000000ADM 4348 - Fall 2013 000000Prof: Sheldon Weatherstone 000000Assignment 1 - Leases

A)
Lease classification Marks

Truck

Transfer of ownership No 1
BPO No 1
Specialised nature of asset No indication 1

Lease term 5 years

Economic life 15 years

5/15=33%
Not a major part 2

MRP =(($200,000-($80,000 X 0.68058))/4.31213 = 33,754

Rate to use 8%

PVMLP = FV 3

Conclusion Finance Lease

Other criteria No bargain renewal option

Lessee does not assume variation
in FV of residual value 1
Lessee does not assume lessor's
losses if cancellation

Final conclusion Finance Lease 2

11
B)

Net investment amortization schedule

8%
A B C (A-B=C) D (C * interest rate) E (C+D)
Opening
Year balance Payment Sub-Total Interest income Ending balance

2014 200,000 33,754 166,246 13,300 179,546

2015 179,546 33,754 145,792 11,663 157,455 167,351
2016 157,455 33,754 123,701 9,896 133,597
2017 133,597 33,754 99,843 7,987 107,831
2018 107,831 33,754 74,077 5,926 80,003
End of 2018 80,003 80,003 (0) - (0)
248,773 48,773 5

C)

Journal entries

Year 2014 Inventory 111,000 1

Accounts Payable 111,000 1

Year 2014 Accounts Payable 111,000 1

Cash 111,000 1

Year 2014 Lease Payment Receivable 248,773 1

Cost Of Good Sold 111,000 1
Sales 200,000 1
Inventory 111,000 1
Unearned Interest income 48,773 1

Year 2014 Cash 33,754 1

Lease Payment Receivable 33,754 1

31-Dec-14 Unearned Interest Income 13,300 1

Interest Income 13,300 1
13
000000ADM 4348 - Fall 2013 000000Prof: Sheldon Weatherstone 000000Assignment 1 - Leases

D)

Partial income statement

MORS
Partial income statement
2014
Sales 200,000 1
COGS (111,000) 1
Interest Income 13,300 1

102,300

appropriate accounts 3
Partial balance sheet
MORS
Partial balance sheet
2014
Current Assets
Current Portion of net investment in a Finance Lease 22,091 2

Long Term Assets

Net investment in a Finance Lease 157,455 2

Partial statement of cash flows

MORS
Partial statement of cash flows
2014

Operating activities
Included in net income 102,300 2
Change in operating WC (13,300)
Increase in net investment in a Finance Lease (166,246)
Net Decerase in Cash (77,246)

appropriate accounts 2
14
E)

PVMLP =33,754 X 4.31213 = 145,552/200,000 = 73 % (not substantially all of FV) 1

Specialized truck 1
Lease Classification Finance Lease 1

Year 2014 Inventory 111,000 no points allocated/same as above

Accounts Payable 111,000 no points allocated/same as above

Year 2014 Accounts Payable 111,000 no points allocated/same as above

Cash 111,000 no points allocated/same as above

Year 2014 Lease Payment Receivable* 248,773 1

Cost Of Good Sold 56,554 1
Sales 145,554 1
Inventory 111,000 1
Unearned Interest income 48,773 1
*Could also use a separate account for URV of $80,000

Year 2014 Cash 33,754 no points allocated/same as above

Lease Payment Receivable 33,754 no points allocated/same as above

31-Dec-14 Unearned Interest Income 13,300 no points allocated/same as above

Interest Income 13,300 no points allocated/same as above

1
Sales = $200,000 - ($80,000 X 0.68058)= 145,554 1
COGS = $111,000 - ($80,000 X 0.68058)= 56,554
10

Total Points 53
Start Date = January 1, 2018
Lease Term = 8 years
Air Canada Leasing plane TO Atlantic Airlines
Payment at year end
Bargain Purchase Option (BPO) of $11,452,800 (vs FV of $12,000,000)
Cost = $30,000,000
Useful Life = 15 years
Atlantic Airlines pay all executory costs
Annual Lease Payments = $3,500,000
Air Canada Rate = 5.25%
Atlantic Airlines Rate = 8%

Question 1 - IFRS Classification

There is reasonable assurance that the lessee will obtain ownership of the leased plane by the end of the lease ter
NO

There is a bargain purchase option in the contract

YES - $11,452,800 vs $12,000,000 FV

The lease term is for the major part of the economic life of the asset (>75%)
LT / EL 53.33% Therefore NO

The leased assests are so specialized that, without major modification, they are of use only to the lessee
There is no indication in the question as to whether this is true, arguably this is a market for used planes in the indu

PVMLP = FV
MRP = (FV - PVBPO)/PV Factor
PVMLP = PV (MRP + GRV) = 6.398396 ( 3,500,000) + 0.664084 (11,452,800) = 30,000,007.24

Therefore the lease should be classified as a finance lease. Since there is no profit being made besides interest inc

Question 2 - Lease Amoritization Table

Lease Amoritization Schedule
End of Year Payments

Year Opening balance Payment Interest Income

2018 $ 30,000,000 $ 3,500,000 $ 1,575,000

2019 $ 28,075,000 $ 3,500,000 $ 1,473,938
2020 $ 26,048,938 $ 3,500,000 $ 1,367,569
2021 $ 23,916,507 $ 3,500,000 $ 1,255,617
2022 $ 21,672,124 $ 3,500,000 $ 1,137,787
2023 $ 19,309,911 $ 3,500,000 $ 1,013,770
2024 $ 16,823,681 $ 3,500,000 $ 883,243
2025 $ 14,206,924 $ 3,500,000 $ 745,864
End of 2025 (BPO) $ 11,452,788 $ 11,452,800 *
Totals $ 39,452,800 $ 9,452,788
Question 3 - Journal Entries
Calculation of Lease Receivable = Total Lease Payments + Bargain Purchase Option = $39,452,800
Calculation of Interest Income = Total Interest Payments = $9,452,787
Calculation of Net Investment in Lease = 30,000,000

Janaury 1 2018

Equipment Acquired for Lease 30,000,000

Cash

To record the purchase of equipment to be leased

Lease Receivable 39,452,800

Equipment Acquired for Lease
Unearned Interest Income

To record the signature of a finance lease

December 31 2018

Cash 3,500,000
Lease Receivable

To record the lease payment on December 31, 2018

Unearned Interest Income 1,575,000

Interest Income

To record the first year of interest income on the finace lease

December 31 2019

Cash 3,500,000
Lease Receivable

To record the lease payment on December 31, 2019

Unearned Interest Income 1,473,938

Interest Income

To record the second year of interest income on the finace lease

Partial income statement

Air Canada
Partial income statement
For Year Ended December 31, 2018
Interest Income

Partial balance sheet

Air Canada
Partial balance sheet
As of December 31, 2018
Current Assets
Current Portion of net investment in a Finance Lease

Long Term Assets

Net investment in a Finance Lease

Partial statement of cash flows

Air Canada
Partial statement of cash flows
For Year Ended December 31, 2018
Operating activities
Included in net income

Financing Activities
Decrease in net investment in a Finance Lease
Net Increase in Cash
e leased plane by the end of the lease term

ey are of use only to the lessee

his is a market for used planes in the industry
22394378.7648 3499998.8692166

MRP = (30,000,000 - (11,452,800 x 0.664084) / 6.398396

800) = 30,000,007.24

no profit being made besides interest income. The cost of the asset to the lessor is equal to the present value of the lease payments + the

hedule Calculation Notes

nts Opening Balance = $30,000,000 = given
Interest Rate 5.25% Payment = $3,500,00 = MRP = calculated previously and given
Principal Recovery Ending balance Interest Income = Opening Balance * Interest Rate (5%)
$ 30,000,000 Principal Recovery = Payment - Interest Income
$ 1,925,000 $ 28,075,000 Ending Balance = Opening Balance - Principal Recovery
$ 2,026,062 $ 26,048,938
$ 2,132,431 $ 23,916,507
$ 2,244,383 $ 21,672,124
$ 2,362,213 $ 19,309,911
$ 2,486,230 $ 16,823,681
$ 2,616,757 $ 14,206,924
$ 2,754,136 $ 11,452,788
$ 11,452,788 $ -
$ 30,000,000 * rounded upwards
ase Option = $39,452,800

30,000,000

30,000,000
9,452,787

3,500,000

1,575,000

3,500,000

1,473,938

Partial income statement

Air Canada
Partial income statement
For Year Ended December 31, 2019
$ 1,575,000 Interest Income

Partial balance sheet

Air Canada
Partial balance sheet
As of December 31, 2019
Current Assets
$ 2,026,062 Current Portion of net investment in a Finance Lease

Long Term Assets

$ 26,048,950 Net investment in a Finance Lease

Partial statement of cash flows

Air Canada
Partial statement of cash flows
For Year Ended December 31, 2019
Operating activities
$ 1,575,000 Included in net income

Financing Activities
$ 1,925,000 Decrease in net investment in a Finance Lease
$ 3,500,000 Net Increase in Cash
 MRP = $3,500,000

ue of the lease payments + the residual value.

sly and given

 ir Canada
ncome statement
ed December 31, 2019
 $ 1,473,938

ir Canada
balance sheet
cember 31, 2019

$ 2,132,431

$ 23,916,519

ir Canada
ement of cash flows
ed December 31, 2019

$ 1,473,938

$ 2,026,062
$ 3,500,000
Start Date = January 1, 2018
Lease Term = 8 years
Air Canada Leasing plane TO Atlantic Airlines
Payment at year end
Bargain Purchase Option (BPO) of $11,452,800 (vs FV of $12,000,000)
Cost = $30,000,000
Useful Life = 15 years
Atlantic Airlines pay all executory costs
Annual Lease Payments = $3,500,000
Air Canada Rate = 5.25%
Atlantic Airlines Rate = 8%

ASPE Classification
There is reasonable assrance that the lessee will obtain ownership of the leased property, including throug ha bargain purchas
YES - there is a BPO

The leasee will benefit from most of the asset benefits due to the length of the lease term (>75%)
NO - same as before

The lessor recovers usbstainially all of its investment and aerns a return on that ivnestment.
PV = PVMLP

MRP = (FV - PVBPO) / PV Factor

PVMLP = PV(MRP + BPO) = (3,500,000 * 5.746639) +
90% of FV = 0.9 * 30,000,000 = 27,000,000
Therefore, NO criteria is not met.

Lease Amoritization Schedule

End of Year Payments

Opening
Year balance Payment Interest Expense

2018 $ 26,300,828 $ 3,500,000 $ 2,104,066

2019 $ 24,904,894 $ 3,500,000 $ 1,992,392
2020 $ 23,397,286 $ 3,500,000 $ 1,871,783
2021 $ 21,769,069 $ 3,500,000 $ 1,741,526
2022 $ 20,010,595 $ 3,500,000 $ 1,600,848
2023 $ 18,111,443 $ 3,500,000 $ 1,448,915
2024 $ 16,060,358 $ 3,500,000 $ 1,284,829
2025 $ 13,845,187 $ 3,500,000 $ 1,107,615
End of 2025 (BPO) $ 11,452,802 $ 11,452,800 *
Totals $ 39,452,800 $ 13,151,973

Janaury 1 2018

Equipment Acquired under Finance Lease 26,300,828

Obligation under Finance Lease
To record the purchase of equipment to be leased

December 31 2018

Obligation under Finance Lease 1,395,934

Interest Expense 2,104,066
Cash

To record the lease payment on December 31, 2018 with accrued interest

Depreciation Expense 1,753,389

Accumulated Depreciation - Leased Equipment

= 26,300,841 / 15 = 1,753,389.40
To record the first year of interest income on the finace lease

December 31 2019

Obligation under Finance Lease 1,507,608

Interest Expense 1,992,392
Cash

To record the lease payment on December 31, 2019 with accrued interest

Depreciation Expense 1,753,389

Accumulated Depreciation - Leased Equipment

= 26,300,841 / 15 = 1,753,389.40
To record the first year of interest income on the finace lease

Partial income statement

Atlantic Airlines
Partial income statement
For Year Ended December 31, 2018
Interest Expense
Depreciation Expense

Partial balance sheet

Atlantic Airlines
Partial balance sheet
As of December 31, 2018
Long Term Asset
Lease Equipment - Plane $ 26,300,828
Accumulat Depreciation $ 1,753,389
Current Liability
Current Portion of net obligation under finance lease

Long Term Liability

Net obligation under finance lease

Partial statement of cash flows

Atlantic Airlines
Partial statement of cash flows
For Year Ended December 31, 2018
Operating activities
Included in net income
Adjustents for items not affecting cash
Depreciation Expense
Financing Activities
Decrease in net obligation under finance lease
Net Decrease in Cash
perty, including throug ha bargain purchase option.

term (>75%)

(MRP + BPO) = (3,500,000 * 5.746639) + (11,452,800 * 0.540269) = 26.300.827.78

0.9 * 30,000,000 = 27,000,000

chedule
ents
Interest Rate 8%
Reduction of Lease
Obligation Ending balance
$ 26,300,828
$ 1,395,934 $ 24,904,894
$ 1,507,608 $ 23,397,286
$ 1,628,217 $ 21,769,069
$ 1,758,474 $ 20,010,595
$ 1,899,152 $ 18,111,443
$ 2,051,085 $ 16,060,358
$ 2,215,171 $ 13,845,187
$ 2,392,385 $ 11,452,802
$ 11,452,802 $ -
$ 26,300,829 * rounded upwards

26,300,828
 3,500,000

1,753,389

3,500,000

1,753,389

Partial income statement

Atlantic Airlines
Partial income statement
For Year Ended December 31, 2019
$ 2,104,066 Interest Expense
$ 1,753,389 Depreciation Expense

Partial balance sheet

Atlantic Airlines
Partial balance sheet
As of December 31, 2019
Long Term Asset
Lease Equipment - Plane
$ 24,547,439 Accumulat Depreciation
 Current Liability
$ 1,507,608 Current Portion of net obligation under finance lease

Long Term Liability

$ 23,397,285 Net obligation under finance lease

Partial statement of cash flows

Atlantic Airlines
Partial statement of cash flows
For Year Ended December 31, 2019
Operating activities
$ (3,857,455) Included in net income
Adjustents for items not affecting cash
$ 1,753,389 Depreciation Expense
Financing Activities
$ (1,395,934) Decrease in net obligation under finance lease
$ (3,500,000) Net Decrease in Cash
Atlantic Airlines
l income statement
nded December 31, 2019
$ 1,992,392
$ 1,753,389

Atlantic Airlines
tial balance sheet
December 31, 2019

$ 26,300,828
$ 3,506,778 $ 22,794,050
 $ 1,628,217

$ 21,769,068

Atlantic Airlines
atement of cash flows
nded December 31, 2019

$ (3,745,781)

$ 1,753,389

$ (1,507,608)
$ (3,500,000)