Bb has not guaranteed the residual value lessor

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Unformatted text preview: ng the transaction is 10%. Chapter 15-90 Lessor Accounting for Unguaranteed Residual Values On January 1, 2050, BB, Inc. leased a color copier from Lessor Corporation at a “price” of $479,079. The lease agreement specifies annual payments beginning January 1, 2050, the inception of the lease, and at each December 31 through 2054. The estimated useful life of the copier is seven years. At the end of the six-year lease term the copier is expected to be worth $60,000. BB has not guaranteed the residual value Lessor manufactured the copier at a cost of $300,000. Lessor’s interest rate for financing the transaction is 10%. This is a Sales Type Lease. Why? Chapter 15-91 Lessor Accounting for Unguaranteed Residual Value Illustration (LESSOR) Calculation of the annual rental payment. Residual value PV of single sum (i=10%, n=6) PV of residual value Cost of equipment to be recovered Present value of residual value Amount to be recovered through lease payment PV factor of annunity due (i=10%, n=6) Annual payment required $ 60,000 0.56447 $ 33,868 x $ 479,079 - (33,868) 445,211 4.79079 $ 92,931 ÷ Chapter 15-92 Sales Type Lease Because the cost of the asset is not equal to its fair value, the lease is classified as a Sales-Type Lease. Gross Receipts Net receipts Unearned Lease Income Sales Cost of Goods Sold (92,931 * 6 ) + $60,000 (445,211) + (33,868) = = $617,586 $479,079 $445,211 = 557,586 – 445,211 = $112,375 PV of Minimum Lease Payments = Cost of Asset – PV (UGRV) 300,000 - 33,868 $266,132 Chapter 15-93 Since the residual value is not guaranteed by lessee, it is not treated as part of lease income Accounting by the Lessor Prepare an amortization schedule that would be suitable for the lessor. Lease Payment $ 92,931 92,931 92,931 92,931 92,931 92,931 35,228 29,458 23,110 16,128 8,451 10% Interest Revenue Recovery of Receivable $ 92,931 57,703 63,473 69,821 76,803 84,480 Lease Receivable $ 445,211 352,280 294,577 231,104 161,283 84,480 0 Date 1/1/50 1/1/50 12/31/50 12/31/51 12/31/52 12/31/53 12/31/54 Chapter 15-94 * * rounding Sales-Type Lease: Unguaranteed Residual Value GENERAL JOURNAL Date Description Debit Credit Jan 1 Lease receivable Cost of goods sold Sales revenue Inventory of equipment Cash Lease receivable 479,079 266,132 445,211 300,000 92,931 92,931 Lease Receivable is from Lessee and Expected Realization of Salvage Value Chapter 15-95 Cost of Goods Sold is reduced by Unguaranteed Residual Value How Does UGRV affect Lessee? BB makes the following entries at inception of the lease. GENERAL JOURNAL Date Description Debit Credit Jan 1 Leased equipment Lease payable Lease payable Cash 445,211 445,211 92,931 92,931 Chapter 15-96 How Does UGRV affect Lessee? At December 31, 2050, BB prepares the following entry to recognize depreciation expense for the year. GENERAL JOURNAL Date Description Debit Credit Dec 31 Depreciation expense 74,202 Accumulated depreciation 74,202 445,211 6 years Chapter 15-97 = 74,402 Lessor Accounting for Guaranteed Residual Values On January 1, 2050, BB, Inc. leased a color copier from Lessor Corporation at a “price” of $479,079. The lease agreement specifies annual payments beginning January 1, 2050, the ince...
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This note was uploaded on 04/08/2009 for the course ACG 3482C taught by Professor Tinaker during the Spring '09 term at University of Florida.

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