Financial Statement Analysis: Lease Accounting and Reporting

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FINANCE WORK
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Table of Contents
Introduction....................................................................................................................................3
E 20-1..............................................................................................................................................4
E 20-11............................................................................................................................................6
P 20-18.............................................................................................................................................9
E21-16...........................................................................................................................................13
Conclusion....................................................................................................................................15
References.....................................................................................................................................16
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Introduction
In the given report, finance related calculations have been performed which will help in a
business organization and to run and manage the business operations successfully. This will
indirectly help to achieve the overall organizational goals and objectives. The report primarily
focuses on the accounting of lease from the point of view of lessor.
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E 20-1
Date 01-01-2017
Lease term 10 Years
Initiates on 01-01-2017 $73,580
Fair Value on 01-01-2017 $450,000
Life of asset 12 Years
Unguaranteed Residual Value $12,000
Depreciation Method SLM
At termination- Asset Reverted to lessor
Borrowing Rate 12%
Repayment Schedule
Opening Balance Installment Principal Interest Closing Balance
450000 73580 73580 0 376420
376420 73580 24118 49462 352302
352302 73580 27288 46292 325014
325014 73580 30873 42707 294141
294141 73580 34930 38650 259211
259211 73580 39520 34060 219691
219691 73580 44713 28867 174979
174979 73580 50588 22992 124391
124391 73580 57235 16345 67156
67156 73580 67156 6424 0
Calculation of IRR
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Lease Payments Term 12% Total 15% Total
73580 0 1 73580 1 73580
73580 1 0.893 65696 0.870 63983
73580 2 0.797 58658 0.756 55637
73580 3 0.712 52373 0.658 48380
73580 4 0.636 46761 0.572 42070
73580 5 0.567 41751 0.497 36582
73580 6 0.507 37278 0.432 31811
73580 7 0.452 33284 0.376 27661
73580 8 0.404 29718 0.327 24053
73580 9 0.361 26534 0.284 20916
465633 424673
Calculation of differential rate (465633-450000) / (465633-424673)
Lease rate- 12% + (15633/40960)
Effective rate for IRR 13.14%
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E 20-11
Castle leasing corporation
Date 01-01-2017
Term of
lease 2 Years
Payment Yearly
Sale Value of equipment to Wai corporation
Guaranteed residual value $13,000
cost and fair value $135,000
Insurance
cost $5,000
(a)
Year Amount(in $)
P.V.F@
10%
Present
value
1 72500 0.909 65903
2 85500 0.826 70623
136526
(b)
The classification is require to be given by Wai corporation refers to be a financial lease,
in which the assets are ultimately transferred to the lessee at the end of financial lease
On an amount which consists of a nominal amount as the asset sold out to the lessee.
as per the criteria of castle leasing company the lease refers to be a financial lease
and cove the aspects of asset classification by lessor i.e. castle leasing company and thus
Need to be evaluated with the aspect of lessor.
(c )
In Respect to castle leasing corporation
Classification of Asset as per ASPE refers to cover the aspects provided as per standards,
thus the leasing cover the effective valuation for carry out and consider the eventual
factors of covering same specified feature of accounting standards and reflects to
identify and analyses the aspects of covering leases such as financial lease and operating
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Lease and needed to provide the aspects of proper follow up aspects.
(d)
Lease amortization schedule for castle leasing
Year
Opening
balance Installment Principal interest
Closing
Balance
1 158000 72500 65903 6597 85500
2 85500 85500 70623 14877 0
(e)
Journal entries in the books of lessor i.e. castle leasing corporation
1-Jan-17
Lease receivable A/c Dr. 136526
To Leased assets account 136526
(being asset sold on Lease)
31-12-2017
Lease receivable A/c Dr. 6597
To Interest Receivable A/c 6597
(Being Interest income recognized )
31-12-2017
Bank account Dr. 72500
To Lease receivable 72500
(Being Lease rentals received)
31-12-2018
Lease receivable A/c Dr. 14877
To Interest Receivable A/c 14877
(Being Interest income recognized )
31-12-2018
Bank account Dr. 85500
To Lease Receivable A/c 85500
(Being income recognized)
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8

(f) Since the asset sold by castle leasing corporation, As the amount receivable on sale of the
asset is under the payment schedule and thus it covers under the above aspects of covering and
reflecting in part (a). As it consider under the coverage the specific areas of analysis and
provides the specific factors of analytical review.
(g) On signing the lease Wai corporation should have to analyses and identify the coverage of
specific factors and need to evaluate the lease payments and various aspects and thus to evaluate
it need to cover lease payments and only the guaranteed payments made by lessee only. Thus on
signing the lease it is necessary required to analyses the aspects and consider lease payments and
guaranteed payments.
The payments includes- (135000+10000+13000), should have to be included under thus criteria.
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P 20-18
(a) Nature of lease refers to be the financial lease due to fact that after completion of lease term
the asset would be return back to the lessor Green Finance corporation, and the asset completed
its normal economic life during the term of lease. Hence the asset would be considered with the
above facts as financial lease. In general lessee and lessor should have to consider and evolve
their own aspects to record the transaction. And by consider the overall analysis. The lessee, i.e.
Lanier Dairy Limited should have to evaluate their own aspects to provide the lease conditions
and cover the necessary aspect as per accounting standards and the same function require
evaluating by the lessor also i.e. Green Finance Corporation.
(b)
Year Lease Rent P.V.F@ 6% Present Value
0 30000 1 30000
1 30000 0.943 28302
2 30000 0.890 26700
3 30000 0.840 25189
4 30000 0.792 23763
5 30000 0.747 22418
6 30000 0.705 21149
7 30000 0.665 19952
8 23000 0.627 14430
TOTAL 211902
(c) In the books of lessee
Date 30-05-2017
Lease equipment A/c Dr. 211902
To Lease liability 211902
(Being asset received on lease)
Lease liability A/c Dr. 30000
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To bank 30000
(payment of Lease liability)
in the books of lessor
Date 30-05-2017
Lease payment receivable A/c Dr. 263000
To Equipment 211902
To Unearned interest income 51098
(Being asset given to lessee on lease)
Bank A/c Dr. 30000
To lease payment Receivable 30000
(Being amount received of lease rentals)
in the books of lessee
Date 30-12-2017
Interest Expenses A/c Dr. 6367
To Interest payable 6367
(Being Interest expense Recognized)
[($211,902 – $30,000) X .06 X 7/12]
Depreciation Expenses A/c Dr. 13774
To Accumulated Depreciation 13774
(Being Depreciation Expense recognized)
[($211,902 – $23,000) ÷ 8 X 7/12]
in the books of lessor
Unearned Interest Income 6367
To Interest Income 6367
(Being income recognized)
(d) in the books of lessee
Date 30-05-2018
Lease liability A/c Dr. 19086
Interest Expense A/c Dr. 4547
Interest Payable A/c Dr. 6367
To bank 30000
(Being lease rentals paid)
[($211,902 – $30,000) X .06 X 5/12]= 4547
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Depreciation Expense A/c Dr. 9839
To Accumulated Depreciation 9839
(Being Depreciation Expense recognized)
[($211,902 – $23,000) ÷ 8 X 5/12]
in the books of lessor
Date 30-05-2018
Unearned interest Income A/c Dr. 4547
To Interest income 4547
(Being income recognized)
Bank A/c Dr. 25250
To Lease payment Receivable 25250
(being Receipt of Income)
(e) 1. Year Lease Rent P.V.F@ 6% Present Value
0 30000 1 30000
1 30000 0.943 28302
2 30000 0.890 26700
3 30000 0.840 25189
4 30000 0.792 23763
5 30000 0.747 22418
6 30000 0.705 21149
7 30000 0.665 19952
TOTAL 197471
(e) 2. Year Lease Rent P.V.F@ 6% Present Value
0 30000 1 30000
1 30000 0.943 28302
2 30000 0.890 26700
3 30000 0.840 25189
4 30000 0.792 23763
5 30000 0.747 22418
6 30000 0.705 21149
7 30000 0.665 19952
TOTAL 197471
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