LEASE EXAMPLE #7- Sales Type - Unguaranteed RV

Acct. 414 – Spring 2006 SOLUTION

LEASE EXAMPLE #7- Sales Type - LESSOR - alternate JE style Lease Unguaranteed RV Date Interest Principal Balance Payment Lease Lessee 300,000 7 Capital PVMLP 10% Illustrates used 01/01/12 84,079 0 84,079 215,921 of interest 01/01/12 84,079 21,593 62,486 153,435 01/01/13 84,079 15,344 68,735 84,700 payable account 01/01/14 84,079 8,470 75,609 9,091 01/01/15 10,000 909 9,091 0 n Lease 7 FMV = 300,000 1/1/12 270,000 90% FMV Gross Investment $346,316 4 Lease Term 6 Economic Life COGS 243,170 66.67% LT as % Eco. Life Sales $293,171 MLP Lessee Comments Unearned Interest 46,315 0 84,079 Inventory 250,000 1 84,079 Cash $ 84,079 2 84,079 Gross Investment $ 84,079 3 84,079 4 The RV is not 5 guaranteed by Note that since only part of the asset was “sold,” the 6 the lessee present value of the unguaranteed residual value ($6,830) 10.00% Lessee's discount rate is subtracted from the cost of goods sold figure. A Lessee's PVMLP: 293,171 Annuity Due 12/31/12 Lease 7 Type of Lease: Unearned Interest $ 21,593 B FOR LESSEE: Why? Capital PVMLP > 90% FMV Interest Revenue $ 21,593

1/2/13 Lessor Cash Flows Comments Cash $ 84,079 0 (215,921) Gross Investment $ 84,079 1 84,079 Unearned Interest $ 15,343 2 84,079 3 84,079 Interest Revenue $ 15,343 4 10,000 Unguaranteed RV 5 LESSOR - "my style" 6 1/2/12 10.00% Guess Net Investment in Lease $215,921 C 10.000% Implicit Rate COGS 243,170 MLP Lessor Comments Sales $293,170 0 84,079 1 84,079 Inventory 250,000 2 84,079 Cash $ 84,079 3 84,079 4 The RV is not 12/31/12 5 guaranteed Net Investment in Lease $ 21,593 6 Interest Revenue $ 21,593 D Lessor's PVMLP = 293,170 Annuity Due Lease 7 Type of Lease: 1/2/13 E FOR LESSOR: Why? Cash $ 84,079 Sales Type PVMLP > 90% FMV Net Investment in Lease $ 84,079 Profit, no cost or collection uncertainties 12/31/13 Net Investment in Lease $ 15,343 Interest Revenue $ 15,343

1 Acct. 414 – Spring 2006 SOLUTION

Example #7 LESSEE (Capital lease because PVMLP > 90% FMV)

Lessee Lease Date Interest Principal Balance Payment 01/01/02 293,171 0 01/01/02 84,079 0 84,079 209,092 1 01/01/03 84,079 20,909 63,170 145,922 2 01/01/04 84,079 14,592 69,487 76,435 3 01/01/05 84,079 7,644 76,435 0

Illustrates use of interest payable account

01/01/12 Leased Asset 293,171 Lease Obligation 209,092 Cash 84,079

12/31/12 Depreciation Expense 73,293 Accumulated Depreciation 73,293

Use 4 year lease term for depreciation since there is no title transfer or bargain purchase option.

Interest Expense 20,909 Interest payable 20,909

01/01/13 Interest payable 20,909 Lease Obligation 63,170 Cash 84,079

12/31/13 Depreciation Expense 73,293 Accumulated Depreciation 73,293

Interest Expense 14,592 Interest payable 14,592

1/2/14 Interest payable 14,592 Lease Obligation 69,487 Cash 84,079