IAsgns5.docx
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IAsgns5.docx
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IAsgns5
LESSON5
Suggestedsolutions
Question1(35marks)
Computersolution
Note:
Forpart(a),theinterestrateimplicitintheleaseisworth3marks.Forpart(b),theleaseamortizationscheduleisworth6marks.
c.(5marks)
January1,2004
Leasereceivable1308,000
Cash(orInventoryorMachine)240,200
Unearnedfinanceincome67,800
1(€76,0004)+€4,000
Cash76,000
Leasereceivable76,000
December21,2004
Unearnedfinanceincome31,465
Financeincome31,465
January1,2005
Cash76,000
Leasereceivable76,000
December31,2005
Unearnedfinanceincome22,931
Financeincome22,931
d.(7marks)
January1,2004
Assetunderfinancelease240,200
Leaseliability240,200
Leaseliability76,000
Cash76,000
December31,2004
Interestexpense31,465
Leaseliability31,465
Depreciationexpense(€240,200/6)40,033
Accumulateddepreciation40,033
January1,2005
Leaseliability76,000
Cash76,000
December31,2005
Interestexpense22,931
Leaseliability22,931
Depreciationexpense40,033
Accumulateddepreciation40,033
e.(8marks)
LessorLessee
Incomestatement
Interestincome22,931
Interestexpense22,931
Depreciationexpense40,033
Balancesheet
Leasereceivable(net)142,596
Leaseliability,currentportion76,000*
Leaseliability,longterm66,596*
Leasedasset240,200
Accumulateddepreciation(80,066)
*TotalliabilityatDecember31,€142,596,ofwhich€76,000isdueJanuary1,2006.
f.(2marks)
Cashflowdisclosure
Operatingactivities
Addbackdepreciation40,033
Financingactivities
Repaidleaseliability(53,069)*
*2004balance,€195,665less€142,596
g.(4marks)
Cashflowdisclosurenote
Thecompanyhasthefollowingcashcommitmentsunderfinanceleases:
Question2(14marks)
(2markseach)
a.3)
Thegainonasaleandleasebackresultinginafinanceleaseisrecognizedoverthetermofthelease,perIAS17,Paragraph50.
b.4)
The€50,000securitydepositisprepaidrentuntilthefinalyear.
c.3)
Thelesseeusestherateimplicitinthelease,unlessitisnotpracticabletodetermine.
d.3)
Theleaseisforthemajorityoftheasset’susefullife,thereforeitisafinancelease.
€100,000(PVA,10yrs,10%);€614,457rounded.
e.1)
Balanceattheendof20X4,€518,400(€608,400–€90,000)
Interestaccrualendof20X5,€51,840
Balanceattheendof20X5,€480,240(€518,400+€51,840–€90,000)
Thisisareductionof€38,160(€518,400–€480,240)
f.2)
€126,000/15;theentireusefullifeisthedepreciationperiod,sincetitlepasses.
g.4)
Inthecalculationofpresentvalueoftheminimumleasepayments,thePVofabargainpurchaseoptionisadded,so(4)iscorrect.Answer
(1)isincorrectsincethepaymentdoeshavetobecapitalized.ThePVisnotsubtracted,so
(2)isincorrect.Thepresentvalueisused,nottheexerciseamount,so(3)isincorrect.
Question3(16marks)
Requirement1(8marks)
#1#2#3
a.Leaseterm1year7years
(1)5years
b.Bargainpurchaseoptionn/a€1n/a
c.Unguaranteedresidual?
n/an/a
d.Guaranteedresidualn/an/a€75,000
e.Bargainrenewaltermsn/an/an/a
f.Minimumnetleasepayments€9,200€150,001
(2)€596,500(3)
g.Contingentleasepayments€7.40/hourn/an/a
h.Interestratetobeusedtodiscount10%8%10%
(1)RenewaltermpreceedsBPO
(2)[(€28,600–€2,600)5]+[(€11,500–€1,500)2]+€1
(3)(€104,3005)+€75,000.Thefullamountoftheguaranteedresidualisincluded.
Requirement2(4marks)
Classification
#1Operatinglease.Noneofthecriteriaforafinanceleasearemet.Thisisastraightforwardrental.
#2Financelease.Titlepasses(BPO).ThePVoftheMLPalsorepresentssubstantiallyallofthefairvalueoftheassetattheinceptionofthelease:
a)(€28,600–€2,600)(PVA,8%,5)(3.99271)€103,810
b)(€11,500–€1,500)(PVA,8%,2)(PV,8%,5)
(1.78326)(.68058)12,137
€115,947
(TheBPOhasanegligiblePV.)
#3Financelease.Theleasetermcoversthemajorpart(5/6)oftheasset’susefullife.ThisisafinanceleaseeventhoughthePVoftheMLPrepresentsonly88%ofthefairvalueoftheassetattheinceptionofthelease:
a)(€104,300)(PVAD,10%,5)(4.16987)€434,917
b)(€75,000)(PV,10%,5)(.62092)46,569
€481,486
Marker:
award1markforleases#1and#3,and2marksforlease#2.
Requirement3(4marks)
#1Maintenanceandinsuranceexpense1,400
Rentalexpense,machinery9,200
Cash10,600
Theexpensecouldallberecordedinrentalexpense
#2Assetundercapitallease115,947
Leaseliability115,947
#3Assetundercapitallease481,486
Leaseliability481,486
Leaseliability104,300
Cash104,300
Marker:
award1markforleases#1and#2,and2marksforlease#3.
Question4(15marks)
Requirement1(4marks)
Note:
MoststudentswillsolvetheIRRusingaspreadsheetprogramandmayalsocompletetheamortizationtablethisway,althoughthisisnotrequired.Ifstudentssolvetheproblemusingextrapolation,someroundingerrorsmaybepresent.Studentsshouldnotbepenalizedforthis.
Interestrateimplicitinthelease
€200,730=(€43,329–€5,200)(PVAD,x%,6)
x=5.55%(solvedbyspreadsheet)
Lessor’sAmortizationSchedule
BeginningInterestatDecreaseEnding
YearBalance5.55%PaymentinBalanceBalance
20x7€200,730€0€38,129€38,129€162,601
20x8162,6019,02438,12929,105133,496
20x9133,4967,40838,12930,721102,775
20x10102,7755,70338,12932,42670,349
20x1170,3493,90438,12934,22536,124
20x1236,1242,00538,12936,1240
€28,044
Requirement2(3marks)
Changesinprofitduetolease
Fiscal
YearProfitfromsaleFinanceIncomeTotal
20x7€50,7301€9,024€59,754
20x807,4087,408
20x905,7035,703
20x1003,9043,904
20x1102,0052,005
20x12000
Total€50,730€28,044€78,774
1Or,€200,730salesincome–€150,000costofasset.
Requirement3(8marks)
January2,20x7
Leasepaymentsreceivable((€43,329–€5,200)6)228,774
Unearnedfinanceincome28,044
Sales200,730
COGS150,000
Inventory150,000
Cash43,329
Maintenanceandinsuranceexpense5,200
Leasepaymentsreceivable38,129
Maintenanceandinsuranceexpense5,200
Cash5,200
December31,20x7
Unearnedfinanceincome9,024
Financeincome9,024
January2,20x8
Cash43,329
Maintenanceandinsuranceexpense5,200
Leasepaymentsreceivable38,129
Maintenanceandinsuranceexpense5,200
Cash5,200
December31,20x8
Unearnedfinanceincome7,408
Financeincome7,408
Question5(20marks)
Caseanalysissolution
Overview
TheleasemustbeaccountedforandreportedinaccordancewithIAS17asafinancelease.Wrightwouldbeconsideredamanufacturerordealerlessor.Sinceoutsideshareholderswillrelyonthefinancialstatements,thereisahighethicalstandardoffairpresentation.
Issues
a)Leaseclassification—financeoroperating
b)Leasepresentation—cantheleasereceivablebenettedwiththebankloanpayable?
Analysis
1.Leaseclassification
Theleaseismostlikelyafinancelease
a)Attheendoftheleaseterm,whichisnomorethan50%oftheexpectedlifeoftheairplane,thelesseecanrenewperpetuallyfor€1,000.Thiscertainlywillbeabargainrenewaloption,since
(1)theoptionisthelessee’s,whichimpliesthatWACwillhavereceivedfullcompensationfortheplanewithintheinitialleaseterm,and
(2)thenormalrentalratesforarelativelyyoungairplanewouldcertainlybemorethan€1,000peryear.Thus,itisreasonablycertainthatthelesseewouldcontinueleasingtheassetsuchthattheleasetermcoversthemajorportionoftheusefullifeoftheairplane.
b)AlthoughWACistechnicallythelessor,WACactuallyreceivesallofthemoneyupfront:
10%fromthelesseeand90%(discounted)fromthebank.Aftertheinitialtransaction,WACdoesnotparticipateintheleaseexceptasanintermediaryforthepaymentsbetweentheflyingclubandthebank.Thisisaclassicleveragedlease.Sincethelessorreceivesallthesalesvalueupfront,thisrepresentsthepresentvalueoftheminimumleasepaymentsandissubstantiallyalloffairmarketvalue.
c)Otherclassificationcriteria,titlepassing,aBPO,orspecializednatureoftheasset,arenotmet.
TheleasemustbereportedinaccordancewithIAS17asafinanceleasebyamanufacturer.Wrightwillrecordsalesrevenueintheamountofthefairvalueoftheplaneor,iflower,thenetpresentvalueoftheleasepayments,discountedattheinterestrateimplicitinthelease(assumingthisratereflectsthecommercialrate).Wrightwillalsorecognizealeasereceivableaccount.
2.Leasepresentation
Itispossibletoarguetwoapproachestopresentingthereceivableandpayable:
a)Reportthenetleasereceivableasanassetandreportthebankloanasaliability.
b)Nettheliabilityagainstthereceivable,showingonlyanynetdifferenceintheaccounts(astheresultofusingdifferentdiscountrates)asdeferredfinancingcostorincome.
Nettingthetwoamountswouldhavetheeffectofreducingthereporteddebtandassets,withthefollowingresults:
∙improvingdebt:
equityratios
∙increasingreturnonassets
∙reducinginterestchargestoincome,andtherebyimprovingthetimes-interest-earnedratio
ThismaybeadesirableresultforWrightifthecompanyhasdebtcovenants.However,itisonlyethicaltochoosethispresentationifitcorrespondstoreality:
whatisthenatureoftherelationshipbetweenWrightandthebankifacustomerdefaults?
Thesecondalternativemaybevalidinthecaseofnon-recourseleveragedleasesituations,butitisnotstatedinthecasethatthebankhasnorecoursetoWright.Thes
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