsidiaries whose primary business is to perform leasing operations for the parent company. They have the point of sale advantage in finding leasing customers for as soon as a parent receives a possible order, a lease financing arrangement can be developed by its leasing subsidiary. Furthermore, the captive (lessor) has the product knowledge which gives it an advantage when financing the parents’ product. The current trend is for captives to focus on the company’s products rather than to do general lease financings. Last, independents are often good at developing innovative contracts for lessees.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

2.

(a)

Possible advantages of leasing for the lessee: 1. Leasing may be more flexible in that the lease agreement may contain less restrictive provisions than the bond indenture. 2. Leasing permits 100% financing of assets, as the lease is often signed without requiring any money down from the lessee. 3. Leasing may permit more rapid changes in equipment, reduce the risk of obsolescence, and pass the risk in residual value to the lessor or a third party. 4. Leasing may have favorable tax advantages.

Assuming that funds are readily available through debt financing, there may not be great advantages (in addition to the above-mentioned) to signing a noncancelable, long-term lease. One additional advantage of leasing is its availability when other debt financing is unavailable. (b) Given the new reporting standard on leasing the financial statement effects of a long-term noncancelable lease versus the purchase of the asset are somewhat similar. That is assets under a long-term lease are capitalized at the present value of the future lease payments and this value is probably equivalent to the purchase price of the assets. On the liability side, the bond payable amount would be equivalent to the present value of the future lease payments. In summary, the amounts presented in the statement of financial position would be quite comparable. The description of the leased asset (right-of-use asset) and related liability would however be different than under a bond financing as would the general classifications; the specific labels (leased assets and lease liability) would be different. LO: 1, Bloom: C, Difficulty: Moderate, Time: 5-10, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

3.

Possible advantages of leasing for a lessor: 1. It often provides profitable interest margins. 2. It can stimulate sales of a lessor’s product whether it be from a dealer (lessor) or a manufacturer (lessor). 3. It often provides tax benefits which enhances the return for the lessor and other parties to the lease. 4. It can provide a high residual value to the lessor upon the return of the property at the end of the lease term, which can potentially provide very large profits.

LO: 1, Bloom: C, Difficulty: Moderate, Time: 5-10, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

4.

The discount rate used by the lessee in the present value test and for valuing the lease liability is the implicit interest rate used by the lessor. This rate is defined as the discount rate that, at the commencement of the lease, causes the aggregate present value of the lease payments and unguaranteed residual value to be equal to the fair value of the leased asset. However, if it is impracticable for the lessee to determine the implicit rate of the lessor, the lessee should use its incremental borrowing rate. The incremental borrowing rate is the rate of interest the lessee would have to pay on a similar lease or incur to borrow over a similar term the funds necessary to purchase the asset.

LO: 2, Bloom: C, Difficulty: Moderate, Time: 5-10, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2018 Wiley       Kieso, IFRS, 3/e, Solutions Manual       (For Instructor Use Only)

21-5

Questions Chapter 21 (Continued) 5.

Paul Singer is for the most part correct. As long as the lease has a lease term of over 12 months and the lease is not low value, Paul is correct that the lease must be recognized on the statement of financial position of the lessee. However, the new lease standard allows for a short-term lease exception. Under the short-term lease or low value lease exceptions for lessees, rather than recording a right-of-use asset and lease liability, lessees may elect to expense the lease payments as incurred. In this case, the lease is not capitalized on the statement of financial position as Paul suggested.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

6.

(a) Residual value is the expected value of the leased asset at the end of the lease term. (b) A guaranteed residual value is a guarantee made to a lessor that the value of the leased asset returned to the lessor at the end of a lease will be at least a specified amount. Any amounts probable to be paid under the residual value guarantee should be included in the present value of payments. (c) Initial direct costs are incremental costs of a lease that would not have been incurred had the lease not been executed. Initial direct costs incurred by the lessee are included in the cost of the right-of-use asset but are not recorded as part of the lease liability.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

7.

A bargain purchase option is a lease purchase option in which the lessee can buy the asset for a price that is significantly lower than the underlying asset’s expected fair value at the date the option becomes exercisable, thus making the exercise of the option reasonably certain. A bargain renewal option is essentially the same conceptually as a bargain purchase option, except the option is to renew the lease as opposed to purchasing the asset. That is, a bargain renewal option is an option in which the price of renewal at which the lessee can buy the asset is significantly lower than the underlying asset’s expected fair value at the date the option becomes exercisable, thus making the exercise of the option reasonably certain. A bargain purchase option and a bargain renewal option have similar impacts on the initial classification and measurement of the lease. With respect to classification, the existence of a bargain purchase option is one way a lessor can meet the finance/sales-type lease classification criteria. In the case of a bargain renewal option, the additional lease term that would be added by exercising the option should be included in the lease term when assessing whether or not the lessor meets the lease term test. The present value of the option price would also be used in assessing whether the lessor meets the present value test. For measurement purposes, the present value of both a bargain purchase option and a bargain renewal option should be included in the initial value of the lease receivable.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

8.

The lease liability is recorded at the present value of the lease payments. This includes the periodic rental payments made by the lessee, bargain-purchase option if any, and amounts probable to be owed under a residual value guarantee. The present value of the lease payments is recorded as a lease liability by the lessee.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

9.

Wonda Stone is correct in her interpretation. For purposes of lease classification by the lessor the present value of the guaranteed residual value is used in determining whether the present value (90%) test is met. The amount included in the measurement of the lease liability is only the amount that the lessee expects to owe under the residual value guarantee at the end of the lease. For example, if a lessee guarantees a residual value of $10,000, but it is also probable that the lessee does not expect to owe any additional money at the end of the lease, then the guaranteed residual value would not be included in the initial measurement of the lease liability.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

21-6

Copyright © 2018 Wiley       Kieso, IFRS, 3/e, Solutions Manual       (For Instructor Use Only)

Questions Chapter 21 (Continued) 10.

The right-of-use asset is initially measured as the same amount as the lease liability (i.e. present value of lease payments), adjusted for initial direct costs, prepayments and lease incentives. Initial direct costs paid by the lessee will increase the initial value of the right-of-use asset. Similarly, prepaid rent paid by the lessee will increase the amount of the right-of-use asset recorded. Lease incentives granted to the lessee by the lessor will decrease the initial value of the right-of-use asset.

LO: 2, 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

11.

Variable lease payments should be included at the level of the index/rate at the commencement date. Increases or decreases in the index should not be assumed when valuing the lease liability. Thus, for the lease in this question, the lessee should not assume any changes in the price index. The difference in the monthly payment in the second year from the first year of $100 ($5,100 - $5,000) is expensed in the period incurred. Only if the lessee knows the amount of the variable payment in subsequent periods should it include these payments in the lease liability computation. The lease payment in the second year is $5,150 ($5,000 X 1.03).

LO: 2, 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

12.

The lessee records a right-of-use asset and lease liability at commencement of the lease. The lessee then recognizes interest expense on the lease liability over the life of the lease using the effective interest method and records depreciation expense on the right-of-use asset generally on a straight-line basis. A lessee therefore reports both interest expense and depreciation of the right to use asset on the income statement. As a result, the total expense for the lease transaction is generally higher in the earlier years of the lease arrangement under the finance lease method. The lessee continues to depreciate the right-of-use asset and decrease the principal of the lease liability until both are reduced to zero at the end of the lease. The right-of-use asset should be depreciated over the lease term, unless there is a bargain-purchase option or ownership of the asset transfers to the lessee at the end of the lease. If either of these criteria are met, then the lessee depreciates the right-of-use asset over the economic life of the asset.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, Measurement, AICPA PC: None

13.

A low value lease is a lease of an underlying asset with a value of $5,000 or less. Rather than recording a right-of-use asset and lease liability, a lessee may elect to expense the lease payments as incurred.

LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

14.

A short-term lease is a lease that, at the commencement date, has a lease term of 12 months or less. Rather than recording a right-of-use asset and lease liability, lessees may elect to expense lease payments as incurred.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

15.

If a bargain-purchase option exists, the lessee must increase the present value of the lease payments by the present value of the option price. This is the case for both classification and initial measurement of the lease liability and right-of-use asset. A bargain purchase option also affects the period over which the right-of-use asset is depreciated, since the lessee amortizes the asset over its economic life rather than the term of the lease. If the lessee fails to exercise the option, the lessee will recognize a loss to the extent of the book value of the right-of-use asset in the period that the option expired.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Reporting, Measurement, AICPA PC: None

16.

From the standpoint of the lessor, leases will (with few exceptions) be classified for accounting purposes as either (a) operating leases or (b) finance (sales-type) leases. A finance (sales-type) lease meets one or more of the followi...