Question

LESSOR ACCOUNTING - PROBLEM 2 Using the same data of the previous exercise and assuming the following information, you will answer this exercise from the point of view of the lessor: Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by XYZ. Additional information: 1. Asset's cost $1,500,000. 2. Asset's FMV - $2,800,000 Required: a. Prepare journal entries for the year 2019.

Answer 1

Solution:

Problem 1:-

a. Computation of the present value test:-

The present value test refers to one of four capitalization criteria used by lessees to account for a leased property. The present value test compares the present value of the minimum lease payments to the asset's value at the inception of the lease. If the present value of the minimum payments is greater than 90% of the asset's value, then the arrangement should be classified as a financing lease otherwise it is operating lease based on the other factors also.

FMV of the asset:- $2,800,000

No of the year: 10 Years.

Rate of interest:- 8%

Rent Payment:-$200,000 (semi-annual at the beginning)

Present Value of the lease payment = $ 2,826,787.87 ( Please refer to working note-1)

Therefore, 2,826,787.87/2,800,000 = 100.96%

Conclusion:- This is a financing lease.

b: The present value of the lease payment to be recorded as a liability.

Present Value of the lease payments = $ 2,826,787.87 ( Please refer to working note-1)

Less: Lease payment made of the beginning of the period= $ 200,000

Therefore, the liability to be recorded = $2,626787.87

c:- Amortization Schedule Table till the year 2021

Years	No. of Semi-annual periods	Opening balance	Interest Expenses	Lease Payment	Principal Payment	Closing Balance
2019	1	2,626,787.87	105,071.51	200,000.00	94,928.49	2,531,859.38
2020	2	2,531,859.38	101,274.38	200,000.00	98,725.62	2,433,133.76
	3	2,433,133.76	97,325.35	200,000.00	102,674.65	2,330,459.11
2021	4	2,330,459.11	93,218.36	200,000.00	106,781.64	2,223,677.48
	5	2,223,677.48	88,947.10	200,000.00	111,052.90	2,112,624.57

d:- Journal Entries during the year of 2019:-

On 1st January, 19

Equipment A/c Debited  $ 2,826,787.87

to Bank/cash A/c $200,000

to Lease Liability A/c   $2,626787.87

Narration:-The equipment account is debited by the present value of the minimum lease payments and the lease liability account is the difference between the value of the equipment and cash paid at the beginning of the year.

On 1st July

Interest A/c Debited $ 105,071.51

Lease Liability A/c Debited $ 94,928.49

to Bank/ Cash A/c $ 200,000

Narration: Semi-annual payment entry along with interest expenses must be recorded.

31st December

Depreciation Expense A/c Debited $140,000

to Accumulated Depreciation A/c $140,000

Narration:-Depreciation expense must be recorded for the equipment that is leased.

Problem 2:-

Journal entries to be passed in the lessor books during the year 2019:-

On 1st January, 19

Lease Receivable A/c Debited 2,626,787.87

Bank/ Cash A/c $ 200,000

to Equipment A/c $ 1,500,000

to Unearned Interest Revenue $1,326,787.87

On 1st July, 19

Bank/ Cash A/c Debited $ 200,000

to Lease Receivable A/c $ 200,000

Narration:- Semi-Annual Payment entry recorded.

Unearned Interest Revenue A/c Debited   94928.49

Revenue A/c 94928.49

Narration:- Interest Revenue recorded ( Please refer Amortization table (c ) for the amount of $ 94,928.49)   

Working notes:

1.

Factor of 4% (8/2) for 10 years= 13.133939 i.e divide 1/(1.04)¹⁹ (19 because it is semi-anuual and the payment is made in the begining)

Present Value of rent payment =200,000+200,000*13.133939

= $ 2,826,787.87