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Unformatted text preview: lue of the BPO price ($50,000 x .59345*) $420,000 (29,673) Amount to be recovered through periodic lease payments $390,327 _____________________ Leasepaymentsatthebeginning ofeachofthenext5years:($390,3274.10245**) $95,145 *presentvalueof$1:n=5,i=11% **presentvalueofanannuitydueof$1:n=5,i=11% Note:SinceaBPOisexpectedtobeexercised,theleasetermendsforaccounting purposeswhentheoptionbecomesexercisable. Exercise 1514 (concluded) Situation 3 Amount to be recovered (fair value) Less: Present value of the BPO price ($22,000 x .77218*) $185,000 (16,988) Amount to be recovered through periodic lease payments $168,012 _____________________ Leasepaymentsatthebeginning ofeachofthenext3years:($168,0122.75911**) $60,894 *presentvalueof$1:n=3,i=9% **presentvalueofanannuitydueof$1:n=3,i=9% Note:SinceaBPOisexpectedtobeexercised,theleasetermendsforaccounting purposeswhentheoptionbecomesexercisable. Problem 158
Requirement 1 Lessor's Calculation of Lease payments Amount to be recovered (fair value) Less: Present value of the guaranteed residual value ($25,000 x .68301*) $365,760 (17,075) Amount to be recovered through periodic lease payments $348,685 _____________________ Leasepaymentsatthebeginning ofeachoffouryears:($348,6853.48685**) $100,000 *presentvalueof$1:n=4,i=10% **presentvalueofanannuitydueof$1:n=4,i=10% Requirement 2 The lessee's incremental borrowing rate (12%) is more than the lessor's implicit rate (10%). So, both parties' calculations should be made using a 10% discount rate: Problem 158 (continued) Application of Classification Criteria 1 2 3 4 Does the agreement specify that ownership of the asset transfers to the lessee? Does the agreement contain a bargain purchase option? Is the lease term equal to 75% or more of the expected economic life of the asset? Is the present value of the minimum lease payments equal to or greater than 90% of the fair value of the asset?
b See calculation below. NO NO NO {4 yrs < 75% of 6 yrs} YES {$365,760b > 90% of $365,760} Present Value of Minimum Lease Payments Present value of periodic lease payments
($100,000 x 3.48685**) $348,685 17,075 $...
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This note was uploaded on 05/08/2010 for the course ACCTG 322 taught by Professor Gill during the Spring '08 term at San Diego State.
 Spring '08
 Gill
 Accounting

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