Use the following to answer questions 10 through 13: Please explain and show wor
ID: 2512422 • Letter: U
Question
Use the following to answer questions 10 through 13: Please explain and show work. Each time I do it I get different answers.
Montana Inc. sells computer systems. Montana leases computers to Utah Company on June 30, 2017. The computers cost Montana $12 million to manufacture. The lease is non-cancelable and has the following terms:
Lease payments: $2,466,754 semiannually; first payment due June 30, 2017; remaining payments due December 31 and June 30 each year through December 31, 2021.
Lease term: 5 years (10 semi-annual payments).
No residual value; no bargain purchase option.
Economic life of equipment: 5 years.
Implicit interest rate and lessee's incremental borrowing rate: 10% per year.
Fair value of the computers at June 30, 2017: $20 million.
Collectability of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
10. Montana would account for this lease as:
A) A finance lease.
B) A sales type lease without selling profit.
C) A sales type lease with selling profit.
D) An operating lease.
11. Utah Company would account for this lease as:
A) A finance lease.
B) A sales type lease without selling profit.
C) A sales type lease with selling profit.
D) An operating lease.
12. The net carrying value of the lease liability on Utah's books after the December 31, 2017 payment is closest to:
A) $15,943,154
B) $17,533,246
C) $21,000,000
D) $15,066,492
13. Total interest revenue Montana would report on its year end December 31, 2017 income statement relative to this lease is closest to:
A) $4,933,508
B) $1,673,820
C) $876,662
D) $2,466,754
Explanation / Answer
Semi-annual payments
Present value factor @5% per six months
2466754
0.952381
2349290
2466754
0.907029
2237419
2466754
0.863838
2130875
2466754
0.822702
2029405
2466754
0.783526
1932766
2466754
0.746215
1840730
2466754
0.710681
1753076
2466754
0.676839
1669596
2466754
0.644609
1590092
2466754
0.613913
1514373
Total liability at the beginning
19047621
Less: Lease payment as on June 30, 2017
2466754
Liability as on June 30, 2017 after payment of first instalment
16580867
Add: Interest @5% up-to December 31, 2017
829043.3
Lease liability as on December 31, 2017 before payment of lease
17409910
Less: Lease payment as on December 31, 2017
2466754
Lease liability as on December 31, 2017
14943156
Note: Present value factor has been taken at 5% as the annual rate of borrowing is 10% thus, semi-annual rate of interest to discount the cash flow is 5%, i.e. (10% x 6/12).
Hence, the net carrying value of the lease liability on Utah’s book after 31st December, 2017 payment is closest to option D, i.e. $15,066,492.
Interest @5% up-to December 31, 2017
829043.3
Total interest revenue Montana would report on its year end December 31, 2017 income statement relative to this lease is closest to option C, i.e. 876,662.
Semi-annual payments
Present value factor @5% per six months
2466754
0.952381
2349290
2466754
0.907029
2237419
2466754
0.863838
2130875
2466754
0.822702
2029405
2466754
0.783526
1932766
2466754
0.746215
1840730
2466754
0.710681
1753076
2466754
0.676839
1669596
2466754
0.644609
1590092
2466754
0.613913
1514373
Total liability at the beginning
19047621
Less: Lease payment as on June 30, 2017
2466754
Liability as on June 30, 2017 after payment of first instalment
16580867
Add: Interest @5% up-to December 31, 2017
829043.3
Lease liability as on December 31, 2017 before payment of lease
17409910
Less: Lease payment as on December 31, 2017
2466754
Lease liability as on December 31, 2017
14943156
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