Ias 17

Problem 1 - Operating lease - Lessee and lessor
Requirement No. 1
20A1 Lessee
1-Jan Prepaid/Accrued rent 150,000
Cash
Cash 50,000
Prepaid/Accrued rent
Lease deposit 204,180

Prepaid/Accrued rent 95,820
Cash
31-Dec Rent expense 189,164


Interest income
20A2
Cash


Interest income
Rent expense 100,000

20A3
Cash

Cash


Interest income
Rent expense 300,000

Year
20A1 150,000
20A2 165,000
20A3 180,000
20A4 195,000
20A5 210,000
Lease bonus (50,000)
Discount on lease deposit 95,820
Total 945,820
Lease term 5
Annual rental 189,164

PV Factor 0.6806
Present value 204,180
Discount 95,820
Requirement No. 2
20A1 Disclosures
The Company's future minimum lease payments (rental collections) are as follows:
Amount
20A2 165,000
20A3 180,000
20A4 195,000
20A5 210,000
Total 750,000
20A2 Disclosures
Amount
20A3 180,000
20A4 195,000
20A5 210,000
Total 585,000
20A3 Disclosures
Amount
20A4 195,000
20A5 210,000
Total 405,000
Lessor
Cash
150,000 Rent Receivable/Unearned rent
Rent Receivable/Unearned rent

50,000 Cash
Cash
300,000 Lease deposit

189,164 Rent income
Interest expense
Cash

189,164 Rent income
Interest expense

100,000 Rent income
Cash
Cash

189,164 Rent income
Interest expense

300,000 Rent income
150,000
150,000
50,000
50,000
300,000
95,820
204,180
189,164
189,164
16,334
16,334
165,000
165,000
189,164
189,164
17,641
17,641
100,000
100,000
180,000
180,000
100,000
100,000
189,164
189,164
19,052
19,052
300,000
300,000
Problem 2 - Classification of leases: operating vs. finance lease
Situation (a)
Minimum lease payments 100,000
PV Factor 4.0373
PV of minimum lease payments (MLP) 403,730
Fair market value (FMV) 500,000
% of MLP over FMV 81%
Lease term 5
Economic life 7
% of Lease term over Economic life 71%
Automatic transfer of ownership.
Conclusion: Finance lease because there is automatic transfer of ownership.
Situation (b)
Minimum lease payments 1,000,000
PV Factor 6.3282
PV of minimum lease payments (MLP) 6,328,200
Fair market value (FMV) 8,000,000
Bargain purchase option 100,000

Fair value at the end of the lease term 10,000,000
BPO is sufficiently lower than the fair value of the asset. PAS 17 does not provide
the threshold.
Conclusion: Finance lease because there is BPO and it is reasonably certain that
the lessee will exercise its BPO.
Situation (c)
Minimum lease payments 1,500,000
PV Factor 7.8431
Lease term 25
Economic life 35
Conclusion: Finance lease because the 90% threshold is exceeded.
Situation (d)
PV Factor 5.6502
PV of minimum lease payments (MLP) 847,530
Lease term 10
Economic life 12
Situation (e)
PV Factor 5.5638
Lease term 8
Economic life 12
Conclusion: Operating lease.
Situation (f)
PV Factor 4.1114
Lease term 6
Economic life 10
Conclusion: Finance lease because it is a specialized asset.

Problem 3 - Direct financing and sales type lease; lessee and lessor
Requirement No. 1
Minimum lease payments

PV Factor
PV of minimum lease payments (MLP)
Fair market value (FMV)
% of MLP over FMV
Lease term
Economic life
% of Lease term over Economic life
Conclusion: Finance lease because the 90% and 75% thresholds are exceeded.
Requirement No. 2
(Lessor) - Net Investment Method

1-Jan Equipment 3,000,000
Cash
Lease receivable 3,000,000

Equipment
Cash 179,873
Lease receivable
1-Apr Cash 179,873

Interest income
Lease receivable
(Lessor) - Gross Investment Method

1-Jan Equipment 3,000,000
Cash

Unearned interest income
Equipment
Cash 179,873
Lease receivable
1-Apr
Cash 179,873
Lease receivable
Unearned interest income 56,403

Interest income
Requirement No. 3
Lease is still classified as finance lease even if the 75% threshold is not met since the 90% threshold is met.

1-Jan Lease receivable 3,000,000
Sales
Cost of sales 2,200,000

Inventory
Cash 179,873
Lease receivable
1-Apr Cash 179,873

Interest income
Lease receivable

1-Jan Lease receivable 3,597,460
Equipment
Cost of sales 2,200,000

Inventory
Cash 179,873
Lease receivable
1-Apr Cash 179,873

Lease receivable

Interest income
179,873
16.6785
3,000,012
3,000,000
100%
5
5
100%
are exceeded.
(Lessee)
3,000,000
Equipment 3,000,000
3,000,000 Lease payable
Lease payable 179,873

179,873 Cash

56,403 Interest expense 56,403
123,470 Cash
Depreciation expense 150,000

Accumulated depreciation
3,000,000
597,460
3,000,000
179,873
179,873
56,403
e the 90% threshold is met.
(Lessee)
3,000,000
Equipment 3,000,000

179,873 Cash

56,403 Interest expense 56,403
123,470 Cash
Depreciation expense 150,000

597,460 Note: Depreciable life is based on lease term since there is no certainty that t
3,000,000
2,200,000
179,873
179,873
56,403
Date Payments
20A1 1-Jan
1-Jan 179,873
1-Apr 179,873
3,000,000 1-Jul 179,873
1-Oct 179,873
20A2 1-Jan 179,873
179,873 1-Apr 179,873
1-Jul 179,873
1-Oct 179,873
20A3 1-Jan 179,873
179,873 1-Apr 179,873
1-Jul 179,873
1-Oct 179,873
150,000 20A4 1-Jan 179,873
1-Apr 179,873
1-Jul 179,873
1-Oct 179,873
20A5 1-Jan 179,873
1-Apr 179,873
1-Jul 179,873
1-Oct 179,873
3,000,000
179,873
179,873
150,000
erm since there is no certainty that the asset will be transferred.
Effective Interest Principal Payment Outstanding
3,000,000
179,873 2,820,127
56,402.54 123,470 2,696,657
53,933.13 125,940 2,570,717
51,414.33 128,459 2,442,258
48,845.16 131,028 2,311,230
46,224.60 133,648 2,177,582
43,551.64 136,321 2,041,260
40,825.21 139,048 1,902,213
38,044.25 141,829 1,760,384
35,207.68 144,665 1,615,719
32,314.37 147,559 1,468,160
29,363.20 150,510 1,317,650
26,353.00 153,520 1,164,130
23,282.60 156,590 1,007,540
20,150.79 159,722 847,818
16,956.35 162,917 684,901
13,698.02 166,175 518,726
10,374.52 169,498 349,227
6,984.55 172,888 176,339
3,526.78 176,346 (7)
Problem 4 - Sales type lease; bargain purchase option; lessee and lessor
Requirement No. 1
Present value of minimum lease payments:
Periodic rental 300,000
PV Factor 4.2397
PV of periodic rental
Bargain purchase option 150,000
PV Factor 0.6499
PV of residual value
Total present value

% of MLP over FMV
Lease term 5
Economic life 6
Conclusion: Finance lease because there is bargain purchase option. Moreover, the 75% and 90% thresholds ar
Requirement No. 2
Sales 1,369,395
Cost of sales 800,000
Gross profit 569,395
Requirement No. 3
1-Jul Inventory 800,000
Cash

Sales
Cost of sales 800,000

Inventory
Cash 300,000
Lease receivable

1-Jul Inventory 800,000
Cash

Equipment
Cash 300,000
Lease receivable
Requirement No. 4
Date Payments Effective Interest Principal Payment
1-Jul 20A1
1-Jul 20A1 300,000 300,000
1-Jul 20A2 300,000 96,245.55 203,754
1-Jul 20A3 300,000 77,907.65 222,092
1-Jul 20A4 300,000 57,919.34 242,081
1-Jul 20A5 300,000 36,132.08 263,868
30-Jun 20A6 150,000 12,383.97 137,616
Requirement No. 5
31-Dec Interest receivable 48,123
Interest income

Lease receivable
Requirement No. 6
(Lessor)
Current assets:
Lease receivable 300,000
Less: Unearned interest 48,123 251,877
Non-current assets:
Requirement No. 7
30-Jun Cash 150,000
Lease receivable
Interest income

Lease receivable
1,271,910
97,485
1,369,395
1,369,395
100%
% and 90% thresholds are exceeded.
(Lessee)
800,000
Transportation equipment
800,000
Lease payable
300,000 Cash
800,000
130,605
1,369,395
300,000
Outstanding
1,369,395
1,069,395
865,641
643,548
401,468
137,600
(16)
(Lessee)
Interest expense
48,123 Interest payable
Depreciation expense
48,123
(Lessee)
Non-current assets:
Transportation equipment
Less: Accumulated depreciation
Current liabilities
Lease payable
Interest payable
Non-current liabilities
Lease payable
(Lessee)
Lease payable
137,616 Interest expense
12,384 Cash
-
1,369,395
1,369,395
300,000
300,000
48,123
48,123
114,116
depreciation 114,116
1,369,395
114,116 1,255,279
203,754
48,123
865,641
137,616
12,384
150,000
228,233
Problem 5 - Guaranteed residual value; direct financing lease; lessee and lessor; executory costs
Requirement No. 1
Fair value
Less: Present value of residual value
Residual value
PV Factor
Balance
Divide by: PV Factor
Annual rentals
Requirement No. 2

Periodic rental
PV Factor
Residual value
PV Factor
Total present value

% of MLP over FMV
Lease term
Economic life
Requirement No. 3

1-Jan Equipment 996,885
Cash

Equipment
Cash 160,000
Lease receivable
Executory costs

Cash

Equipment
Cash 160,000
Lease receivable
Executory costs
Requirement No. 4
20A1
20A1 150,000 150,000
20A2 150,000 84,688.50 65,312
20A3 150,000 78,157.35 71,843
20A4 150,000 70,973.09 79,027
20A5 150,000 63,070.39 86,930
20A6 150,000 54,377.43 95,623
20A7 150,000 44,815.18 105,185
20A8 150,000 34,296.69 115,703
20A8 250,000 22,726.36 227,274
Requirement No. 5
31-Dec Cash 160,000
Interest income
Lease receivable
Executory costs

Cash 160,000
Lease receivable
Executory costs

Interest income
Requirement No. 6
(Lessor)
Current assets:
Non-current assets:
Requirement No. 7
Equipment 200,000
Cash 50,000
Interest income 22,726

Equipment 200,000
Cash 50,000

Requirement No. 8(a)
(Lessor)
Periodic rental
PV Factor
Residual value
PV Factor
Total present value

% of MLP over FMV
Lease term
Economic life
Conclusion: Finance lease because the 90% threshold is exceeded
Requirement No. 8(b)

Cash

Equipment
Cash 160,000
Lease receivable
Executory costs

Cash
Equipment
Cash 160,000
Lease receivable
Executory costs
Requirement 8(c)
31-Dec Cash 160,000
Interest income
Lease receivable
Executory costs

Cash 160,000
Lease receivable
Executory costs

Interest income
Requirement 8(d)
Equipment 200,000
Cash 50,000

Equipment 200,000
Cash 50,000

996,885
250,000
0.4665
(116,625)
880,260
5.8684
150,000
150,000
5.8684
880,260
250,000
0.4665
116,625
996,885
996,885
100%
8
12
67%
(Lessee)
996,885
Equipment
996,885 Lease payable
Lease payable
150,000 Executory costs
10,000 Cash
996,885
203,115
996,885
150,000
10,000
Outstanding
996,885
846,885
781,574
709,731
630,704
543,774
448,152
342,967
227,264
(10)
(Lessee)
Lease payable
84,689 Prepaid xecutory costs
10,000 Cash
150,000
10,000
84,689
(Lessee)
Non-current assets:
Equipment
Current liabilities
Lease payable
Lease payable
(Lessee)
Lease payable
Interest expense
Loss on guaranteed residual value
Equipment
Cash
(Lessee)
150,000
5.8684
880,260
250,000
0.4665
116,625
996,885
996,885
100%
8
12
67%
(Lessee)
996,885
996,885
150,000 Executory costs
10,000 Cash
996,885
203,115
996,885
150,000
10,000
(Lessee)
Rent expense
84,689 Prepaid/Accrued rent
65,312
10,000 Prepaid/Accrued rent
Prepaid executory costs
Cash
150,000
10,000
84,689
(Lessee)
No entry
Note: Third party guarantor will pay the residual value.
996,885
996,885
150,000
10,000
160,000
65,312
10,000
84,689
160,000
93,361
depreciation 93,361
996,885
93,361 903,524
71,843
709,731
93,361
depreciation 93,361
746,885
227,274
22,726
50,000
996,885
50,000

Periodic rental 150,000
PV Factor 5.8684
PV of periodic rental 880,260
Residual value -
PV Factor -
PV of residual value -
Total present value 880,260
Fair market value (FMV) 996,885

Lease term 8
Economic life 12
Conclusion: Operating lease because the 75% and 90% thresholds were not met
150,000
10,000
160,000
150,000
150,000
160,000
10,000
170,000
e residual value.
Problem 6 - Initial direct costs; direct financing lease and sales type lease; lessee and lessor
Requirement No. 1
Periodic rental
PV Factor

% of MLP over FMV
Lease term
Economic life
Conclusion: Finance lease since the 75% and 90% thresholds are exceeded. Specifically, direct financing lease.
Requirement No. 2

1-Jan Aircraft 6,455,240
Cash

Aircraft
Cash 1,100,000
Lease receivable

Cash

1-Jan Aircraft 6,455,240
Cash

Aircraft
Cash 1,100,000
Lease receivable

Cash
Requirement No. 3
20A1
20A1 1,100,000 1,100,000
20A2 1,100,000 535,524.00 564,476
20A3 1,100,000 479,076.40 620,924
20A4 1,100,000 416,984.04 683,016
20A5 1,100,000 348,682.44 751,318
20A6 1,100,000 273,550.69 826,449
20A7 1,100,000 190,905.76 909,094
20A8 1,100,000 99,996.33 1,000,004
Requirement No. 4
PV of lease payments 6,455,240

Initial direct costs 181,060
Net investment 6,636,300
Divide by: Annual lease payments 1,100,000
PV Factor 6.0330
Effective rate 9%
Requirement No. 5
20A1
20A1 1,100,000 1,100,000
20A2 1,100,000 498,267.00 601,733
20A3 1,100,000 444,111.03 655,889
20A4 1,100,000 385,081.02 714,919
20A5 1,100,000 320,738.31 779,262
20A6 1,100,000 250,604.76 849,395
20A7 1,100,000 174,159.19 925,841
20A8 1,100,000 90,833.52 1,009,166
Requirement No. 6

31-Dec Cash 1,100,000
Lease receivable
Interest income

31-Dec Cash 1,100,000
Lease receivable

Interest income
Requirement No. 7
(Lessor)
Current assets:
Non-current assets:
Less: Unearned interest 1,221,417 4,278,583
Requirement No. 8

31-Dec Cash 1,100,000
Lease receivable
Interest income

31-Dec Cash 1,100,000
Lease receivable

Interest income
Requirement No. 9(a)
Classified as finance lease based on calculation under Requirement No. 1. Specifically, to be classified as sales-
Requirement No. 9(b)
20A1 (Lessor) - Net Investment Method

1-Jan Aircraft inventory 4,000,000
Cash

Sales
Cost of goods sold 4,000,000

Aircraft inventory
Cash 1,100,000
Lease receivable
Initial direct costs expense 181,060

Cash

1-Jan Aircraft inventory 4,000,000
Cash

Sales
Cost of goods sold 4,000,000

Aircraft inventory
Cash 1,100,000
Lease receivable
Initial direct costs expense 181,060

Cash

31-Dec Cash 1,100,000
Lease receivable
Interest income

31-Dec Cash 1,100,000
Lease receivable

Interest income

31-Dec Cash 1,100,000
Lease receivable
Interest income

31-Dec Cash 1,100,000
Lease receivable

Interest income
Requirement No. 9(c)
(Lessor)
Current assets:
Non-current assets:
Less: Unearned interest 1,330,119 4,169,881
1,100,000
5.8684
6,455,240
6,455,240
100%
8
8
100%
ly, direct financing lease.
(Lessee)
6,455,240
Equipment
Lease payable
1,100,000 Cash
181,060
6,455,240
2,344,760
6,455,240
1,100,000
181,060
Outstanding
6,455,240
5,355,240
4,790,764
4,169,840
3,486,824
2,735,507
1,909,058
999,963
(40)
Outstanding
6,636,300
5,536,300
4,934,567
4,278,678
3,563,759
2,784,497
1,935,102
1,009,261
95
(Lessee)
Interest expense
1,100,000
498,267
(Lessee)
Non-current assets:
Aircraft
Current liabilities
Lease payable
Lease payable
(Lessee)
Interest expense
1,100,000
90,834
to be classified as sales-type lease.
4,000,000
6,455,240
4,000,000
1,100,000
181,060
4,000,000
2,344,760
6,455,240
4,000,000
1,100,000
181,060
564,476
535,524
1,100,000
535,524
1,000,004
99,996
1,100,000
99,996
(Lessee)
Non-current assets:
Aircraft
Current liabilities
Lease payable
Lease payable
6,455,240
6,455,240
1,100,000
1,100,000
535,524
564,476
1,100,000
806,905
6,455,240
806,905 5,648,335
620,924
4,169,840
99,996
1,000,004
1,100,000
806,905
6,455,240
806,905 5,648,335
620,924
4,169,840
Problem 7 - Lease of land and building
Requirement No. 1
Fair value of land 1,399,040
Fair value of land and building 6,995,200
% of fair value of land 20%
Since FV of land is below 25%, the land and building will be treated as a single asset.

Periodic rental
PV Factor

% of MLP over FMV
Lease term
Economic life
Conclusion: Finance lease since the 90% threshold is exceeded.
1-Jan Land and building

Lease payable
Lease payable
Cash
31-Dec Interest expense

Interest payable
Requirement No. 2
Since FV of land is above 25%, the land and building will be treated as separate assets.

Periodic rental
PV Factor

% of MLP over FMV
Lease term
Economic life
Conclusion: Finance lease for building since the 90% threshold is exceeded; Operating lease for the la
Note: Residual approach was used to determine the fair value of the building and rent attributable to th
Requirement No. 3
Since FV of land is above 25%, the land and building will be treated as separate assets.

Periodic rental
PV Factor

% of MLP over FMV
Lease term
Economic life
Conclusion: Lease of building is considered finance lease since the 90% threshold is exceeded, while
Note: Residual approach was used to determine the fair value of the building and rent attributable to th
ated as a single asset.
1,000,000
6.9952
6,995,200
6,995,200
100%
10
20
50%
6,995,200
6,995,200
1,000,000
1,000,000
539,568
539,568
699,520
699,520
eated as separate assets.
Building Land
700,000 300,000
6.9952 6.9952
4,896,640 2,098,560
4,896,640 2,098,560
100% 100%
10 Not applicable
20
50%
d is exceeded; Operating lease for the land since no transfer of ownerhsip at the end.
of the building and rent attributable to the building.
eated as separate assets.
Building Land
750,000 250,000
6.9952 6.9952
5,246,400 1,748,800
5,246,400 2,098,560
100% 83%
10 Not applicable
20
50%
e the 90% threshold is exceeded, while lease of land is an operating lease.

of the building and rent attributable to the building.
Problem 8 - Sale and leaseback of building; finance lease; implicit interest rate
Requirement No. 1
Fair value
Divide by: Annual rentals
PV Factor
Implicit interest rate
Requirement No. 2
1-Jan Building
Cash
Lease receivable
Building

1-Jan Building
Cash
Lease receivable
Aircraft

31-Dec Cash
Lease receivable
Interest income

31-Dec Cash
Lease receivable

Interest income
Requirement No. 3
(Lessor)
Current assets:
Less: Unearned interest 372,388
Non-current assets:
Less: Unearned interest 1,679,097
Requirement No. 4
1-Jan Building
Cash
Lease receivable
Aircraft
Amortization Table
Date Payments Effective Interest
20A1
20A1 745,145 400,000.00
20A2 745,145 372,388.40
20A3 745,145 342,567.87
20A4 745,145 310,361.70
20A5 745,145 275,579.04
20A6 745,145 238,013.76
20A7 745,145 197,443.26
20A8 745,145 153,627.12
20A9 745,145 106,305.69
20A10 745,145 55,198.55
5,000,000
745,145
6.7101
8%
(Lessee)
5,000,000 Cash
5,000,000 Accumulated depreciation
5,000,000 Building
5,000,000
5,000,000
5,000,000
7,451,450
2,451,450
5,000,000
(Lessee)
400,000
745,145
745,145
400,000
400,000
(Lessee)
Non-current assets:
Building
372,757 Less: Accumulated depreciation
Current liabilities
Lease payable
(Lessee)
5,000,000 Cash
Loss on sale and leaseback
5,000,000 Building
5,000,000
Principal Payment Outstanding
5,000,000
345,145 4,654,855
372,757 4,282,098
402,577 3,879,521
434,783 3,444,738
469,566 2,975,172
507,131 2,468,041
547,702 1,920,339
591,518 1,328,821
638,839 689,982
689,946 35
5,000,000
depreciation 6,000,000
Building 10,000,000
Deferred gain on sale and leaseback 1,000,000
5,000,000
Lease payable 5,000,000
400,000
345,145
500,000
Accumulated depreciation 500,000
5,000,000
mulated depreciation 500,000 4,500,000
372,757
4,282,098
5,000,000
depreciation 4,500,000
and leaseback 500,000
Building 10,000,000
5,000,000
Lease payable 5,000,000
Problem 9 - Sale and leaseback; operating lease
Requirement No. 1
(Lessor)
1-Jan Office building
Cash
1-Jan Cash
Unearned rent/Rent receivable
31-Dec Unearned rent/Rent receivable

Rent income
Requirement No. 2
(Lessor)
Cash
1-Jan Cash

Rent income
Requirement No. 3
(Lessor)
Cash
1-Jan Cash
Rent income
Requirement No. 4
(Lessor)
Cash
1-Jan Cash

Rent income
Requirement No. 5
(Lessor)
Cash
1-Jan Cash

Rent income
(Lessee)
6,000,000 Cash
250,000 Prepaid rent/Rent payable

250,000
250,000 Rent expense

250,000
300,000
300,000
(Lessee)
6,000,000 Cash
Proceeds
Fair market value
Deferred gain
Fair market value

Carrying amount
Gain

250,000

250,000
300,000
300,000
(Lessee)
4,200,000 Cash
4,200,000 Loss on sale and leaseback

250,000
250,000
210,000
210,000
(Lessee)
4,200,000 Cash
4,200,000 Impairment loss
Loss on sale and leaseback
Fair value
Carrying amount
Impairment loss
Proceeds
Fair value
Loss

250,000

250,000
210,000
210,000
(Lessee)
4,200,000 Cash
4,200,000 Deferred loss on sale and leaseback
Proceeds
Carrying amount
Loss
Divide by: Lease term
Compensated by rentals below market/Amortization
Market rental
Annual rental
Difference

250,000

250,000
210,000 Loss on sale and leaseback

210,000
6,000,000
d depreciation 3,000,000
Office building 8,000,000
Gain on sale of building 1,000,000
/Rent payable 250,000

Cash 250,000
250,000
Prepaid rent/Rent payable 250,000
6,000,000
Gain on sale of building 300,000
Deferred gain on sale of building 700,000
6,000,000
5,300,000
700,000
5,300,000
5,000,000
300,000

Cash 250,000
250,000
4,200,000
e and leaseback 800,000

Cash 250,000
250,000
4,200,000
500,000
4,500,000
5,000,000
(500,000)
4,200,000
4,500,000
(300,000)

Cash 250,000
250,000
4,200,000
s on sale and leaseback 800,000
4,200,000
5,000,000
(800,000)
10
ed by rentals below market/Amortization (80,000)
330,000
250,000
80,000

Cash 250,000
250,000

Deferred loss on sale and leaseback 80,000
Problem 10 - Determining whether an arrangement contains a lease
a. The arrangement does not depend on a specific asset. This is because it is economically feasible and practical fo
by providing use of more than one plant. A specific asset has therefore not been identified either explicitly or impl
Payments under the contract may be unavoidable because it is a take-or-pay arrangement and the purchaser ma
but the arrangement does not convey a right to use the asset. Rivery Valley does not have the right to control the
the ability or right to operate the asset in a manner it determines (or to direct others to do so on its behalf), and it
arrangement does not contain a lease. No specific asset has been identified.
b. Royal Canterbury's plant is explicitly identified in the arrangement, but it has the right to fulfil the arrangement by
it owned. However, to do so for any extended period of time would be uneconomical. Royal Canterbury must stan
is required to pay a fixed price per unit for the actual quantity taken. Even if River Valley's needs are such that the
they still pay only for the actual quantity taken.
Royal Canterbury has the right to sell the component parts to other customers and has a history of doing so by s
expected that parties other than the purchaser will take more than an insignificant amout of the component parts
Royal Canterbury is responsible for repairs, maintenance, and capital expenditures of the plant.
The arrangement does not contain a lease. The right to control the use of an underlying asset is not conveyed.
c. The fulfilment of the arrangement depends on the use of a specific asset, the tooling. Rivery Valley obtained the
presented, the likelihood is remote that one or more parties other than River Valley will take more than an insignif
estimated capacity of the tooling equipment corresponds to the total production of the finished product units prod
substantially all of the output produced using that tooling.
As the pricing is based on increasing efficiencies and economies of scale, it is not equal to the current market pri
The arrangement contains a lease. River Valley will have to determine whether it is a finance or operating lease.
s economically feasible and practical for Royal Canterbury to fulfil the arrangement
been identified either explicitly or implicitly.
ay arrangement and the purchaser may in fact take all the output of a single plant
y does not have the right to control the use of the underlying asset. It does not have
ct others to do so on its behalf), and it does not control physical access. The
s the right to fulfil the arrangement by shipping the component parts from another plant
onomical. Royal Canterbury must stand to deliver a minimum quantity. River Valley
River Valley's needs are such that they do not need the stated minimum quantity,
ers and has a history of doing so by selling in the replacement parts market, so it is
nificant amout of the component parts produced at Royal Canterbury's plant.
nditures of the plant.
an underlying asset is not conveyed.
he tooling. Rivery Valley obtained the right to use the tooling because, on the facts
er Valley will take more than an insignificant amount of the tooling's output. As the
ction of the finished product units produced by River Valley, River Valley takes
t is not equal to the current market price as of the time of delivery of the output.
ther it is a finance or operating lease.

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Problem 1 - Operating lease - Lessee and lessor

Lease deposit 204,180

31-Dec Rent expense 189,164

Lease deposit 16,334

31-Dec Rent expense 189,164

Lease deposit 17,641

Rent expense 100,000

31-Jan Prepaid/Accrued rent 100,000

31-Dec Rent expense 189,164

Lease deposit 19,052

Rent expense 300,000

Lease deposit 300,000

Rent Receivable/Unearned rent

Rent Receivable/Unearned rent

Rent Receivable/Unearned rent

Rent Receivable/Unearned rent

Rent Receivable/Unearned rent

Rent Receivable/Unearned rent

Automatic transfer of ownership.

Conclusion: Finance lease because there is automatic transfer of ownership.

Bargain purchase option 100,000

Conclusion: Finance lease because the 90% threshold is exceeded.

Conclusion: Operating lease.

Conclusion: Finance lease because it is a specialized asset.

Minimum lease payments

(Lessor) - Net Investment Method

Lease receivable 3,000,000

1-Apr Cash 179,873

(Lessor) - Gross Investment Method

Lease receivable 3,597,460

Unearned interest income 56,403

(Lessor) - Net Investment Method

Cost of sales 2,200,000

1-Apr Cash 179,873

(Lessor) - Gross Investment Method

Cost of sales 2,200,000

1-Apr Cash 179,873

Unearned interest income 56,403

Lease payable 179,873

Lease payable 123,470

Depreciation expense 150,000

Lease payable 179,873

Lease payable 123,470

Depreciation expense 150,000

Fair market value (FMV)

Lease receivable 1,369,395

Cost of sales 800,000

(Lessor) - Gross Investment Method

Lease receivable 1,500,000

(Lessor) - Gross Investment Method

(Lessor) - Gross Investment Method

% and 90% thresholds are exceeded.

Present value of minimum lease payments:

Fair market value (FMV)

Conclusion: Finance lease because the 90% threshold is exceeded.

(Lessor) - Net Investment Method

Lease receivable 996,885

(Lessor) - Gross Investment Method

Lease receivable 1,200,000

Date Payments Effective Interest Principal Payment

(Lessor) - Gross Investment Method

Unearned interest income 84,689

(Lessor) - Gross Investment Method