Scenario 1 - Consider the following lease:
Inception of the lease: March 1, 2010.
The lessor is Evanston Equipment Inc. The cost of the equipment is $500,000; the fair market value is estimated to be $650,000
No initial direct costs are incurred by the lessor.
The lessee is Laramie Lighting Inc. Its incremental borrowing rate is 12%. The lessee does not know the lessor's implicit interest rate.
The term of the lease is 9 years, with annual rentals of $96,000. The first payment is made at the inception of the lease and subsequent payments are made at one year intervals.
Title does not transfer at the end of the lease.
The estimated useful life of the equipment is 15 years.
Laramie Lighting (lessee) agrees to absorb all executory costs (maintenance, taxes and insurance).
At the end of the lease, the equipment has an expected fair value of $100,000.
There is an option to purchase the equipment at the end of the lease for $100,000. If the option is not exercised, the equipment is returned to the lessor.
The collectibility of the rentals is reasonably assured and there are no uncertainties involved in the lease.
Accounting: Both lessor and lessee have fiscal years that coincide with the calendar year and therefore make any necessary accruals on December 31. You may assume that both companies use the straight-line depreciation method with no salvage value.
Scenario 2 -All the facts are the same EXCEPT for (b), (g), (j) and (k) above. Note: the lessor’s implicit interest rate may be different than it was for the first scenario.
(b) Assume that lessor acquired the equipment for $650,000.
(g) Assume instead that the life of the asset is 12 years.
(j) Assume there that the purchase option is $60,000 instead of $100,000.
(k) Assume that the lessor is worried about the collectability of the lease payments.
Required for each scenario:
Determine the lessor’s implicit interest rate (not given).
Classify the lease from the perspective of the lessor and lessee under US GAAP – a sentence or three will do.
Based on what you know so far, how would the lease be classified under IFRS? Another very short essay will be fine.
Construct separate amortization tables for both the lessee and the lessor (even if you think it is an operating lease).
The amortization tables must be prepared using Excel. Do NOT try to show the effect of year-end accruals on the amortization table itself -- look at the examples in the PowerPoint slides or solutions posted to examples.
The journal entries may be prepared “by hand” and typed into Excel (if you don’t use formulas, please EXPLAIN computations, for example how did you compute depreciation expense, interest expense, etc.).
For the essays, you could draft them in Word and then paste into Excel as a “word object” using the “paste special function.” There are other alternatives, of course – just be sure the essays are part of the file and easy to find (see item 2 below). Short sentences and abbreviations are fine.
For full credit, your spreadsheet must compute the present value of the minimum lease payments using formulas or functions like PV or NPV. You must also use Excel functions like IRR or RATE to find the implicit interest rate. Try for a professional looking project with clearly labeled tabs.
PLEASE SUBMIT ELECTRONICALLY IN A SINGLE FILE:
(you may use multiple sheets within the file)
Two amortization tables (lessor and lessee) for each scenario. On the lessor’s amortization tables, CLEARLY show the implicit interest rate taken to at least two decimal places (e.g., 8.59%).
A brief paragraph between amortization tables and journal entries that explains the reasons you classified the lease as operating or capital (lessee) or operating, direct financing or sales-type (lessor) under US GAAP.
Another brief paragraph explaining the IFRS classification.
Lessor journal entries for 2010 and 2011 for scenarios 1 and 2.
Lessee journal entries for 2010 and 2011 for scenarios 1 and 2.
ASSIGNMENT DUE: Wednesday, Feb. 17, 2010 no later than 5:00 PM. Only electronic submissions are accepted for this assignment. Follow the “file protocol” document instructions for naming your file. In other words, be sure the file name includes YOUR name(s) as well as “Proj1.” Send file to my teaching assistant, Xie Dan (Dana) at email@example.com with cc to firstname.lastname@example.org. NO LATE ASSIGNMENTS WILL BE ACCEPTED SINCE ASSIGNMENTS WILL BE RETURNED TO STUDENTS AS SOON AS EACH ONE IS GRADED. So if Dana doesn’t get started until Wednesday morning, you might get a slight reprieve!
This is a GROUP assignment unless you get permission from me to do it alone. Group size is TWO to THREE students. Put all names on the excel sheet WHERE IT IS EASY TO SEE WHILE GRADING and include all names in the file name of your submission. For example: “Proj1 Jane Smith and Zane Jones.xls” or “JSmith and ZJones Proj1.xls”