Kieso_IA_16e_PPT_Ch21v2.pptx

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After studying this chapter, you should be able to: Accounting for Leases 21 LO 4
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21-46 1. Residual values. 2. Disclosure. SPECIAL LEASE ACCOUNTING PROBLEMS LO 4
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21-47 Meaning of Residual Value - Estimated fair value of the leased asset at the end of the lease term. Guaranteed versus Unguaranteed A guaranteed residual value is when the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value at the end of the lease term. Residual Values LO 4 SPECIAL LEASE ACCOUNTING PROBLEMS
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21-48 Lease Payments - Lessor may adjust lease payments because of the increased certainty of recovery of a guaranteed residual value. Lessee Accounting for Residual Value - The minimum lease payment includes a guaranteed residual value but excludes an unguaranteed residual value. Residual Values LO 4 SPECIAL LEASE ACCOUNTING PROBLEMS
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21-49 Illustration: Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction Corp. sign a lease agreement dated January 1, 2017, that calls for Caterpillar to lease a front-end loader to Sterling beginning January 1, 2017. The terms and provisions of the lease agreement, and other pertinent data, are as follows. The term of the lease is five years. The lease agreement is noncancelable, requiring equal rental payments of $25,981.62 at the beginning of each year (annuity-due basis). The loader has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and an estimated residual value of $5,000 . Sterling pays all of the executory costs directly to third parties except for the property taxes of $2,000 per year, which is included as part of its annual payments to Caterpillar. The lease contains no renewal options. The loader reverts to Caterpillar at the termination of the lease. Sterling’s incremental borrowing rate is 11 percent per year. Sterling depreciates, on a straight-line basis, similar equipment that it owns. Caterpillar sets the annual rental to earn a rate of return on its investment of 10 percent per year; Sterling knows this fact. LO 4 SPECIAL LEASE ACCOUNTING PROBLEMS
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21-50 Illustration: Caterpillar assumes a 10 percent return on investment (ROI), whether the residual value is guaranteed or unguaranteed. Caterpillar would compute the amount of the lease payments as follows. ILLUSTRATION 21-16 Lessor’s Computation of Lease Payments LO 4 SPECIAL LEASE ACCOUNTING PROBLEMS
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21-51 Guaranteed Residual Value (Lessee Accounting) Computation of Lessee’s capitalized amount assuming a guaranteed residual value. LO 4 SPECIAL LEASE ACCOUNTING PROBLEMS ILLUSTRATION 21-17 Computation of Lessee’s Capitalized Amount— Guaranteed Residual Value
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21-52 LO 4 Guaranteed Residual Value (Lessee) ILLUSTRATION 21-18 Lease Amortization Schedule for Lessee— Guaranteed Residual Value
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21-53 Assume the same facts as those above except that the $5,000 residual value is unguaranteed instead of guaranteed. Caterpillar will recover the same amount through lease rentals—that is, $96,895.40.
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