Lessee - Capital Lease Lessor - Direct Financing Lease

IFRS 16 (Lease)
1. Lessee – Capital Lease; Lessor – Direct Financing Lease

On January 1, 2010, Velde Company (lessee) entered into a 4 year, non-cancellable contract to lease a
computer from Exceptional Computer Company (lessor). Annual rentals of $17,208 are to be paid each
January 1, Velde will assume responsibility for all normal ownership costs, and at the end of the lease
period the computer will be returned back to Exceptional Computer Company. The cost of the computer
to Exceptional Computer Company was $60,000 and it had an estimated useful life of four years and no
residual value. Velde has an incremental borrowing rate of 12%, but has knowledge that Exceptional
Computer Company used a rate 10% in setting annual rentals. Collection of the rentals is reasonably
predictable and there are no important uncertainties regarding future un-reimbursable costs to be
incurred by the lessor. PVIFAD(10%,4) – 3.48685; PVIF(10%,4) – 0.68301
Instructions:
a. What type of lease is this? Explain
b. Record the journal entries in the book of lessee.
c. Record the journal entries in the book of lessor.
2. Lessee – Capital Lease; Lessor – Sale Type Lease

On January 1, 2010, Velde Company (lessee) entered into a 4 year, non-cancellable contract to lease a
to Exceptional Computer Company was $40,000 and had an estimated FV of $60,000, an estimated useful
life of four years and no residual value. Velde has an incremental borrowing rate of 12%, but has
knowledge that Exceptional Computer Company used a rate 10% in setting annual rentals. Collection of
the rentals is reasonably predictable and there are no important uncertainties regarding future un-
reimbursable costs to be incurred by the lessor. PVIFAD(10%,4) – 3.48685; PVIF(10%,4) – 0.68301
Instructions:
3. Lessee – Capital Lease; Lessor – Direct Financing Lease; Residual Value - Guaranteed
On January 1, 2010, Velde Company (lessee) entered into a 4 year, noncancellable contract to lease a
to Exceptional Computer Company was $60,000 and it had an estimated useful life of four years and a
guaranteed residual value of $5,000. Velde has an incremental borrowing rate of 12%, but has knowledge
that Exceptional Computer Company used a rate 10% in setting annual rentals. Collection of the rentals is
reasonably predictable and there are no important uncertainties regarding future unreimbursable costs to
be incurred by the lessor. PVIFAD(10%,4) – 3.48685; PVIF(10%,4) – 0.68301
Instructions:
4. Lessee – Capital Lease; Lessor – Direct Financing Lease; Residual Value - Unguaranteed
On January 1, 2010, Velde Company (lessee) entered into a 4 year, noncancellable contract to lease a
to Exceptional Computer Company was $60,000 and it had an estimated useful life of four years and an
unguaranteed residual value of $5,000. Velde has an incremental borrowing rate of 12%, but has
knowledge that Exceptional Computer Company used a rate 10% in setting annual rentals. Collection of
the rentals is reasonably predictable and there are no important uncertainties regarding future
unreimbursable costs to be incurred by the lessor. PVIFAD(10%,4) – 3.48685; PVIF(10%,4) – 0.68301
Instructions:
5. Lessee – Capital Lease; Lessor – Direct Financing Lease

Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction Corp. sign a
lease agreement dated January 1, 2012, that calls for Caterpillar to lease a front-end loader to Sterling
beginning January 1, 2012. The terms and provisions of the lease agreement, and other pertinent data, are
as follows:
 The term of the lease is five years. The lease agreement is noncancelable, requiring equal rental
payments of $25,981.62 at the beginning of each year (annuity-due basis).
 The loader has a cost of $100,000 and fair value at the inception of the lease is also $100,000, an
estimated economic life of five years, and no residual value.
 Sterling pays all of the executory costs directly to third parties except for the property taxes of
$2,000 per year, which is included as part of its annual payments to Caterpillar.
 The lease contains no renewal options. The loader reverts to Caterpillar at the termination of the
lease.
 Sterling’s incremental borrowing rate is 11 percent per year.
 Sterling depreciates, on a straight-line basis, similar equipment that it owns.
 Caterpillar sets the annual rental to earn a rate of return on its investment of 10 percent per year;
Sterling knows this fact.
 PVIFAD(10%,5) – 4.16986; PVIF(10%,4) – 0.62092
Instructions:
d. What type of lease is this? Explain
e. Compute the amortization Schedule.
f. Record the journal entries in the book of lessee for year 2012, 2013.
g. What will be the last entry in the book of lessee upon expiration of the lease.
h. Record the journal entries in the book of lessor for year 2012, 2013.
6. (Lessee Entries, Capital Lease with Executory Costs and Unguaranteed Residual Value)
Assume that on January 1, 2008, Kimberly-Clark Corp. signs a 10-year non cancelable lease agreement to
lease a storage building from Trevino Storage Company. The following information pertains to this lease
agreement.
 The agreement requires equal rental payments of $72,000 beginning on January 1, 2008.
 The fair value of the building on January 1, 2008 is $440,000.
 The building has an estimated economic life of 12 years, with an unguaranteed residual value of
$10,000. Kimberly-Clark depreciates similar buildings on the straight-line method.
 The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
 Kimberly-Clark’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not
known by Kimberly-Clark. PVIFAD(12%,10) – 6.32825
 The yearly rental payment includes $2,470.51 of executory costs related to taxes on the property.
Instructions
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 2008 and 2009. Kimberly-Clark’s
corporate year end is December 31.
7. (Lessee-Lessor Entries, Sales-Type Lease) On January 1, 2012, Palmer Company leased equipment to
Woods Corporation. The following information pertains to this lease.
 The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to
the lessor at the termination of the lease.
 Equal rental payments are due on January 1 of each year, beginning in 2012.
 The fair value of the equipment on January 1, 2012, is $150,000, and its cost is $120,000.
 The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000.
Woods depreciates all of its equipment on a straight-line basis.
 Palmer sets the annual rental to ensure an 11% rate of return. Woods’s incremental borrowing
rate is 12%, and the implicit rate of the lessor is unknown.
 Collectibility of lease payments is reasonably predictable, and no important uncertainties
surround the amount of costs yet to be incurred by the lessor.
 PVIFAD(11%,6) – 4.69590; PVIF(11%,6) – 0.53464
Instructions: (Both the lessor and the lessee’s accounting period ends on December 31.)
(a) Discuss the nature of this lease to Palmer and Woods.
(b) Calculate the amount of the annual rental payment.
(c) Prepare all the necessary journal entries for Woods for 2012.
(d) Prepare all the necessary journal entries for Palmer for 2012.
8. (Lessee-Lessor Entries, Sales-Type Lease)

Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January 1, 2012. The
following information relates to the lease agreement.
 The term of the lease is 7 years with no renewal option, and the machinery has an estimated
economic life of 9 years.
 The cost of the machinery is $420,000, and the fair value of the asset on January 1, 2012, is
$560,000.
 At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of
$80,000. Jensen depreciates all of its equipment on a straight-line basis.
 The lease agreement requires equal annual rental payments, beginning on January 1, 2012.
 The collectibility of the lease payments is reasonably predictable, and there are no important
uncertainties surrounding the amount of costs yet to be incurred by the lessor.
 Glaus desires a 10% rate of return on its investments. Jensen’s incremental borrowing rate is 11%,
and the lessor’s implicit rate is unknown.
 PVIFAD(10%,7) – 5.35526; PVIF(10%,7) – 0.51316; PVIFAD(11%,7) - 5.2305; PVIF(11%,7) - 0.4817
Instructions: (Assume the accounting period ends on December 31.)

(a) Discuss the nature of this lease for both the lessee and the lessor.
(b) Calculate the amount of the annual rental payment required.
(c) Compute the present value of the minimum lease payments.
(d) Prepare the journal entries Jensen would make in 2012 and 2013 related to the lease
arrangement.
(e) Prepare the journal entries Glaus would make in 2012 and 2013.
9. (Lessee/Lessor Entries, Operating Lease)

On January 1, 2012, Secada Co. leased a building to Ryker Inc. The relevant information related to the
lease is as follows.
 The lease arrangement is for 10 years.
 The leased building cost $4,500,000 and was purchased for cash on January 1, 2012.
 The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no
salvage value.
 Lease payments are $275,000 per year and are made at the end of the year.
 Property tax expense of $85,000 and insurance expense of $10,000 on the building were incurred
by Secada in the first year. Payment on these two items was made at the end of the year.
 Both the lessor and the lessee are on a calendar-year basis.
Instructions:
(a) Prepare the journal entries that Secada Co. should make in 2012.
(b) Prepare the journal entries that Ryker Inc. should make in 2012.
(c) If Secada paid $30,000 to a real estate broker on January 1, 2012, as a fee for finding the lessee,
how much should be reported as an expense for this item in 2012 by Secada Co.

Lessee - Capital Lease Lessor - Direct Financing Lease

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IFRS 16 (Lease)

1. Lessee – Capital Lease; Lessor – Direct Financing Lease

2. Lessee – Capital Lease; Lessor – Sale Type Lease

5. Lessee – Capital Lease; Lessor – Direct Financing Lease

8. (Lessee-Lessor Entries, Sales-Type Lease)

Instructions: (Assume the accounting period ends on December 31.)

9. (Lessee/Lessor Entries, Operating Lease)

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