Reference no: EM133079878

Question - LESSEE ACCOUNTING Annual Rent, payable at the end of each year - 1,200,000

Lease term - 5 years

Useful life - 8 years

Residual Value - 300,000

Initial Direct Cost - 50,000

Annual Executor Cost Paid - 30,000

Lease Incentive Received - 75,000

Lease Bonus Paid - 100,000

Implicit Interest rate - 9%

Instance 1: Residual Value is Guaranteed

1) What is the initial amount of ROUA?

2) What is the initial amount of Lease Liability?

3) What is the carrying amount of the ROUA at the end of year 1?

4) What is the carrying amount of the Lease liability at the end of year 1?

5) What is the depreciation expense in year 1?

6) What is the total expense in year 1?

7) What is the carrying amount of the ROUA at the end of year 3?

8) What is the carrying amount of the Lease Liability at the end of year 3?

9) What is the depreciation expense in year 3?

10) What is the total expense in year 3?

11) If the fair value of the asset is lower by 50,000. How much is the loss borne by the lessor?

Instance 2: Residual Value Unguaranteed, no transfer of ownership nor purchase option.

12) What is the initial amount of ROUA?

13) What s the initial amount Lease Liability?

14) What is the carrying amount of the ROUA at the end of year 1?

15) What is the carrying amount of the Lease Liability at the end of year 1?

16) What is the depreciation expense in year 1?

17) What is the total expense in year 1?

18) If the fair value of the asset is 350,000 at the end of lease term, how much is the gain borne by the lessee?

Instance 3: Purchase option 200,000, reasonably certain to exercise.

Annual Rent is payable at the beginning of the year. Ignore the Residual Value

19) What is the initial amount of ROUA?

20) What is the initial amount of Lease Liability?

21) What is the carrying amount of the ROUA after 1st year?

22) What is the carrying amount of the Lease Liability after second payment?

23) What is the depreciation expense in year 1?

24) What is the 1st amount of interest expense to be recognized?

25) What is the total expense in year 1?