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Chapter 13 - Solution Manual

Lease agreement collectibility of minimum lease

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lease agreement; collectibility of minimum lease payments is reasonably assured; and there are no important uncertainties surrounding unreimbursible costs to be paid by the lessor. ii. James should record the gross amounts of minimum lease payments and the unguaranteed residual value of the machine at the end of the lease as minimum lease payment receivable and remove the machine given up from the books by a credit to the applicable asset account. The balancing amount in this entry is recorded as unearned revenue. iii. During the life of the lease, James will record payments received as a reduction in the receivable. Unearned revenue is recognized as earned interest revenue by applying the implicit interest rate to the declining balance of a gross minimum lease payments receivable reduced by payments received and the balance of unearned revenue. The implicit rate is the rate of interest that, when applied to the gross minimum lease payments (net of executory costs and any profit thereon) and the unguaranteed residual value of the machine at the end of the lease, will discount the sum of the payments and unguaranteed residual value to the fair value of the machine at the date of the lease agreement. This method of earnings recognition is termed the interest method of amortization of unearned revenue. iv. James must make the following disclosures with respect to this lease: a. The components of the net investment in direct financing leases, which are (1) the future minimum lease payments to be received, (2) any unguaranteed residual values accruing to the benefit of the lessor, an (3) the amounts of unearned revenue. b. Future minimum lease payments to be received for each of the remaining fiscal years (not to exceed five) as of the date of the latest statement of financial position presented. Case 13-8 a. The economic effects of a long-term capital lease on the lessee are similar to that of an equipment purchase using installment debt. Such a lease transfers substantially all of the benefits and risks incident to the ownership of property to the lessee, and obligates the lessee in a manner similar to that created when funds are borrowed. To enhance comparability between a firm that purchases an asset on a long-term basis and a firm that leases an asset under substantially equivalent terms, the lease should be capitalized. b. A lessee should account for a capital lease at its inception as an asset and an obligation at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term, excluding any portion of payments representing executory costs, together with any profit thereon. However, if the present value exceeds the fair value of the leased property at the inception of the lease, the amount recorded for the asset and obligation should be the fair value.
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284 c. A lessee should allocate each minimum lease payment between a reduction of the obligation and
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