IAsgns5.docx

IAsgns5.docx

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IAsgns5

LESSON5

Suggestedsolutions

Question1（35marks）

Computersolution

Note:

Forpart（a）,theinterestrateimplicitintheleaseisworth3marks.Forpart（b）,theleaseamortizationscheduleisworth6marks.

c.（5marks）

January1,2004

Leasereceivable1308,000

Cash（orInventoryorMachine）240,200

Unearnedfinanceincome67,800

1（€76,0004）+€4,000

Cash76,000

Leasereceivable76,000

December21,2004

Unearnedfinanceincome31,465

Financeincome31,465

January1,2005

Cash76,000

Leasereceivable76,000

December31,2005

Unearnedfinanceincome22,931

Financeincome22,931

d.（7marks）

January1,2004

Assetunderfinancelease240,200

Leaseliability240,200

Leaseliability76,000

Cash76,000

December31,2004

Interestexpense31,465

Leaseliability31,465

Depreciationexpense（€240,200/6）40,033

Accumulateddepreciation40,033

January1,2005

Leaseliability76,000

Cash76,000

December31,2005

Interestexpense22,931

Leaseliability22,931

Depreciationexpense40,033

Accumulateddepreciation40,033

e.（8marks）

LessorLessee

Incomestatement

Interestincome22,931

Interestexpense22,931

Depreciationexpense40,033

Balancesheet

Leasereceivable（net）142,596

Leaseliability,currentportion76,000*

Leaseliability,longterm66,596*

Leasedasset240,200

Accumulateddepreciation（80,066）

*TotalliabilityatDecember31,€142,596,ofwhich€76,000isdueJanuary1,2006.

f.（2marks）

Cashflowdisclosure

Operatingactivities

Addbackdepreciation40,033

Financingactivities

Repaidleaseliability（53,069）*

*2004balance,€195,665less€142,596

g.（4marks）

Cashflowdisclosurenote

Thecompanyhasthefollowingcashcommitmentsunderfinanceleases:

Question2（14marks）

（2markseach）

a.3）

Thegainonasaleandleasebackresultinginafinanceleaseisrecognizedoverthetermofthelease,perIAS17,Paragraph50.

b.4）

The€50,000securitydepositisprepaidrentuntilthefinalyear.

c.3）

Thelesseeusestherateimplicitinthelease,unlessitisnotpracticabletodetermine.

d.3）

Theleaseisforthemajorityoftheasset’susefullife,thereforeitisafinancelease.

€100,000（PVA,10yrs,10%）;€614,457rounded.

e.1）

Balanceattheendof20X4,€518,400（€608,400–€90,000）

Interestaccrualendof20X5,€51,840

Balanceattheendof20X5,€480,240（€518,400+€51,840–€90,000）

Thisisareductionof€38,160（€518,400–€480,240）

f.2）

€126,000/15;theentireusefullifeisthedepreciationperiod,sincetitlepasses.

g.4）

Inthecalculationofpresentvalueoftheminimumleasepayments,thePVofabargainpurchaseoptionisadded,so（4）iscorrect.Answer

（1）isincorrectsincethepaymentdoeshavetobecapitalized.ThePVisnotsubtracted,so

（2）isincorrect.Thepresentvalueisused,nottheexerciseamount,so（3）isincorrect.

Question3（16marks）

Requirement1（8marks）

#1#2#3

a.Leaseterm1year7years

（1）5years

b.Bargainpurchaseoptionn/a€1n/a

c.Unguaranteedresidual?

n/an/a

d.Guaranteedresidualn/an/a€75,000

e.Bargainrenewaltermsn/an/an/a

f.Minimumnetleasepayments€9,200€150,001

（2）€596,500（3）

g.Contingentleasepayments€7.40/hourn/an/a

h.Interestratetobeusedtodiscount10%8%10%

（1）RenewaltermpreceedsBPO

（2）[（€28,600–€2,600）5]+[（€11,500–€1,500）2]+€1

（3）（€104,3005）+€75,000.Thefullamountoftheguaranteedresidualisincluded.

Requirement2（4marks）

Classification

#1Operatinglease.Noneofthecriteriaforafinanceleasearemet.Thisisastraightforwardrental.

#2Financelease.Titlepasses（BPO）.ThePVoftheMLPalsorepresentssubstantiallyallofthefairvalueoftheassetattheinceptionofthelease:

a）（€28,600–€2,600）（PVA,8%,5）（3.99271）€103,810

b）（€11,500–€1,500）（PVA,8%,2）（PV,8%,5）

（1.78326）（.68058）12,137

€115,947

（TheBPOhasanegligiblePV.）

#3Financelease.Theleasetermcoversthemajorpart（5/6）oftheasset’susefullife.ThisisafinanceleaseeventhoughthePVoftheMLPrepresentsonly88%ofthefairvalueoftheassetattheinceptionofthelease:

a）（€104,300）（PVAD,10%,5）（4.16987）€434,917

b）（€75,000）（PV,10%,5）（.62092）46,569

€481,486

Marker:

award1markforleases#1and#3,and2marksforlease#2.

Requirement3（4marks）

#1Maintenanceandinsuranceexpense1,400

Rentalexpense,machinery9,200

Cash10,600

Theexpensecouldallberecordedinrentalexpense

#2Assetundercapitallease115,947

Leaseliability115,947

#3Assetundercapitallease481,486

Leaseliability481,486

Leaseliability104,300

Cash104,300

Marker:

award1markforleases#1and#2,and2marksforlease#3.

Question4（15marks）

Requirement1（4marks）

Note:

MoststudentswillsolvetheIRRusingaspreadsheetprogramandmayalsocompletetheamortizationtablethisway,althoughthisisnotrequired.Ifstudentssolvetheproblemusingextrapolation,someroundingerrorsmaybepresent.Studentsshouldnotbepenalizedforthis.

Interestrateimplicitinthelease

€200,730=（€43,329–€5,200）（PVAD,x%,6）

x=5.55%（solvedbyspreadsheet）

Lessor’sAmortizationSchedule

BeginningInterestatDecreaseEnding

YearBalance5.55%PaymentinBalanceBalance

20x7€200,730€0€38,129€38,129€162,601

20x8162,6019,02438,12929,105133,496

20x9133,4967,40838,12930,721102,775

20x10102,7755,70338,12932,42670,349

20x1170,3493,90438,12934,22536,124

20x1236,1242,00538,12936,1240

€28,044

Requirement2（3marks）

Changesinprofitduetolease

Fiscal

YearProfitfromsaleFinanceIncomeTotal

20x7€50,7301€9,024€59,754

20x807,4087,408

20x905,7035,703

20x1003,9043,904

20x1102,0052,005

20x12000

Total€50,730€28,044€78,774

1Or,€200,730salesincome–€150,000costofasset.

Requirement3（8marks）

January2,20x7

Leasepaymentsreceivable（（€43,329–€5,200）6）228,774

Unearnedfinanceincome28,044

Sales200,730

COGS150,000

Inventory150,000

Cash43,329

Maintenanceandinsuranceexpense5,200

Leasepaymentsreceivable38,129

Maintenanceandinsuranceexpense5,200

Cash5,200

December31,20x7

Unearnedfinanceincome9,024

Financeincome9,024

January2,20x8

Cash43,329

Maintenanceandinsuranceexpense5,200

Leasepaymentsreceivable38,129

Maintenanceandinsuranceexpense5,200

Cash5,200

December31,20x8

Unearnedfinanceincome7,408

Financeincome7,408

Question5（20marks）

Caseanalysissolution

Overview

TheleasemustbeaccountedforandreportedinaccordancewithIAS17asafinancelease.Wrightwouldbeconsideredamanufacturerordealerlessor.Sinceoutsideshareholderswillrelyonthefinancialstatements,thereisahighethicalstandardoffairpresentation.

Issues

a）Leaseclassification—financeoroperating

b）Leasepresentation—cantheleasereceivablebenettedwiththebankloanpayable?

Analysis

1.Leaseclassification

Theleaseismostlikelyafinancelease

a）Attheendoftheleaseterm,whichisnomorethan50%oftheexpectedlifeoftheairplane,thelesseecanrenewperpetuallyfor€1,000.Thiscertainlywillbeabargainrenewaloption,since

（1）theoptionisthelessee’s,whichimpliesthatWACwillhavereceivedfullcompensationfortheplanewithintheinitialleaseterm,and

（2）thenormalrentalratesforarelativelyyoungairplanewouldcertainlybemorethan€1,000peryear.Thus,itisreasonablycertainthatthelesseewouldcontinueleasingtheassetsuchthattheleasetermcoversthemajorportionoftheusefullifeoftheairplane.

b）AlthoughWACistechnicallythelessor,WACactuallyreceivesallofthemoneyupfront:

10%fromthelesseeand90%（discounted）fromthebank.Aftertheinitialtransaction,WACdoesnotparticipateintheleaseexceptasanintermediaryforthepaymentsbetweentheflyingclubandthebank.Thisisaclassicleveragedlease.Sincethelessorreceivesallthesalesvalueupfront,thisrepresentsthepresentvalueoftheminimumleasepaymentsandissubstantiallyalloffairmarketvalue.

c）Otherclassificationcriteria,titlepassing,aBPO,orspecializednatureoftheasset,arenotmet.

TheleasemustbereportedinaccordancewithIAS17asafinanceleasebyamanufacturer.Wrightwillrecordsalesrevenueintheamountofthefairvalueoftheplaneor,iflower,thenetpresentvalueoftheleasepayments,discountedattheinterestrateimplicitinthelease（assumingthisratereflectsthecommercialrate）.Wrightwillalsorecognizealeasereceivableaccount.

2.Leasepresentation

Itispossibletoarguetwoapproachestopresentingthereceivableandpayable:

a）Reportthenetleasereceivableasanassetandreportthebankloanasaliability.

b）Nettheliabilityagainstthereceivable,showingonlyanynetdifferenceintheaccounts（astheresultofusingdifferentdiscountrates）asdeferredfinancingcostorincome.

Nettingthetwoamountswouldhavetheeffectofreducingthereporteddebtandassets,withthefollowingresults:

∙improvingdebt:

equityratios

∙increasingreturnonassets

∙reducinginterestchargestoincome,andtherebyimprovingthetimes-interest-earnedratio

ThismaybeadesirableresultforWrightifthecompanyhasdebtcovenants.However,itisonlyethicaltochoosethispresentationifitcorrespondstoreality:

whatisthenatureoftherelationshipbetweenWrightandthebankifacustomerdefaults?

Thesecondalternativemaybevalidinthecaseofnon-recourseleveragedleasesituations,butitisnotstatedinthecasethatthebankhasnorecoursetoWright.Thes