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Tutorial FA10

The document outlines a tutorial on leasing for Financial Accounting, detailing various tasks related to lease agreements for different companies, including Samson AG, Fieger Company, Waterworld Company, and others. Each task requires calculations or journal entries based on specific lease terms, payments, and conditions. The tutorial aims to provide practical applications of leasing concepts in financial accounting.

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60 views3 pages

Tutorial FA10

The document outlines a tutorial on leasing for Financial Accounting, detailing various tasks related to lease agreements for different companies, including Samson AG, Fieger Company, Waterworld Company, and others. Each task requires calculations or journal entries based on specific lease terms, payments, and conditions. The tutorial aims to provide practical applications of leasing concepts in financial accounting.

Uploaded by

gildartson
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Financial Accounting | SoSe 2024

Prof. Dr. Christoph Sextroh

Financial Accounting
Tutorial 10
Leasing

Task 1
Samson AG leases a building and land. The lease term is 6 years and the annual fixed payments
are €800,000. The lease arrangement gives Samson the right to purchase the building and land for
€11,000,000 at the end of the lease. Based on an economic analysis of the lease at the
commencement date, Samson is reasonably certain that the fair value of the leased assets at the
end of lease term will be much higher than €11,000,000.
Required: What are the total lease payments in this lease arrangement?

Task 2
Fieger Company leases equipment for 8 years with an annual rental of $2,000 per year or $16,000
in total. General Leasing (the lessor) agrees to provide Fieger with $300 for the first 2 years of the
lease to defray needed repairs to the equipment.
Required: Determine the undiscounted lease payments that Fieger will pay for the first 3 years of
the lease agreement.

Task 3
Waterworld Company leased equipment from Costner Company, beginning on December 31,
2021. The lease term is 4 years and requires equal rental payments of $41,933 at the beginning of
each year of the lease, starting on the commencement date (December 31, 2021). The equipment
has a fair value at the commencement date of the lease of $150,000, an estimated useful life of 4
years, and no estimated residual value. The appropriate interest rate is 8%.
Required: Prepare Waterworld’s 2021 and 2022 journal entries, assuming Waterworld depreciates
similar equipment it owns on a straight-line basis.

Task 4
Assume that on December 31, 2021, Stora Enso (FIN) signs a 10-year, non-cancelable lease
agreement to lease a storage building from Sheffield Storage. The following information pertains to
this lease agreement.
1. The agreement requires equal rental payments of €71,830 beginning on December 31,
2021.
2. The fair value of the building on December 31, 2021, is €525,176.
3. The building has an estimated economic life of 12 years, a guaranteed residual value of
€10,000, and an expected residual value of €7,000. Stora Enso depreciates similar
buildings using the straight-line method.

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Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh

4. The lease is non-renewable. At the termination of the lease, the building reverts to the
lessor.
5. Stora Enso’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not
known by Stora Enso.
Required: Prepare the journal entries on the lessee’s books to reflect the signing of the lease
agreement and to record the payments and expenses related to this lease for the years 2021, 2022,
and 2023. Stora Enso’s fiscal year-end is December 31.

Task 5
Castle Leasing Company signs a lease agreement on January 1, 2022, to lease electronic
equipment to Jan Way Company. The term of the non-cancelable lease is 2 years, and payments
are required at the end of each year. The following information relates to this agreement.
1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the
lease. It is not reasonably certain that Jan Way will exercise this option.
2. The equipment has a cost of $120,000 and fair value of $160,000 to Castle Leasing. The
useful economic life is 2 years, with a residual value of $16,000.
3. Castle Leasing desires to earn a return of 5% on its investment.
4. Collectability of the payments by Castle Leasing is probable.

Required:
a) Prepare the journal entries on the books of Castle Leasing to reflect the payments received
under the lease and to recognize income for the years 2022 and 2023.
b) Assuming that Jan Way exercises its option to purchase the equipment on December 31,
2023, prepare the journal entry to record the sale on Castle Leasing’s books.
[Hint: Present value of an ordinary annuity of 1$ for 2 periods at 5% is 1.85941$.]

Task 6
Suppose that for the a new store, a fashion company leases some showroom equipment from
another lessor. The equipment had a fair value of EUR 62,000 on the date of the lease inception.
The lease term is four years for an initial payment of EUR 30,000 and an annual payment of EUR
8,000 (payable on 31 December). The expected residual value of the equipment after the lease
term is EUR 8,000 of which EUR 3,000 are guaranteed by the lessee. The lessor incurred legal
costs of EUR 1,000 related to drawing up the contract etc. Assume that the economic life of the
equipment is typically 5 to maximum 6 years.
Required:
(1) How should the fashion company account for the lease contract in its financial statements
ending December 31, 2019, and in subsequent periods according to IFRS 16 (ignore
taxes)? Assume that the company expects to pay the residual value guarantee at the end
of the lease term.
(2) How should the lessor account for the lease arrangement?

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Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh

Task 7
Sanders Fashion enters into a lease arrangement with Highpoint Leasing for 5 years. Sanders
agrees to pay 4% of its net sales as a variable lease payment. Sanders does not pay any fixed
payments. Sanders is a highly successful company that has achieved over £1,000,000 in net sales
over the last 7 years. Both Sanders and Highpoint forecast that net sales will be a much greater
amount than £1,000,000 in subsequent years. As a result, it is highly certain that Sanders will make
payments of at least £40,000 (£1,000,000 × .04) each year.
Required: What is the undiscounted lease payment amount Sanders should use to record its right-
of-use asset?

Common questions

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In determining the lease payments for Fieger Company, consider any incentives or reimbursements provided by the lessor. Fieger Company receives $300 for the first two years to cover repair costs, reducing the effective lease payment. Thus, for the first year, the payment would be $1,700 ($2,000 - $300), resulting in total payments of $1,700 + $1,700 + $2,000 = $5,400 for the first three years .

Jan Way Company should consider the residual value, fair value assessments, and financial implications when evaluating whether to exercise the purchase option. If Jan Way exercises the option for $16,000 on 31 December 2023, Castle Leasing recognizes the sale by decreasing the asset's carrying amount and recording the sale price in a journal entry reflecting the equipment's transfer of ownership .

For Waterworld Company, the initial journal entry on December 31, 2021, records the right-of-use asset and lease liability at the present value of lease payments, calculated using an 8% discount rate. The first lease payment decreases the lease liability. Waterworld should also record depreciation for the asset using the straight-line method over its useful life of 4 years. At the end of 2021, record a depreciation expense and corresponding accumulated depreciation account .

The lessor should recognize the equipment as an asset and record lease income on a systematic basis reflecting the earning pattern over the lease term. Legal costs should be amortized over the lease term as part of the expense related to lease administration. It should adjust the financial statements for any expected residual value of the equipment .

To calculate the total lease payments for Samson AG in this scenario, add the annual fixed payments over the lease term to the price of the purchase option. Samson AG has annual fixed payments of €800,000 over a 6-year lease term, which totals €4,800,000. If Samson exercises the purchase option at the end of the lease for €11,000,000, the total payments would be €15,800,000. However, the decision to exercise the purchase option depends on the fair value of the assets at lease end, which is expected to be higher than the purchase price .

Sanders Fashion, needing to recognize variable lease payments, should base its recognized lease liability on expected net sales due to its high historical performance. The undiscounted lease payment amount for recording its right-of-use asset should be calculated as 4% of the expected net sales, with certainty above £1,000,000 annually, assuring payments of at least £40,000 each year .

When Stora Enso enters a lease agreement with guaranteed and expected residual values, it should record a lease liability and corresponding right-of-use asset at the present value of lease payments, calculated using the incremental borrowing rate. Entries include the initial recognition of the lease, lease payments each year, interest on the lease liability, and depreciation expense using straight-line over the economic life of the building. Record these entries at year-end for 2021, 2022, and 2023 .

Lease incentives like repair reimbursements reduce total recognized lease payments, affecting reported expenses. Fieger Company must audit financial results by adjusting cash flows for incentives, ensuring transparency and compliance with financial reporting standards. The impact of these incentives on balance sheet liabilities and income statements should be clearly outlined .

The fashion company must record a right-of-use asset and a lease liability reflecting the present value of lease payments, including fixed payments and the expected residual value guarantee. Depreciate the right-of-use asset on a straight-line basis over the lease term. Lease liabilities should reflect effective interest rate changes and any agreed-upon residual value .

The interest rate determines the present value of lease payments, affecting both the initial recognition of lease liabilities and right-of-use assets. Using the lessee's incremental borrowing rate, as with Stora Enso at 8%, affects the size of liabilities and subsequent interest expenses recorded annually .

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