Chapter E21

E21.
3 (LO2) (Lessee Computations and Entries; Lease with Guaranteed Residual Value) Delaney AG leases
an automobile with a fair value of €10,000 from Simon Motors, on the following terms.
1. Non-cancelable term of 50 months.
2. Rental of €200 per month (at the beginning of each month). (The present value at 0.5% per month is
€8,873.)
3. Delaney guarantees a residual value of €1,180 (the present value at 0.5% per month is €920). Delaney
expects the probable residual value to be €1,180 at the end of the lease term.
4. Estimated economic life of the automobile is 60 months.
5. Delaney's incremental borrowing rate is 6% a year (0.5% a month). Simon's implicit rate is unknown.
Instructions
a. What is the present value of the lease payments to determine the lease liability?
b. Based on the original fact pattern, record the lease on Delaney's books at the date of commencement.
c. Record the first month's lease payment (at commencement of the lease).
d. Record the second month's lease payment.
e. Record the first month's amortization on Delaney's books (assume straight-line).
f. Suppose that instead of €1,180, Delaney expects the residual value to be only €500 (the guaranteed
amount is still €1,180). How does the calculation of the present value of the lease payments change
from part E21.3b.?
E21.4 (LO2) (Lessee Entries; Unguaranteed Residual Value) Assume that on December 31, 2018, 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, 2018.
2. The fair value of the building on December 31, 2018, 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.
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.
Instructions
a. 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 2018, 2019, and 2020. Stora Enso's
fiscal year-end is December 31.
b. Suppose the same facts as above, except that Stora Enso incurred legal fees resulting from the
execution of the lease of €5,000, and received a lease incentive from Sheffield to enter the lease of
€1,000. How would the initial measurement of the lease liability and right-of-use asset be affected
under this situation?
c. Suppose that in addition to the €71,830 annual rental payments, Stora Enso is also required to pay
€5,000 for insurance costs each year on the building directly to the lessor, Sheffield Storage. How
would this executory cost affect the initial measurement of the lease liability and right-of-use asset?
d. Return to the original facts in the problem. Now suppose that, at the end of the lease term, Stora Enso
took good care of the asset and Sheffield agrees that the fair value of the asset is actually €10,000.
Record the entry for Stora Enso at the end of the lease to return control of the storage building to
Sheffield (assuming the accrual of interest on the lease liability has already been made).
E21.5 (LO3) (Computation of Rental; Journal Entries for Lessor) Morgan Leasing Group signs an agreement
on January 1, 2019, to lease equipment to Cole plc. The following information relates to this agreement.
1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an
estimated economic life of 6 years.
2. The cost of the asset to the lessor is £245,000. The fair value of the asset at January 1, 2019, is
£245,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to
have a residual value of £24,335, none of which is guaranteed.
4. The agreement requires equal annual rental payments, beginning on January 1, 2019.
5. Collectibility of the lease payments by Morgan is probable.
Instructions
(Round all numbers to the nearest pound.)
a. Assuming the lessor desires an 8% rate of return on its investment, calculate the amount of the annual
rental payment required. (Round to the nearest pound.)
b. Prepare an amortization schedule that is suitable for the lessor for the lease term.
c. Prepare all of the journal entries for the lessor for 2019 and 2020 to record the lease agreement, the
receipt of lease payments, and the recognition of revenue. Assume the lessor's annual accou nting
period ends on December 31, and it does not use reversing entries.

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