IAsgns5.docx

1、IAsgns5LESSON 5 Suggested solutionsQuestion 1 (35 marks)Computer solutionNote:For part (a), the interest rate implicit in the lease is worth 3 marks. For part (b), the lease amortization schedule is worth 6 marks.c. (5 marks)January 1, 2004Lease receivable1 308,000 Cash (or Inventory or Machine) 240

2、,200Unearned finance income 67,8001 (76,000 4) + 4,000Cash 76,000Lease receivable 76,000December 21, 2004Unearned finance income 31,465Finance income 31,465January 1, 2005Cash 76,000Lease receivable 76,000December 31, 2005Unearned finance income 22,931Finance income 22,931d. (7 marks)January 1, 2004

3、Asset under finance lease 240,200Lease liability 240,200Lease liability 76,000Cash 76,000December 31, 2004Interest expense 31,465Lease liability 31,465Depreciation expense (240,200/6) 40,033Accumulated depreciation 40,033January 1, 2005Lease liability 76,000Cash 76,000December 31, 2005Interest expen

4、se 22,931Lease liability 22,931Depreciation expense 40,033Accumulated depreciation 40,033e. (8 marks) Lessor LesseeIncome statementInterest income 22,931Interest expense 22,931Depreciation expense 40,033Balance sheetLease receivable (net) 142,596Lease liability, current portion 76,000*Lease liabilit

5、y, long term 66,596*Leased asset 240,200Accumulated depreciation (80,066)* Total liability at December 31, 142,596, of which 76,000 is due January 1, 2006.f. (2 marks)Cash flow disclosureOperating activitiesAdd back depreciation 40,033Financing activitiesRepaid lease liability (53,069)* 2004 balance

6、, 195,665 less 142,596g. (4 marks)Cash flow disclosure noteThe company has the following cash commitments under finance leases:Question 2 (14 marks)(2 marks each)a. 3)The gain on a sale and leaseback resulting in a finance lease is recognized over the term of the lease, per IAS 17, Paragraph 50.b. 4

7、)The 50,000 security deposit is prepaid rent until the final year.c. 3)The lessee uses the rate implicit in the lease, unless it is not practicable to determine.d. 3)The lease is for the majority of the assets useful life, therefore it is a finance lease.100,000 (PVA, 10 yrs, 10%); 614,457 rounded.e

8、. 1)Balance at the end of 20X4, 518,400 (608,400 90,000)Interest accrual end of 20X5, 51,840Balance at the end of 20X5, 480,240 (518,400 + 51,840 90,000)This is a reduction of 38,160 (518,400 480,240)f. 2)126,000/15; the entire useful life is the depreciation period, since title passes.g. 4)In the c

9、alculation of present value of the minimum lease payments, the PV of a bargain purchase option is added, so (4) is correct. Answer (1) is incorrect since the payment does have to be capitalized. The PV is not subtracted, so (2) is incorrect. The present value is used, not the exercise amount, so (3)

10、 is incorrect.Question 3 (16 marks)Requirement 1 (8 marks) #1 #2 #3a. Lease term 1 year 7 years (1) 5 yearsb. Bargain purchase option n/a 1 n/ac. Unguaranteed residual ? n/a n/ad. Guaranteed residual n/a n/a 75,000e. Bargain renewal terms n/a n/a n/af. Minimum net lease payments 9,200 150,001 (2) 59

11、6,500 (3)g. Contingent lease payments 7.40/hour n/a n/ah. Interest rate to be used to discount 10% 8% 10%(1) Renewal term preceeds BPO(2) (28,600 2,600) 5 + (11,500 1,500) 2 + 1(3) (104,300 5) + 75,000. The full amount of the guaranteed residual is included.Requirement 2 (4 marks)Classification#1 Op

12、erating lease. None of the criteria for a finance lease are met. This is a straightforward rental.#2 Finance lease. Title passes (BPO). The PV of the MLP also represents substantially all of the fair value of the asset at the inception of the lease: a) (28,600 2,600) (PVA, 8%, 5) (3.99271) 103,810 b

13、) (11,500 1,500) (PVA, 8%, 2) (PV, 8%, 5) (1.78326) (.68058) 12,137 115,947 (The BPO has a negligible PV.)#3 Finance lease. The lease term covers the major part (5/6) of the assets useful life. This is a finance lease even though the PV of the MLP represents only 88% of the fair value of the asset a

14、t the inception of the lease: a) (104,300) (PVAD, 10%, 5) (4.16987) 434,917 b) (75,000) (PV, 10%, 5) (.62092) 46,569 481,486Marker: award 1 mark for leases #1 and #3, and 2 marks for lease #2.Requirement 3 (4 marks)#1 Maintenance and insurance expense 1,400 Rental expense, machinery 9,200 Cash 10,60

15、0 The expense could all be recorded in rental expense#2 Asset under capital lease 115,947 Lease liability 115,947#3 Asset under capital lease 481,486 Lease liability 481,486 Lease liability 104,300 Cash 104,300Marker: award 1 mark for leases #1 and #2, and 2 marks for lease #3.Question 4 (15 marks)R

16、equirement 1 (4 marks)Note:Most students will solve the IRR using a spreadsheet program and may also complete the amortization table this way, although this is not required. If students solve the problem using extrapolation, some rounding errors may be present. Students should not be penalized for t

17、his.Interest rate implicit in the lease200,730 = (43,329 5,200) (PVAD, x%, 6)x = 5.55% (solved by spreadsheet)Lessors Amortization Schedule Beginning Interest at Decrease EndingYear Balance 5.55% Payment in Balance Balance20x7 200,730 0 38,129 38,129 162,60120x8 162,601 9,024 38,129 29,105 133,49620

18、x9 133,496 7,408 38,129 30,721 102,77520x10 102,775 5,703 38,129 32,426 70,34920x11 70,349 3,904 38,129 34,225 36,12420x12 36,124 2,005 38,129 36,124 0 28,044Requirement 2 (3 marks)Changes in profit due to leaseFiscalYear Profit from sale Finance Income Total20x7 50,7301 9,024 59,75420x8 0 7,408 7,4

19、0820x9 0 5,703 5,70320x10 0 3,904 3,90420x11 0 2,005 2,00520x12 0 0 0Total 50,730 28,044 78,7741 Or, 200,730 sales income 150,000 cost of asset.Requirement 3 (8 marks)January 2, 20x7Lease payments receivable (43,329 5,200) 6) 228,774Unearned finance income 28,044Sales 200,730COGS 150,000Inventory 15

20、0,000Cash 43,329Maintenance and insurance expense 5,200Lease payments receivable 38,129Maintenance and insurance expense 5,200Cash 5,200December 31, 20x7Unearned finance income 9,024Finance income 9,024January 2, 20x8Cash 43,329Maintenance and insurance expense 5,200Lease payments receivable 38,129M

21、aintenance and insurance expense 5,200Cash 5,200December 31, 20x8Unearned finance income 7,408Finance income 7,408Question 5 (20 marks)Case analysis solutionOverviewThe lease must be accounted for and reported in accordance with IAS 17 as a finance lease. Wright would be considered a manufacturer or

22、 dealer lessor. Since outside shareholders will rely on the financial statements, there is a high ethical standard of fair presentation. Issuesa) Lease classification finance or operatingb) Lease presentation can the lease receivable be netted with the bank loan payable?Analysis1. Lease classificati

23、onThe lease is most likely a finance leasea) At the end of the lease term, which is no more than 50% of the expected life of the airplane, the lessee can renew perpetually for 1,000. This certainly will be a bargain renewal option, since (1) the option is the lessees, which implies that WAC will hav

24、e received full compensation for the plane within the initial lease term, and (2) the normal rental rates for a relatively young airplane would certainly be more than 1,000 per year. Thus, it is reasonably certain that the lessee would continue leasing the asset such that the lease term covers the m

25、ajor portion of the useful life of the airplane.b) Although WAC is technically the lessor, WAC actually receives all of the money up front: 10% from the lessee and 90% (discounted) from the bank. After the initial transaction, WAC does not participate in the lease except as an intermediary for the p

26、ayments between the flying club and the bank. This is a classic leveraged lease. Since the lessor receives all the sales value up front, this represents the present value of the minimum lease payments and is substantially all of fair market value.c) Other classification criteria, title passing, a BP

27、O, or specialized nature of the asset, are not met.The lease must be reported in accordance with IAS 17 as a finance lease by a manufacturer. Wright will record sales revenue in the amount of the fair value of the plane or, if lower, the net present value of the lease payments, discounted at the int

28、erest rate implicit in the lease (assuming this rate reflects the commercial rate). Wright will also recognize a lease receivable account.2. Lease presentationIt is possible to argue two approaches to presenting the receivable and payable:a) Report the net lease receivable as an asset and report the

29、 bank loan as a liability.b) Net the liability against the receivable, showing only any net difference in the accounts (as the result of using different discount rates) as deferred financing cost or income.Netting the two amounts would have the effect of reducing the reported debt and assets, with t

30、he following results: improving debt:equity ratios increasing return on assets reducing interest charges to income, and thereby improving the times-interest-earned ratioThis may be a desirable result for Wright if the company has debt covenants. However, it is only ethical to choose this presentation if it corresponds to reality: what is the nature of the relationship between Wright and the bank if a customer defaults? The second alternative may be valid in the case of non-recourse leveraged lease situations, but it is not stated in the case that the bank has no recourse to Wright. The s