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Unformatted text preview: term. So "substance over form" dictates that the gain on the sale of the asset not be immediately recognized, but deferred and recognized over the term of the lease. There typically is an interdependency between the lease terms and the price at which the asset is sold. So the earnings process is not complete at the time of sale but is completed over the term of the lease. Viewing the sale and the leaseback as a single transaction is consistent with the revenue realization principle. Exercise 1511
Situation1 (a) $600,000 5.88923** = $101,881 fair lease value payments ** present value of an ordinary annuity of $1: n=10, i=11% (b) $101,881 x 5.88923** = $600,000* lease leasedasset/ payments leaseliability * rounded ** present value of an ordinary annuity of $1: n=10, i=11% Situation2 (a) $980,000 9.12855** = $107,355 fair lease value payments ** present value of an ordinary annuity of $1: n=20, i=9% (b) $107,355 x 9.12855** = $980,000 lease leasedasset/ payments leaseliability ** present value of an ordinary annuity of $1: n=20, i=9% rounded for convenience Situation3 (a) $185,000 3.03735** = $60,908 fair lease value payments ** present value of an ordinary annuity of $1: n=4, i=12% (b) $60,908 x 3.10245** = $188,964 lease leasedasset/ payments leaseliability ** present value of an ordinary annuity of $1: n=4, i=11% But since this amount exceeds the asset's fair value, the lessee must capitalize the $185,000 fair value instead. Exercise 1512
Situation1 Amounttoberecovered(fairvalue) $50,000 ___________________ Leasepaymentsatthebeginning ofeachofthenext4years:($50,0003.48685**) $14,340 **presentvalueofanannuitydueof$1:n=4,i=10% Situation 2 Amount to be recovered (fair value) Less: Present value of the residual value ($50,000 x .48166*) $350,000 (24,083) Amount to be recovered through periodic lease payments $325,917 _______________________ Leasepaymentsatthebeginning ofeachofthenext7years:($325,9175.23054**) $62,310 *presentvalueof$1:n=7,i=11% **presentvalueofanannuitydueof$1:n=7,i=11% Exercise 1512 (concluded) Situation 3 Amount to be recovered (fair value) Less: Present value of the residual value ($7,000 x .64993*) $75,000 (4,550) Amount to be recovered through periodic lease payments $70,450 ______________________ Leas...
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 Spring '08
 Gill
 Accounting

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