Perfect Competition Essay Example

Perfect Competition Essay Perfect competition is a market structure with large number of buyers and sellers. There are no barriers to entry into the industry. Firms sell identical products that are perfect substitutes each other. In addition, they are well informed about prices and no have government intervention. Transport cost is negligible hence do not affect pricing. Price determined by the market must be accepted by the buyers and sellers. They are said to be price takers. Therefore, firms have no market power. Each firm in perfect competition seeks to maximize their profit, which equals total revenue minus total cost.Total revenue for a firm is the selling price times the quantity cost [ TR=(P*Q) ] . Total cost is the opportunity cost of production, which includes normal profit. Average revenue tells us how much revenue a firm receives for the typical unit sold. The average revenue equals the price of the good in perfect competition. Marginal revenue is the change in total revenue from an additional unit sold. For competitive firm, marginal revenue equals the price of the good. In the short run, firms can make super-normal profits or losses under perfect competition. The firm has fixed resources and maximizes profit or minimizes loss by adjusting output.When a firm operates in a perfectly competitive market, its supply curve is its short-run marginal cost curve above average variable cost. We will write a custom essay sample on Perfect Competition specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Perfect Competition specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Perfect Competition specifically for you FOR ONLY $16.38 $13.9/page Hire Writer The firm should not produce, but should shut down in the short run if its loss exceeds its fixed costs. By shutting down, its loss will just equal those fixed costs. The shut down point is the level of output and price at which the firm just covers its total variable cost. For perfect competition, marginal revenue is equal to price as the firm is facing a perfectly elastic demand. Entry and exit is possible in the long run of perfect competitive.Long run firms are attracted into the industry if the supernormal profits are making by the incumbent firms. This is because there are no barriers to entry and there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are freely to exit, and this will shift the industry supply to the left, which increase price and allows those left in the market to derive normal profits.In perfect competition, optimal allocation of resources helped by high degree of competition. Lower price charged for the consumers. Consumer and producers surplus are maximized. This is because the change in demand leads extra supply. But insufficient profit for investment is one of the disadvantages in perfect competition. Besides that, perfect competition cause unequal distribution of goods and income. If there are externalities in production or consumption there is likely to be market failure without government intervention Competitive Markets.Due to the availability of many brands of the handsets in market, sellers share the market to comparatively smaller shares since the products are identical and serve the same intentions. The handsets are in this case standardized due to the functionality aspect they provide to the buyers. The government does not adjust the prices of the mobile phones in ties industry other than the normal taxes on business. The competitive aspect in this sector is mainly via prices such that the handset selling firms compete mainly using the prices (Lee, 2003).This is the ideal competitive environment where the products being sold are homogenous. From the Globe and Mail, deals with lamb prices in Canada. The article indicates that because the Orthodox and Western Christian Easters fall on the same Sunday in 2010, the demand for lamb and braided bread has gone up. And while there is a shortage of lamb there doesnt appear to be a shortage of bread. Lamb prices are up 22% over last year. Lamb producers in Alberta have been trying to convince people to take up the craft of raising sheep and hope that promise of higher prices will be an incentive.

Funny Quotes for Graduation Speeches

Funny Quotes for Graduation Speeches If youve been asked to speak at a high school or college graduation or celebration, you may be searching for the perfect icebreaker. But how do you get a group of serious-minded students and their parents to crack a smile? Fortunately, plenty of famous (and not-so-famous) writers and orators have been in the same situation before you, and have come up with some clever, witty quotes to borrow. Funny Quotes About Education and Learning High schools and colleges take academics very seriously, but there is a funny side to learning! UnknownOne thing about the school of experience is that it will repeat the lesson if you flunk the first time. George ForemanI think sleeping was my problem in school. If  school  had started at 4:00 in the afternoon, Id be a  college graduate  today. Oscar WildeEducation  is an admirable thing, but it is well to remember from time to time that nothing worth knowing can be taught. Theodore  Roosevelt  A  man who has never gone to school may steal from a freight car. But if he has a university education, he may steal the whole railroad. Funny Quotes About Graduation Graduation is a formal event with lots of pomp and circumstance. Seen through the right lens, though, it is pretty funny! Robert OrbenA graduation ceremony is an event where the commencement speaker tells thousands of students dressed in identical caps and gowns that individuality is the key to success. Gary BoldingYour families are extremely proud of you. You cant imagine the sense of relief they are experiencing. This would be a most opportune time to ask for money. Doug LarsonThe trouble with learning from experience is that you never graduate. James DarcyIt was only when I finished the course and left my graduation diploma on the bus that I realized Id become an actor. Garry TrudeauCommencement speeches were invented largely in the belief that outgoing college students should never be released into the world until they have been properly sedated. Robert GoheenIf you feel that you have both feet planted on level ground, then the university has failed you. UnknownThe tassel’s worth the hassle! Erma Bombeck  Graduation day is tough for adults. They go to the ceremony as parents. They come home as contemporaries. After twenty-two years of child-raising, they are unemployed.  Ã‚  Ã‚   Jon StewartThe unfortunate, yet truly exciting thing about your life, is that there is no core curriculum. The entire place is an elective. Bill Watterson  So, what’s it like in the real world? Well, the food is better, but beyond that, I don’t recommend it. Funny Quotes About Succeeding in Life Most commencement speakers have something to say about success in life and the road ahead. Here are some quotes to add a little humor to your sage advice. ProverbYou cannot get to the top by sitting on your bottom. Ed HelmsSo long as your desire to explore is greater than your desire to not screw up, youre on the right track. Frank A. Clark  If you can find a path with no obstacles, it probably doesnt lead anywhere. UnknownAll that stands between the graduate and the top of the ladder is the ladder.  Ã‚  Ã‚  Ã‚   Ellen DeGeneres  Follow your passion, stay true to yourself, never follow someone elses path unless you’re in the woods and you’re lost and you see a path then by all means you should follow that.

Ten Tips for Reporters Who Are Covering Accidents and Natural Disasters

Ten Tips for Reporters Who Are Covering Accidents and Natural Disasters Accidents and disasters – everything from plane and train crashes to earthquakes, tornadoes and tsunamis – are some of the hardest stories to cover. Reporters at the scene must gather information under very difficult circumstances, and produce stories on very tight deadlines. Covering such an event requires all of a reporter’s training and experience. But if you keep in mind the lessons youve learned and the skills youve acquired, covering an accident or a disaster can be a chance to really test yourself as a reporter, and to do some of your best work. So here are 10 tips to keep in mind. 1. Keep Your Cool Disasters are stressful situations. After all, a disaster means something horrible has happened on a very large scale. Many of the people at the scene, especially victims, will be distraught. It’s the reporter’s job in such a situation to keep a cool, clear head. 2. Learn Fast Reporters covering disasters often have to take in a lot of new information very quickly. For instance, you may not know much about planes, but if you’re suddenly called upon to help cover a plane crash, you’re going to have to learn as much as you can – fast. 3. Take Detailed Notes Take detailed notes about everything you learn, including things that seem insignificant. You never know when small details might become critical to your story. 4. Get Plenty of Description Readers will want to know what the scene of the disaster looked like, sounded like, smelled like. Get the sights, sounds and smells in your notes. Think of yourself as a camera, recording every visual detail you can. 5. Find The Officials in Charge In the aftermath of a disaster there will usually be dozens of emergency responders on the scene – firefighters, police, EMTs, and so on. Find the person who’s in charge of the emergency response. That official will have the big-picture overview of what’s happening and will be a valuable source. 6. Get Eyewitness Accounts Information from emergency authorities is great, but you need to also get quotes from people who saw what happened. Eyewitness accounts are invaluable for a disaster story. 7. Interview Survivors – If Possible It’s not always possible to interview survivors of a disaster immediately after the event. Often they’re being treated by EMTs or being debriefed by investigators. But if survivors are available, try your best to interview them. But remember, disaster survivors have just survived a traumatic event. Be tactful and sensitive with your questions and general approach. And if they say they don’t want to talk, respect their wishes. 8. Find The Heroes In nearly every disaster there are heroes who emerge - people who bravely and selflessly jeopardize their own safety in order to help others. Interview them. 9. Get The Numbers Disaster stories are often about numbers - how many people were killed or injured, how much property was destroyed, how fast the plane was traveling, etc. Remember to gather these for your story, but only from reliable sources - the officials in charge at the scene. 10. Remember The Five W’s and the H As you do your reporting, remember what’s critical to any news story – the who, what, where, when, why and how. Keeping those elements in mind will help to ensure that you gather all the information you need for your story. Read about writing disaster stories here. Return to Covering Different Kinds of Live Events

Mark-to-market accounting Assignment Example | Topics and Well Written Essays - 250 words - 1

Mark-to-market accounting - Assignment Example Another benefit for companies of using such accounting treatment is the recording of unrealized gain on mark to market of financial assets e.g. in the case of investment in shares, the unrealized gain would be the difference between the cost price of those shares and the market price of those shares on which it is currently being traded in the stock market. Mark to market accounting is criticized now and then based on the fact that at times it is quite complicated to accurately determine the fair value of a particular asset or liability. The fair value of financial assets is liabilities are based on the expected income or expense in future periods. Uncertain and volatile economic condition can be major hindrance in forecasting such values. 2) For mark to market accounting it is very essential for trading to be in practice as the buyers and sellers are the two factors who determine the fair value of the assets and liabilities. In times financial crises trading is minimal and the markets are destabilized. The companies, during financial crises, have losses to report on in their P&L statements as the fair value of their assets has decreased below their cost price. Recording of such losses erodes the equity of companies which significantly reduces their asset holding capacity. Since every company in the economy practices mark to market accounting, the affect of economic downturn prevails throughout and the business cycle takes a down turn which causes further exacerbation. The banks and financial institution are affected the most as their balance sheet comprises mostly of financial assets. As a result, bankruptcy, large- scale fire-sale of assets and layoffs takes place. 3) During financial turmoil, relaxation in the requirement of mark to market by the regulators can certainly be a boost for the companies facing financial difficulties. Instead of valuing the assets based on the fair value in the market, the company should be allowed to use

The Acute Care Nurse Practitioner,The Certified Nurse Midwife Assignment

The Acute Care Nurse Practitioner,The Certified Nurse Midwife - Assignment Example This phenomenon is driven majorly by a largely ageing nursing population and few numbers of incoming nurses to fill this void. There is a considerable rise in the number of people seeking the cares of these practitioners with healthcare and medical needs, putting considerable strain in the health care system and in the process, necessitating an urgency to curb this shortage. Generally speaking, research upon research has identified four main reasons behind this problem (although there are several minor causes too, that would need to be delved into at hospital and care center levels). These are the ageing practitioner population, declining enrolment, changing work climate (such as lesser pay, increased patient loads, unpalatable work shifts and mandatory overtime, decreased time to provide direct patient care, assignment of non-nursing tasks, poor patient and relatives’ attitudes, skipping meals to attend to work, poor health and safety such as chronic effects of stress and overwork, possible nosocomial infection (such as HIV, Anthrax, Hepatitis, etc.) making nurses feel unsafe at work) and a poor ima ge of nursing in particular (Phillipson, 2009). Some of the solutions that can be used to curb this escalating shortage include conducting recruitment efforts, for example by promoting pursuance of such careers in schools, advertising for vacancies, reducing training period and time it takes for one to become a registered practitioner while not compromising on the quality of training and also by encouraging more men to consider nursing as a career choice. Secondly, there’s need to explore retention efforts by providing opportunities for career advancement, encouraging flexible work schedules, good retirement benefits and by encouraging these practitioners to feel free to be at the forefront in resolving workforce issues and devising solutions for the same. An elaborate emphasis on the

Evening MBA and Online MBA Essay Example for Free

Evening MBA and Online MBA Essay During my undergraduate studies and my work experiences, I have achieved a number of significant accomplishments that have prepared me for the W.P. Carey MBA. As part of my undergraduate studies, I did an internship at Stora Enso’s Wisconsin Rapids paper mill. My capstone project at the mill involved designing and installing an operator information display, which required me to utilize the services of an interdisciplinary team. For my senior project during my undergraduate studies, I was part of the engineering enterprise team, which expanded my knowledge on business and product development. After graduating college, I joined the United States Air Force, which provided me with a wealth of leadership opportunities. I have held several leadership roles both at the Air Force and afterwards in civilian jobs. While in the Air Force, I was given the opportunity to be the squadron physical fitness leader. I was responsible for the physical training of 200+ personnel and their tests. As part of this duty, I designed a special training program for personnel that were not successful with their tests. As such, I was able to effectively and successfully train staff using the training program I had developed. My superiors at the Air Force were instrumental in mentoring my development and leadership skills, and provided me with the opportunities to lead various projects. These experiences pushed me to improve my supervisor abilities. With this knowledge, I have had great success leading small teams of enlisted personnel in various projects and roles. After separating from the Air Force, I transitioned to the civilian world to further develop and strengthen my skill set. During that time I worked for Dynetics and developed test plans for a variety of military projects. Following development, I would lead a small team to run the tests and write up the findings. This experience improved my technical writing and detailed planning skills. Following a move to Phoenix, I accepted a position with General Dynamics. I was involved in supporting different functional areas such as test and development, while at the same time I expanded my knowledge of program management. I am confident that with my academic potential, team-working abilities, innovative spirit, and leadership skills, I will add significant value to the W.P. Carey MBA program. Essay Question #2 How will the W. P. Carey MBA help you achieve your personal and professional goals? Please reference any area of emphasis you plan to pursue and discuss your career goals after the MBA program. During my time in college, I did an internship at a large paper mill. Observing various roles in the company I realized my ideal position required getting a MBA. By the time I graduated from college, I already had some experience in company management through our schools engineering enterprise program. With seven years of experience now, I have gained expertise in technology and leadership. However, my experience has been limited to operating as a team member in an established organization. Now I would like to understand industry from the viewpoint of a project manager. I want to learn how to manage a technical program from conception to implementation. A MBA will provide me these skills through learning modules, case studies, and projects with fellow students and interactions with peers from assorted professional backgrounds. During my MBA studies, I plan on taking the supply chain management area of emphasis. The ability to understand how the pieces integrate into the whole, combined with my pre-MBA experiences, will set me up to be able to excel in roles as the project manager or team lead. To reach my career goals, I need time-proven business knowledge and practical exposure to all areas of business disciplines, such as management fundamentals, marketing, operations, and most importantly, supply chain management that will complement my engineering experience. The W.P. Carey MBA program is my top choice because of its top-ranked Department of Supply Chain Management. Whereas the core courses will give me a good groundwork of business fundamentals, courses such as â€Å"Management of Technology/Innovation and â€Å"Project Management are in my area of interest. W.P. Carey will provide me with the academic foundation and network that I need to realize my career ambitions. I am positive that with my academic potential, group skills, and leadership potential, I will add significant value to any employer. Essay Question #3 Please address any weaknesses in your W. P. Carey MBA application or provide additional information you would like to bring to the attention of the Admissions Committee. Concerns to be addressed may include past academic performance or GPA, work experience and/or GMAT scores. The biggest weakness on my MBA application is my college GPA. When I was an undergraduate student I did not fully appreciate the work level that was required to truly excel in my studies at Michigan Technological University. However, if you take a closer look at my GPA throughout my undergraduate years of study, you can see that that there is progressive improvement from the beginning of the year as I got acclimated. Moreover, there is also a positive trend in my grades from my third year of studies up to graduation. There were two main reasons for this shift in my grades; firstly the classes became more focused and specific, which allowed me to excel in these courses, and secondly, I matured during my course of studies. The improvement in my studies was reflective of the successful completion of the engineer-in-training exam, which was obtained at the end of my undergraduate degree. Even though I vastly improved during my undergraduate program of study, I realized that my GPA would continue to be a deterrent for my future goals. To acquire the necessary discipline and expand my skills and knowledge, I joined the United States Air Force. Upon joining the Air Force, I went to Officer Training School, and learning from my previous mistakes at college, worked exceptionally hard. As such, I excelled and graduated Officer Training School in the top ten percent of my class, earning several honors along the way. My time in the United States Air Force was instrumental in expanding my skills in leadership, self-discipline and planning while implementing the knowledge I had gained as part of my undergraduate study. After the Air Force I worked in several challenging jobs, where I was responsible overseeing multiple projects and personnel. I have excelled in every project I have worked on, and my attitude is vastly different to how it was back in the early years of my degree. My college and work experiences have prepared me for the W.P. Carey MBA. Likewise, my GMAT scores demonstrate my future academic potential should this application be viewed favorably.

The Discovery and Development of Nuclear Technology Essay -- Essays Pa

The Discovery and Development of Nuclear Technology Man has always been interested in how the world around him works. He wondered about the structure of matter,of which his world, as well as our world, is made up. Countless scientists have been pondering that same question ever since the beginning of time. In this paper you will read about just a few of the men and women that broke the ground for the nuclear technology of today. One of the first people to do this was a Greek philosopher named Anaxagoras in five hundred years before Christ. He questioned what would happen if he cut in half a sample of matter, gold in his case, and then half the halves and continue doing this. Anaxagoras’ theory stated that it would be possible to continue the process of halving for infinity. A different Greek, Democritus, disagreed with Anaxagoras and said that there is a point that the gold can no longer be cut in half any smaller. Democritus said that when this occurs, all that is left are tiny particles that were unchangeable and indestructible because there is no power present in the universe that was great enough to destroy or change these particles. He named these tiny particles, which are the building blocks of matter, atoms after the Greek word a-tomos which means not cuttable. Democritus met with some agreement, albeit three hundred years later, from a Roman poet Lucretius who wrote a six volume work of verse entitled "De Rerum Natura." In his work, which literally translates to "The Nature of Things," Lucretius uses the example of animals looking similar to their offspring in order to explain that the atom was unchangeable and indestructible. One person who did not agree with him was Aristotle, a man ... ...means of atom smashing, and in 1932 Earnest Thomas Sinton Walton and John Douglas Cockcroft announced that they had created an artificial means of accelerating atoms to make possible the destruction of larger atoms. Now that it was possible to create this amount of energy it could be used to power homes and destroy entire cities. Man tried to learn about how his world was structured and he succeeded. He discovered that the all matter is made up of atoms. And through years of hard work he was able to harness its energy for the use of man. To Bibliography - Dietz, David. Atomic Science: Bombs and Power. Collier Books, New York, 1962 - Feinberg, J.G. The Story of Atomic Theory and Atomic Energy. Dover Publications Inc., New York, 1960 - Graetzer, Hans. The Discovery of Nuclear Fission. Van Nostrand Reinhold Co., New York, 1971

Chapter 21 Lease Answer Problems

CHAPTER 21 ACCOUNTING FOR LEASES CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Time Range (minutes) 5-10 Number E21-1 Content Operating Lease. (Easy) Annual rental payments, no renewable option clause, executory costs. Lessee's journal entries to record agreement, payments, expenses. Capital Lease. (Moderate) Calculation of rental payments made at end of year. Table summarizing lease payments, interest expense. Journal entries. IFRS differences. Capital Lease. (Moderate) Payments made at beginning of year. Table summarizing lease payments, interest expense. Journal entries.Direct Financing Lease. (Moderate) Calculation of rental receipts, made at end of year. Table summarizing rental receipts, interest revenue. Journal entries. Direct Financing Lease. (Easy) Journal entries to record contract, first rental receipt. Direct Financing Lease / Capital Lease. (Moderate) Table summarizing lease and interest payments. Journal entries for lessor and lessee. Sales-Type Lease. (Moderate) Payments made at end of year. Calculation of selling price (fair value). Table summarizing lease receipts, interest revenue. Journal entries. Sales-Type Lease. Moderate) Payments made at beginning of year. Calculation of selling price (fair value). Table summarizing lease receipts, interest revenue. Journal entries. Sales-Type Lease / Capital Lease. (Moderate) Computation of lease payments. Journal entries for lessor and lessee. Operating Lease / Sales-Type Lease. (Moderate) Accounted for as operating, should have been sales-type. Computation of effect on net income. Operating Lease. (Easy) Computation of income derived from lease by lessor, amount of rent expense for lessee. E21-2 15-25 E21-3 10-15 E21-4 10-15 E21-5 E21-6 5-10 10-15E21-7 10-15 E21-8 10-15 E21-9 E21-10 10-15 10-20 E21-11 10-15 21-1 Number E21-12 Content Determining Type of Lease. (Moderate) Title passes at leaseend, collectibility reasonably assured, no uncertainties surrounding costs to be incurred. Table summarizing recei pts, revenue. Lessor's journal entries. Guaranteed and Unguaranteed Residual Values. (Moderate) Calculate residual value. Determine classification of the lease depending on the type of residual value. (Appendix). Sales-Leaseback. (Easy) Calculation of lease payments. Lessor's journal entries to record sale and agreement.Description of how to treat the gain by the lessee. Determining Type of Lease. (Moderate) No bargain purchase option, no agreement to transfer ownership at lease-end, no uncertainties surrounding costs to be incurred. Journal entries for lessee and lessor. Guaranteed residual value. Determining Type of Lease. (Moderate) Lessor's viewpoint. Option to buy, collectibility reasonably assured, no uncertainties surrounding costs. Journal entries, disclosure requirements. Capital Lease. (Moderate) Calculation of rental payments. Table summarizing lease payments, interest expense.Journal entries, partial balance sheet. IFRS differences. Direct Financing Lease. (Challenging) Table summarizing lease receipts, interest revenue. Explanation of lease classification. Journal entries. Partial balance sheets. Comprehensive: Direct Financing and Capital Lease. (Challenging) Computation of rental amounts. Table summarizing lease and interest receipts. Analysis of lessee's lease classification. Journal entries for lessor and lessee. Comparative financial statement presentation. Direct Financing Lease. (Moderate) Unguaranteed residual value. Computation of rental amounts.Table summarizing lease and interest receipts. Journal entries. Sales-Type Lease. (Challenging) Calculation of implied selling price. Table summarizing lease receipts, interest revenue. Explanation of lease classification. Journal entries, partial balance sheet. Various Lease Issues. (Challenging) Journal entries for lessee and lessor to record all lease transactions. Various Lease Issues. (Challenging) Computation of annual rentals if payable at beginning of year, at end of year. Table. Journal e ntries for lessee and lessor. Partial balance sheet disclosures. 21-2Time Range (minutes) 15-20 E21-13 15-25 E21-14 15-20 P21-1 30-40 P21-2 25-35 P21-3 30-50 P21-4 35-50 P21-5 45-60 P21-6 30-40 P21-7 30-45 P21-8 P21-9 30-45 45-60 Number P21-10 Content Initial Direct Costs. (Moderate) Analysis for various lease classifications. Determination of lessor's lease classification. Discussion of lessor's journal entries. Various Lease Issues. (Challenging) Classification of lease for lessee, for lessor. Option to buy, collectibility reasonably assured, no uncertainties. Lessor journal entries. Accounting for a change in residual value. Accounting for Leases. Challenging) Journal entries to record the lease for both the lessee and lessor. (AICPA adapted). Lessor's Income Statement. (Challenging) Preparation of lessor's income statement, including sales-type and operating lease as well as long-term construction contracts. (Appendix). Determining Types of Leases. (Moderate) For lessee, for les sor. Lease of land. No bargain purchase option, collectibility reasonably assured, no uncertainties surrounding costs. (Appendix). Sales-Leaseback. (Moderate) Classification of lease by lessee. Journal entries for both lessee and lessor. Time Range (minutes) 20-30P21-11 30-45 P21-12 P21-13 30-45 50-60 P21-14 10-20 P21-15 20-30 ANSWERS TO QUESTIONS Q21-1 Q21-2 GAAP provides a common set of criteria for determining the classification of leases by both the lessee and the lessor. The advantages of leasing for the lessee include: 1. Financing benefits: a. b. c. The lease provides 100% financing so that the lessee acquires the asset without having to make a down payment. The lease contract may contain fewer restrictive provisions for financing. The leasing arrangement creates a claim that is against only the leased equipment and not against all assets. 2.Risk benefit: The lease may reduce the risk of obsolescence for the lessee. 3. Tax benefit: For income tax purposes, the lessee, through deduction of the lease payment, can write off the full cost of an asset. 4. Financial reporting benefit: For operating leases, the lease does not add an asset or a liability to the lessee's balance sheet. 5. Billing benefit: For certain contract-type work, leasing may permit higher charges because interest on borrowed money to purchase assets is not usually allowed as a contract charge, whereas the interest element contained in the rental payments is allowed as a contract charge. 1-3 Q21-3 By structuring the terms of the lease so that it qualifies as an operating lease, the lessee avoids having to include the asset and the liability in the balance sheet. Exclusion of these items creates more favorable financial ratios, such as rate of return on investment, the current ratio, and the ratio of debt to equity. This, in turn, may increase the borrowing capacity of the lessee. The lessee is practicing â€Å"off balance sheet financing. † A capital lease, on the other hand, would appear in the financial statements and affect financial ratios.It may impede lessee borrowing efforts. a. A lease is â€Å"an agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets), usually for a stated period of time. † b. A sales-type lease for the lessor is a lease that meets any one of the Column A criteria and both of the Column B criteria in Exhibit 20-2, and results in a manufacturer's or dealer's profit. c. A direct financing lease for the lessor is a lease that meets any one of the Column A criteria and both of the Column B criteria, and does not result in a manufacturer's or dealer's profit. d.A sale-leaseback transaction is a lease transaction in which the owner of an asset sells it, and then immediately leases it back from the buyer. e. An operating lease for the lessee is a lease that meets none of the Column A criteria. For the lessor, it is a lease that meets none of the Column A criteria, and fails at least one of t he Column B criteria. f. A leveraged lease is a three-party lease in which one party (the equity participant) buys or manufactures an asset and leases it to another party (the asset user), with a third party (the debt participant) providing nonrecourse financing for the transaction.Q21-4 Q21-5 a. Inception of lease is the date of the lease agreement; or, if the leased property is being constructed, the date that the title passes to the lessor. b. Bargain purchase option is a provision allowing the lessee to purchase the leased property at the end of the life of the lease at a price so favorable that the exercise of the option appears, at the inception of the lease, to be reasonably assured. c. Unguaranteed residual value is the portion of the estimated residual value of the leased property that is not guaranteed by the lessee or by a third party unrelated to the lessor. . Implicit interest rate is the interest (discount) rate that, when applied on a present value basis to the sum of the minimum lease payments and any unguaranteed residual value accruing to the lessor, causes the resulting present value to be equal to the net investment of the leased property to the lessor. 21-4 Q21-5 (continued) e. Initial direct costs are costs incurred by the lessor to originate a lease that (1) result directly from acquiring that lease and (2) would not have been incurred had that leasing transaction not occurred.They also include costs directly related to specified activities performed by the lessor for that lease, such as evaluating the lessee's financial condition, negotiating lease terms, preparing and processing lease documents, and closing the transaction. Q21-6 If there is a bargain purchase option, the components of the minimum lease payments are: (1) the minimum periodic rental payment required by the lease over the lease term, and (2) the payment required by the bargain purchase option.Otherwise, they include (1) the minimum periodic rental payments plus (2) any g uarantee by the lessee of the residual value, and (3) any payments upon failure to renew or extend the lease. The criteria for a capital lease are: 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is 75% or more of the estimated economic life of the asset 4. Present value of minimum lease payments is 90% or more of fair value of the leased property to the lessor One (or more) of these criteria must be met for the lessee to classify a lease as a capital lease.Q21-8 Under an operating lease, the lessee records each rental payment as rent expense; no amount is capitalized. The lessor records each rental receipt as rent revenue. The leased asset is retained on the lessor's books and is depreciated by the lessor. Under a capital lease, the lessee records the present value of the minimum lease payments as both an asset and a liability. The lessee recognizes a portion of each payment as interest expense to produce a constant rate of interest on the book val ue at the beginning of the period, and recognizes the remainder of the payment as a reduction of the lease obligation.The lessee depreciates the asset over the term of the lease, unless there is a bargain purchase option or transfer of ownership at the end of the lease, in which case the depreciation period is the economic life of the asset. The two additional criteria for a sales-type lease are: 1. Collectibility of the minimum lease payments is reasonably assured. 2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. In addition, the lease must result in a manufacturer's or dealer's profit or loss.Q21-7 Q21-9 Q21-10 21-5 Q21-11 The basic difference in accounting for a sales-type lease is that the carrying value of the asset is charged to cost of asset leased (expense), and the present value of the minimum lease payments is recorded as the amount of the sale. In a direct financing lease, no sales or expense is re cognized. Instead, the asset is removed from the books and the difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue.The net investment in a sales type lease is accounted for in a similar manner to that for a direct financing lease. The FASB states that the interest revenue from a lease is recognized so as to yield a constant return on net investment. Compound interest techniques can be used to compute this return if the following are known: (a) the amount of the lease payment, (b) the cost or fair value of the lease, and (c) the number of periods of the lease. Multiplying the interest rate by the amount of the net investment at the beginning of the year results in a constant return on investment.Q21-12 Q21-13 Q21-14 Owens Company records the lease as a capital lease due to the bargain purchase option, and depreciates the asset over its estimated economic life. The original lease was a capital lease and McFarland C ompany is relieved of its obligation. McFarland removes the equipment from its books, and recognizes the gain when the new lease transaction takes place, that is, during the current year. a. Lessee's disclosure: 1. For all leases, a general description of the leasing arrangement 2.For operating leases having lease terms in excess of one year: (a) Future minimum rental payments required as of the date of the latest balance sheet presented, for each of the 5 succeeding fiscal years and in total The total of minimum rentals to be received in the future under noncancellable subleases Q21-15 (b) 3. For all operating leases, rental expense for each period 4. For capital leases: (a) (b) The gross amount of assets recorded under capital leases by major classes according to nature or function Future minimum lease payments for each of the 5 succeeding fiscal years and in total 21-6 Q21-15 (continued) a. 4. continued) (c) (d) The total of minimum sublease rentals to be received in the future u nder noncancellable subleases Assets, accumulated depreciation, depreciation expense, and liabilities b. Lessor's disclosure: 1. A general description of all leasing arrangements 2. For operating leases: (a) The cost and carrying amount, if different, of property on lease or held for leasing by major classes of property, and the amount of the total accumulated depreciation Minimum future rentals on noncancellable leases for each of the 5 succeeding fiscal years and in total Total contingent rentals included in income for each period b) (c) 3. For direct financing and sales-type leases: (a) The components of the net investment in direct financing and sales-type leases including: (1) (2) (3) (4) (b) (c) Q21-16 Q21-17 The future minimum lease payments to be received Including any profit thereon The unguaranteed residual values accruing to the benefit of the lessor For direct financing leases only, initial direct costs Unearned income Future minimum lease payments to be received for eac h of the 5 succeeding fiscal years Total contingent rentals included in income for each periodIFRS classify leases as either finance leases or operating leases. A finance lease is equivalent to a capital lease under U. S. GAAP. In general, IFRS provide a series of indicators that, individually or in combination, normally lead a lease to be classified as a finance lease. U. S. GAAP contains a series of four criteria which, if any one is met, will result in the classification of a lease as a capital lease. While these indicators and criteria are similar, the IFRS indicators are less detailed and require more judgment in classifying leases. Specifically, both IFRS and U.S. GAAP treat leases that transfer title from the lessor to the lessee and leases that contain bargain purchase options as finance (capital) leases. However, if an asset is leased for the major part of an asset’s economic life, IFRS consider this an indicator of a finance lease. IFRS do not define what is meant b y â€Å"substantially all† of the asset’s fair value while U. S. GAAP sets a 90% threshold. 21-7 Q21-18 The primary accounting issue in accounting for a sales-leaseback transaction from the seller-lessee's viewpoint is the recognition of a profit or a loss on the sale.Any profit or loss is deferred and amortized in proportion to the amortization of the leased asset, if a capital lease, or in proportion to the rental payments, if an operating lease. If the fair value of the property is less than its undepreciated cost at the time of the transaction, a loss is recognized immediately on the difference between the undepreciated cost and the fair value. The fact that there are three or four parties (equity participant, asset user, debt participant, and also a manufacturer if the equity participant does not make the product) distinguishes a leveraged lease from other leases.For the lessee there are no new accounting issues. The lessee classifies and accounts for the lease as for a nonleveraged lease. Q21-19 ANSWERS TO MULTIPLE CHOICE 1. 2. a b 3. 4. d b 5. 6. a c 7. 8. b c 9. 10. a d 21-8 SOLUTIONS TO REVIEW EXERCISES RE21-1 1. 2. 3. 4. Classification Criteria Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of minimum lease payments is 90% or more of fair value Criteria Met? No No No No It is 40% (8 ? 20 years) It is 50% ($50,000 ? $100,000) Remarks Therefore, this lease is an operating lease.It does not meet any of the criteria. RE21-2 Rent Expense Cash 10,000 10,000 RE21-3 1. 2. 3. 4. Classification Criteria Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of minimum lease payments is 90% or more of fair value Criteria Met? No No No Yes It is 71% (5 ? 7 years) It is 100% ($250,000 ? $250,000) Remarks Therefore, this lease is a capital lease. It meets one of the four criteria. RE21-4 Jan, 1 Leased Equipment Capit al Lease Obligation Dec. 31 Interest Expense (10% x $250,000) Capital Lease Obligation ($65,949. 7 – $25,000) Cash 250,000. 00 250,000. 00 25,000. 00 40,949. 37 65,949. 37 21-9 RE21-4 (continued) Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 50,000. 00* 50,000. 00 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $50,000 ($250,000 ? 5). RE21-5 Jan, 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Dec. 31 Interest Expense Accrued Interest on Capital Lease Obligation *($275,000 – $65,949. 37) x 0. 0 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 55,000. 00* 55,000. 00 275,000. 00 65,949. 37 275,000. 00 65,949. 57 20,905. 06* 20,905. 06 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $55,000 ($275,000 ? 5). RE21-6 PV of lease payments = $25,000 x 6. 710081 = PV of single sum of $4,000 = $4,000 x 0. 463193 = Present value of minimum lease payments RE21-7 PV of lease payments = $25,000 x 6. 710081 = PV of single sum of $20,000 = $20,000 x 0. 63193 = Present value of minimum lease payments RE21-8 (a) (b) (c) Sales-type lease Direct financing lease Operating lease $167,752 9,264 $177,016 $167,752 1,853 $169,605 21-10 RE21-9 Jan, 1 Lease Receivable ($65,949. 37 x 5) Equipment Unearned Interest: Leases Dec. 31 Cash Lease Receivable Unearned Interest: Leases (0. 10 x $250,000) Interest Revenue: Leases *($329,746. 85 – $79,746. 85) x 0. 10 RE21-10 Jan, 1 Lease Receivable Sales Revenue Unearned Interest: Leases Cost of Asset Leased Merchandise Inventory (or Equipment Held for Lease) Dec. 31 Cash Lease Receivable Unearned Interest: Leases (0. 0 x $250,000) Interest Revenue: Lease s *($329,746. 85 – $79,746. 85) x 0. 10 329,746. 85 329,746. 85 250,000. 00 79,746. 85 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 250,000. 00 79,746. 85 200,000. 00 200,000. 00 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 21-11 SOLUTIONS TO EXERCISES Note to Instructor: Although students may use their calculators or software to make the various present value calculations, any present value calculations in the following solutions to exercises and problems are based on the factors from the appropriate tables in the TVM Module of the book. E21-1 Criteria 1. . 3. 4. Transfer of ownership at end of lease Bargain purchase option 1. Determination of Lease Classification Met No No No Remarks Reverts to lessor Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value 20% ( 10 year lease life ) 50 year economic life) No PV is $485,098. 79* or 24% of the fair value *PV = (Annual lease payment – Annual executory costs) x PV factor fo r 10 payments at 14% = ($100,000 – $7,000) x 5. 216116 = $485,098. 79 The lease is an operating lease, since none of the above criteria are met. 2. 2010 Dec. 2011 Dec. E21-2 1. . 31 Rent Expense Cash Rent Expense Cash 100,000 100,000 31 100,000 100,000 1. Determination of Lease Classification Criteria Transfer of ownership at end of lease Bargain purchase option Met No No Remarks 21-12 E21-2 (continued) 3. 4. Criteria Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met Yes Remarks 100% Yes 100% The lease is a capital lease, since at least one of the Column A criteria is met. 2. Present value = Lease payments x PV factor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 3. 1) Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 aColumn Summary of Lease Payments and Interest Expense for the Sax Company (2) Lease Payment Required $ 83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) (4) (5) Interest Expense Reduction at 12% on of Lease Balance of Obligation Balancea Obligationb Obligationc $300,000. 00 $36,000. 00 $47,222. 92 252,777. 08 30,333. 25 52,889. 67 199,887. 41 23,986. 49 59,236. 43 140,650. 98 16,878. 12 66,344. 80 74,306. 18 8,916. 74 74,306. 18 -0- 5 at beginning of year x 12%. – Column 3. alance – Column 4. 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Interest Expense (12% x $300,000) Cash 300,000 47,222. 92 36,000. 00 b$83,222. 92 cPrevious 4. 2010 Jan. Dec. 300,000 31 83,222. 92 21-13 E21-2 (continued) 4. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000. 00 ? 5) Capital Lease Obligation Interest Expense (12% x $252,777. 08) Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 60,000 60,000 52,889. 67 30,333. 25 2011 Dec. 31 83,222. 92 31 60,000 60,000 5. Under U. S.GAAP, the Sax Company would classify the lease as an operating lease. The lease does not meet either of the first two criteria. The third criterion is not met since the 3-year lease life is 60% of the economic life of 5 years. The fourth criterion is also not met since the present value of the lease payments of $264,201 ($110,000 x 2. 401831) is 88. 1% of the fair value of $300,000. Therefore, the lease would be an operating lease. Under IFRS, the Sax Company would have to exercise judgment but it is likely that it would classify the lease as a â€Å"finance† lease since two of the indicators would probably be considered to be met.The present value of 88. 1% is probably â€Å"substantially all† of the fair value of the asset. Also, it could be argued that 60% is the †major part† of the economic life of the asset. E21-3 1. Application of Criteria for Determination of Lease Classification from Lessee's Viewpoint Group I Criteria 1. 2. 3. 4. Transfe r of ownership Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value* Met No No Yes 100% Remarks Yes 100% = $20,000 x PV factor for 4 payments in advance at 12% = $20,000 x 3. 401831 = $68,036. 62 21-14 *PV of minimum lease paymentsE21-3 (continued) 1. (continued) Since the lease meets at least one of the Column A criteria, it is a capital lease. 2. (1) Summary of Lease Payments and Interest Expense for the Adden Company (2) (3) (4) Balance of Capital Lease Obligation $68,036. 62 48,036. 62a 53,801. 01c 33,801. 01 37,857. 13 17,857. 13 20,000. 00 0 Date January 1, 2010 January 1, 2010 December 31, 2010 January 1, 2011 December 31, 2011 January 1, 2012 December 31, 2012 January 1, 2013 a$68,036. 62 b$48,036. 62 c$48,036. 62 dAdjusted Interest at 12% Annual Lease on Unpaid Payment Obligation Before the initial payment $20,000. 00 0 0 $5,764. 9b 0 20,000. 00 4,056. 12 0 0 20,000. 00 2,142. 87d 0 0 20,000. 00 â₠¬â€œ $20,000 x 12% + $5,764. 39 for $0. 01 rounding error 1 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Interest Expense Accrued Interest on Capital Lease Obligation Insurance Expense Property Tax Expense Cash 68,036. 62 20,000 5,764. 39 5,764. 39 1,500 6,000 3. 2010 Jan. 68,036. 62 20,000 Dec. 31 31 7,500 21-15 E21-3 (continued) 3. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($68,036. 62 ? 4) Accrued Interest on Capital Lease Obligation Capital Lease Obligation CashInterest Expense Accrued Interest on Capital Lease Obligation Insurance Expense Property Tax Expense Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 17,009. 16 17,009. 16 2011 Jan. 1 5,764. 39 14,235. 61 4,056. 12 20,000. 00 Dec. 31 4,056. 12 1,300 5,500 31 6,800 31 17,009. 16 17,009. 16 E21-4 1. Rental receipt = = Fair value of assets PV factor for 8 receipts at 14% $500,000 4. 638864 = $107,785 . 01 21-16 E21-4 (continued) 2. Summary of Lease Payments Received and Interest Revenue Earned by the Rexon Company (1) (2) Annual Lease Payment Received $107,785. 01 107,785. 01 107,785. 01 107,785. 1 107,785. 01 107,785. 01 107,785. 01 107,785. 01 (3) Interest Revenue at 14% on Net Investment $70,000. 00a 64,710. 10 58,679. 61 51,804. 86 43,967. 63 35,033. 20 24,847. 95 13,236. 73f (4) Amount of Net Investment Recovered $37,785. 01b 43,074. 91 49,105. 40 55,980. 15 63,817. 38 72,751. 81 82,937. 06 94,548. 28 (5) Lease Receivable $862,280. 08 754,495. 07c 646,710. 06 538,925. 05 431,140. 04 323,355. 03 215,570. 02 107,785. 01 -0(6) Unearned Interest: Leases $362,280. 08 292,280. 08d 227,569. 98 168,890. 37 117,085. 51 73,117. 88 38,084. 68 13,236. 73 -0(7) Net Investment $500,000. 00 462,214. 99e 419,140. 08 370,034. 8 314,054. 53 250,237. 15 177,485. 34 94,548. 28 -0- Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 Dec ember 31, 2015 December 31, 2016 December 31, 2017 a$500,000 21-17 x 14% – $70,000. 00 – $107,785. 01 – $70,000. 00 b$107,785. 01 c$862,280. 08 d$362,280. 08 e$500,000 fAdjusted – $37,785. 01 for $0. 03 rounding error 21-17 E21-4 (continued) 3. 2010 Jan. 1 Lease Receivable Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 862,280. 8 500,000. 00 362,280. 08 107,785. 01 70,000 Dec. 31 31 107,785. 01 70,000 2011 Dec. 31 31 107,785. 01 64,710. 10 107,785. 01 64,710. 10 E21-5 Proof that the yield is 1%: PVn=48, i=1% is not given in text; it is 37. 973959; thus PV of lease payments received = Monthly lease payment x PV factor for 48 receipts at 1% = $1,600 x 37. 973959 = $60,758 (This is not required for the problem) 2010 Jan. 2 Lease Receivable Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Int erest Revenue: Leases [1% x ($76,800 – $16,042)], (rounded) 76,800 0,758 16,042 1,600 31 1,600 31 608 608 21-18 E21-6 1. Annual lease payment = Cost of the equipmet PV factor for 5 years in advance at 14% = $30,000 3. 913712 = $7,665. 36 Summary Table (1) Lessee Company (2) Lease Payment Required Lease Rental Collected (3) Interest at 14% on Unpaid Obligation Interest at 14% on Net Investment (4) Balance of Lease Obligation Net Investmenta Lessor Company Date January 1, 2010 January 1, 2010 $7,665. 36 December 31, 2010 0 January 1, 2011 7,665. 36 December 31, 2011 0 January 1, 2012 7,665. 36 December 31, 2012 0 January 1, 2013 7,665. 6 December 31, 2013 0 January 1, 2014 7,665. 36 aPrevious balance – Column 2 + Column 3 b$22,334. 64 cAdjusted 0 $3,126. 85b 0 2,491. 46 0 1,767. 11 0 941. 38c 0 $30,000. 00 22,334. 64 25,461. 49 17,796. 13 20,287. 59 12,622. 23 14,389. 34 6,723. 98 7,665. 36 0 x 14% for $0. 02 rounding error 21-19 E21-6 (continued) Date 01/01/10 12/31/10 12/31/11 12/31/12 12/31/13 1$7,665. 36 Lease Receivable $38,326. 801 30,661. 44 22,996. 08 15,330. 72 7,665. 36 x5 – $30,000. 00 – $3,126. 85 – Unearned Net = Interest: Leases Investment $8,326. 802 5,199. 953 2,708. 49 941. 38 0 $30,000. 00 25,461. 9 20,287. 59 14,389. 34 7,665. 36 2$38,326. 80 3$8,326. 80 2. Lessor Leasing Company: 2010 Jan. 1 Lease Receivable ($7,665. 36 x 5) Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 38,326. 80 30,000. 00 8,326. 80 7,665. 36 3,126. 85 1 Dec. 31 7,665. 36 3,126. 85 Lessee Company: 2010 Jan. 1 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash 30,000 7,665. 36 30,000 7,665. 36 21-20 E21-6 (continued) 2. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($30,000 ? ) Interest Expense Accrued Interest on Capital Lease Obligation Executory Costs (Expenses) Cash 6,000 6,000 3,126. 85 3,126. 85 500 500 31 31 E21-7 1. Selling price (fair value and the net investment) = $50,000 (PVn = 4, i = 12%) = $50,000 x 3. 037349 = $151,867. 45 2. Summary of lease receipts and interest revenue: Information needed to prepare table: Gross investment = Annual lease payment received x Number of payments = $50,000 x 4 = $200,000 Initial PV of the investment: PV of lease payments (see 1) = $151,867. 45 Unearned interest revenue = Gross investment – Initial PV of investment = $200,000 – $151,867. 5 = $48,132. 55 = $151,867. 45 = $130,000. 00 Sales price = PV of minimum lease payments Cost of asset leased = Cost of equipment 21-21 E21-7 (continued) 2. (continued) Gross profit = Sales price – Cost of asset leased = $151,867. 45 – $130,000. 00 = $21,867. 45 (Table follows Requirement 3) 3. 2010 Jan. 1 Lease Receivable Sales Unearned Interest: Leases Cost of Asset Leased Equipment Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Recei vable Unearned Interest: Leases Interest Revenue: Leases 200,000. 00 151,867. 45 48,132. 55 130,000. 00 50,000 18,224. 09 1 Dec. 31 31 2011 Dec. 30,000. 00 50,000 18,224. 09 31 31 50,000 14,410. 98 50,000 14,410. 98 21-22 E21-7 (continued) 2. Summary of Lease Payments Received and Interest Revenue Earned by the Berne Company (1) (2) Annual Lease Payment Received $50,000 50,000 50,000 50,000 (3) Interest Revenue at 12% on Net Investment $18,224. 09a 14,410. 98 10,140. 30 5,357. 18f (4) Amount of Net Investment Recovered $31,775. 91b 35,589. 02 39,859. 70 44,642. 82 (5) Lease Receivable $200,000 150,000c 100,000 50,000 -0(6) Unearned Interest: Leases $48,132. 55 29,908. 46d 15,497. 48 5,357. 18 -0(7) Net Investment $151,867. 45 120,091. 54e 84,502. 52 44,642. 2 -0- Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 a$151,867. 45 b$50,000 21-23 x 0. 12 – $18,224. 09 – $50,000 – $18,224. 09 – $31,775. 91 c$200,000 d$4 8,132. 55 e$151,867. 45 fAdjusted for $0. 04 rounding error 21-23 E21-8 1. Selling price (fair value) = $100,000 (PV in advance) n = 5, i = 14% = $100,000 (3. 913712) = $391,371. 20 2. Summary of lease payments received and interest revenue: Information needed to prepare table: Gross investment 20-24 = = = (Annual lease payment received x Number of payments) + Unguaranteed residual value ($100,000 x 5) + $20,000 $520,000Initial present value of the investment: PV of lease payments (see part 1) PV of unguaranteed residual value: $20,000 x PV of a single sum for 5 years at 14%: $20,000 x 0. 519369 Total initial PV (this is also the net investment) Unearned interest: leases $391,371. 20 10,387. 38 $401,758. 58 = Gross investment – Initial PV of the investment = $520,000. 00 – $401,758. 58 = $118,241. 42 Sales price = = Present value of lease payments $391,371. 20 (see part 1) = Cost of asset – PV of the unguaranteed residual value = $313,000. 00 – $10,387. 3 8 = $302,612. 62 Cost of asset leased 21-24 E21-8 (continued) 2. continued) Gross profit = = = Sales price – Cost of asset leased $391,371. 20 – $302,612. 62 $ 88,758. 58 Summary of Lease Payments Received and Interest Revenue Earned by the Edom Company (1) (2) Annual Lease Payments Received $100,000. 00 100,000. 00 100,000. 00 100,000. 00 100,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $520,000. 00a 420,000. 00 320,000. 00 220,000. 00 120,000. 00 20,000. 00 (5) Unearned Interest: Leases $118,241. 42b 75,995. 22 41,834. 55 16,891. 39 2,456. 18 0 (6) Net Investment $401,758. 58 301,758. 58 344,004. 78d 244,004. 78 278,165. 45 178,165. 45 203,108. 61 103,108. 61 117,543. 2 17,543. 82 20,000. 00f Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 a($100,000 b$520,000 $42,246. 20c 34,160. 67 24,943. 16 14,435. 21 2,456. 18e x 5) + $20,000 x 1 4% + $42,246. 20, or $420,000 – $75,995. 22 residual value Lease Receivable Cost of Asset Leased Sales Equipment (or Inventory) Unearned Interest: Leases 520,000. 00 302,612. 62 – $401,758. 58 c$301,758. 58 d$301,758. 58 eAdjusted for $0. 05 rounding error fUnguaranteed 3. 2010 Jan. 1 391,371. 20 313,000. 00 118,241. 42 21-25 E21-8 (continued) 3. (continued) Jan. Dec. 011 Jan. Dec. E21-9 Summary Table for First 3 Months (1) Bullard Company: Month Anson Company: Month Beginning of 1 Beginning of 1 End of 1 Beginning of 2 End of 2 Beginning of 3 End of 3 (2) Lease Payment Required (3) Interest Expense (4) Balance of Lease Obligation 1 31 Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 100,000 42,246. 20 100,000 42,246. 20 1 31 100,000 34,160. 67 100,000 34,160. 67 Lease Receipt $2,000 0 2,000 0 2,000 0 Interest Revenue 0 $588b 0 574 0 560 Net Investmenta $60,817 58,817 59,40 5c 57,405 57,979 55,979 56,539 1-26 E21-9 (continued) Receivable $70,0001 68,000 66,000 64,000 1($2,000 2$58,817 b1% aLease – Unearned = Interest: Leases $9,183 8,595 8,021 7,461 Net Investment $60,8172 59,405 57,979 56,539 x 35) + $2,000 + $588 Lease Receivable Sales ($58,817 + $2,000) Unearned Interest: Leases ($72,000 – $60,817) Cost of Asset Leased Merchandise Inventory 72,000 60,817 11,183 50,000 2,000 588 2,000 574 2,000 560 50,000 2,000 588 2,000 574 2,000 560 x $58,817 c$58,817 1. At inception Initial receipt At end of 1st month Cash Lease Receivable Unearned Interest: Leases Interest Revenue: LeasesSecond Cash Installment Lease Receivable At end of Unearned Interest: Leases 2nd month Interest Revenue: Leases Third Cash installment Lease Receivable At end of 3rd month Unearned Interest: Leases Interest Revenue: Leases 21-27 E21-9 (continued) 2. Computation of Lessee's Obligation Using the Implicit Interest Rate PV of lease payments = $ 2,000 + PV of remaining 3 5 payments of $2,000 each at 1% = $ 2,000 + $58,817 = $60,817* *Note: By definition, the present value of the lease payments equals the initial payment plus the present value of the remaining lease payments, since the initial payment is at the beginning of the period.At inception Initial payment At end of 1st month Leased Equipment Capital Leases Obligation Capital Lease Obligation Cash Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($60,817 ? 36) Second Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of Interest Expense 2nd month Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 60,817 2,000 588 588 1,689 1,689 588 1,412 574 574 1,689 1,689 60,817 2,000 ,000 21-28 E21-9 (continued) 2. (continued) Third Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of 3rd month Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment E21-10 Computation of the effect on income before income taxes using the sales-type lease method Sales = PV of lease payments receivable = (PV factor for 8 payments in advance at 12%) x $60,000 = 5. 563757 x $60,000 = $333,825 Cost of asset leased = = Cost of the property $275,000 574 1,426 560 560 1,689 1,689 ,000 21-29 E21-10 (continued) Interest revenue: leases = 12% x [(Lease receivable – Initial payment) Unearned interest: leases] = 12% x [($60,000 x 8) – $60,000) – (Lease rec. – Sales)] = 12% x ($420,000 – $146,175) = $32,859 Incremental effect on income before income taxes Sales Less: Cost of asset leased Gross margin Add: Interest revenue Incremental revenue recognized $333,825 (275,000) $ 58,825 32,859 $ 91,684 Computation of the effect on income before in come taxes using the operating lease method Rental revenue Depreciation expense = $60,000. 0 = = Cost – Residual Value Economic life $275,000 – $0 8 = $34,375 Incremental effect on income before income taxes Rental revenue $60,000 Less: Depreciation expense (34,375) $25,625 Effect on income before income taxes Sales-type lease income Operating lease income Income before income taxes $91,684 (25,625) $66,059 understated 21-30 E21-11 1. Computation of Income Before Income Taxes Derived by Reuben Company for Year Ended December 31, 2010 Rental revenue Maintenance expense Depreciation expense Income before income taxes *10/12 x $180,000 #$900,000 150,000* (20,000) (90,000)# $ 40,000 ? 10 (It should be depreciated for a full year) 2. Rent expense = 10/12 x $180,000 = $150,000 E21-12 1. Application of Criteria for Determination of Lease Classification from Lessor's Viewpoint Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met Yes No Y es 80% ( Remarks Lease term is 75% or more of economic life 4 year lease life ) 5 year economic life 4. Present value of lease payments is 90% or more of fair value Column B Criteria 1. Collectibility assured 2.No uncertainties Yes Present value is $8,400, or 100% of the fair value Yes Yes Since the lease meets at least one of the Column A criteria and both of the Column B criteria, and there is no dealer's profit (PV of lease payments – Cost of car = $8,400 – $8,400 = $0), the transaction should be classified as a direct financing lease. 21-31 E21-12 (continued) 2. Summary of lease payments received and interest revenue: Computation of amount of lease receipts: Yearly lease receipt = Cost of the car PV factor for 4 payments at 10% $8,400 3. 169865 = $2,649. 96 (Table follows Requirement 3) 3. 2010 Jan. 1 1 Automobile Held for Lease Cash Lease Receivable Automobile Held for Lease Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue : Leases (from table) Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases (from table) 8,400. 00 10,599. 84 8,400. 00 8,400. 00 2,199. 84 2,649. 96 Dec. 31 31 2,649. 96 840. 00 840. 00 2,649. 96 659. 00 659. 00 2011 Dec. 31 31 2,649. 96 21-32 E21-12 (continued) 2.Summary of Lease Payments Received and Interest Revenue Earned by the Ravis Rent-A-Car Company (by Interest Method) (1) (2) Annual Lease Payments Received $2,649. 96 2,649. 96 2,649. 96 2,649. 96 (3) Interest Revenue at 10% on Net Investment $840. 00a 659. 00 459. 90 240. 94f (4) Amount of Net Investment Recovered $1,809. 96b 1,990. 96 2,190. 05 2,409. 02 (5) Lease Receivable $10,599. 84 7,949. 88c 5,299. 92 2,649. 96 -0(6) Unearned Interest: Leases $2,199. 84 1,359. 84d 700. 84 240. 94 -0(7) Net Investment $8,400. 00 6,590. 04e 4,599. 08 2,409. 02Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 a$8,400. 00 b$2,649. 96 21-33 x 10% – $840. 00 – $2 ,649. 96 – $840. 00 – $1,809. 96 c$10,599. 84 d$2,199. 84 e$8,400. 00 fAdjusted for $0. 04 rounding error 21-33 E21-13 1. Present value of lease payments = $10,000 x PV factor for 6 payments at 10% = $10,000 x 4. 355261 = $43,552 (rounded down for simplicity) = $50,000 fair value of the machine – $43,552 = $6,448 = $6,448 x FV of 1 factor for 6 periods at 10% = $6,448 x 1. 771561 = $11,421 (rounded) Present value of residual valueResidual value at the end of the lease term 2. 20-34 Since the first three criteria are not met, the classification of the lease depends on the fourth criterion. A guaranteed residual value is not included in the minimum lease payments. Therefore, Baker Company would classify the lease as a capital lease because the fourth criterion is met as follows: Present value of minimum lease payments = = $43,552 + $6,448 $50,000, or 100% of the fair value of the machine 3. Since the first three criteria are not met, the classification of the leas e depends on the fourth criterion.An unguaranteed residual value is included in the minimum lease payments. Therefore, Baker Company would classify the lease as an operating lease because the fourth criterion is not met as follows: Present value of minimum lease payments = $43,552, or 87. 1% of the fair value of the machine E21-14 1. 2010 Jan. 1 Cash Land Unearned Profit on Sales-Leaseback Leased Land Capital Lease Obligation Insurance and Property Tax Expense Cash 31 Capital Lease Obligation Interest Expense – Leases (14% x $2,500,000) Cash 21-34 2,500,000 2,000,000 500,000 2,500,000 12,000 1 During the year Dec. ,500,000 12,000 7,007 350,000 357,007 E21-14 (continued) 2. The $500,000 unearned profit is amortized by the straight-line method over the 25 year term of the lease. The yearly entry is 2010 Dec. 31 Unearned Profit on Sales – Leaseback Realized Profit on Sales – Leaseback 20,000 20,000 21-35 SOLUTIONS TO PROBLEMS P21-1 1. Application of Criteria for De termination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic lifePV of $268,685. 58* is 88% of fair value 4. Present value of lease payments is 90% or more of fair value *PV No = (Yearly lease payments – Executory costs) x PV factor for 5 payments in advance at 12% = ($70,000 – $3,450) x 4. 037349 = $66,550 x 4. 037349 = $268,685. 58 This lease is an operating lease for both the Alice Company (lessee) and the Superior Equipment Company (lessor). Reasons: None of the Column A criteria are met. 2. Alice Company (lessee): 2010 Jan. 1 Rent Expense Cash 70,000 70,000 21-36 P21-1 (continued) 2. (continued) Superior Equipment Company (lessor): 2011 Jan.During the year Dec. 31 1 Cash Rental Revenue Property Tax Expense Maintenance Expense Insurance Expense Cash 70,000 650 1,600 1,200 70,000 3,450 Depreciation Expense: Equipment 49,500 Accumulated Depreciation: Equipment [($500,000 – $5,000) ? 10] Application of Criteria for Determination of Lease Classification 49,500 3. Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic life PV of $305,000* (rounded) 100% of fair value . Present value of lease payments is 90% or more of fair value *PV Yes = [(Yearly lease payments – Executory costs) x PV factor for 5 payments in advance at 12%] + PV of guaranteed residual value = = = = [($70,000 – $3,450) x 4. 037349] + ($64,000 x 0. 567427) ($66,550 x 4. 037349) + $36,315. 33 $268,685. 57 + $36,315. 33 $305,000 (rounded) This lease is a capital lease for both the Alice Company (lessee) and the Superior Equipment Company (lessor). Reasons: †¢ The lessee would classify the lease as a capital lease because one of the Column A criteria i s met. The lessor would classify the lease as a direct financing lease because (a) one of the Column A criteria is met, (b) both of the Column B criteria are met, and (c) there is no profit at the inception of the lease (fair value = present value of the minimum lease payments). 21-37 P21-1 (continued) 3. (continued) Alice Company (lessee): 2010 Jan. 1 1 Leased Equipment Capital Lease Obligation Executory Costs Expense Capital Lease Obligation Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment [($305,000 – $64,000) ? ] Interest Expense [12% x ($305,000 – $66,550)] Accrued Interest on Capital Lease Obligation Executory Costs Expense Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment Interest Expense [12% x ($305,000 – $66,550 – $37,936)] Accrued Interest on Capital Obligation 305,000 3,450 66,550 305,000 70,000 Dec. 31 48,200 48,200 28,614 28,614 3,450 28,614 37,936 31 2011 Jan. 1 70,000 Dec. 31 48,200 48,200 24,061. 68 24,061. 68 31 21-38 P21-1 (continued) 3. continued) 2014 Dec. 31 Capital Lease Obligation Cash 64,000 64,000 Superior Equipment Company (lessor): 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($66,550 x 5 + $64,000) Equipment Leased to Others Unearned Interest: Leases Cash Lease Receivable Property Tax Expense Maintenance Expense Insurance Expense Cash Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Property Tax Expense Maintenance Expense Insurance Expense Cash Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable 305,000 305,000 396,750 05,000 91,750 66,550 1 During The Year Dec. 31 2011 Jan. During The Year Dec. 31 2014 Jan. 66,550 650 1,600 1,200 28,614 3,450 28,614 1 66,550 650 1,600 1,200 24,061. 68 66,550 3,450 24,061. 68 1 64,000 64,000 21-39 P21-2 1. Application of Criteria for Determination of Lease Classific ation Column A Criteria 1. 2. 3. 4. Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met No Yes Yes 100% Present value is $185,090. 68 or 100% of fair value Remarks YesThis is a sales-type lease for Ballieu Company, since one or more of the Column A criteria are met, both of the Column B criteria are met, and there is a dealer's profit (PV of lease payments – Cost of asset = $185,090. 68 – $150,000 = $35,090. 68) 2. (1) Two-Year Table of Lease Payment Receipts and Interest Revenue Recognition (2) Annual Lease Payments Received $35,000. 00 35,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $280,000. 00a 245,000. 00 210,000. 00 (5) Unearned Interest: Leases $94,909. 32b 73,896. 62 (6) Net Investment $185,090. 8 150,090. 68 171,103. 38d 136,103. 38 155,157. 85 Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 a$35,000 $21,012. 70c 19,054. 47 x8 – $185,090. 68 x 14% + $21,012. 70 b$280,000 c$150,090. 68 d$150,090. 68 21-40 P21-2 (continued) 2. (continued) 2010 Jan. 1 Lease Receivable ($35,000 x 8) Sales Unearned Interest: Leases ($280,000 – $185,090. 68) Cost of Asset Leased Specialty Equipment (Inventory) Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 280,000. 0 185,090. 68 94,909. 32 1 1 Dec. 2011 Jan. Dec. 3. 31 150,000. 00 35,000 21,012. 70 150,000. 00 35,000 21,012. 70 1 31 35,000 19,054. 47 35,000 19,054. 47 The lessor must disclose: a. A general description of the leasing arrangements b. (1) The components of the net investment at the date of each balance sheet presented: (a) The future lease payments to be received (b) The unearned interest revenue: leases (2) Future lease payments to be received for each of the 5 succeeding fiscal years as of the date of the latest ba lance sheet presented P21-3 1.Present value = Lease payments x PV factor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 21-41 P21-3 (continued) 2. (1) Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 a$300,000 Summary Table of Lease Payments and Interest Expense for Timmer Company (2) Lease Payment Required $83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) Interest Expense at 12% on Obligation Balancea $36,000. 00a 30,333. 25 23,986. 49 16,878. 12 8,916. 74d (4) Reduction of Lease Obligation $47,222. 2b 52,889. 67 59,236. 43 66,344. 80 74,306. 18 (5) Balance of Lease Obligation $300,000. 00 252,777. 08c 199,887. 41 140,650. 98 74,306. 18 -0- x 12% – $36,000. 00 – $47,222. 92 b$83,222. 92 c$300,000. 00 3. 2010 Jan. Dec. 1 31 Leased Equipment Capital Lease Obligation Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense Cash Depre ciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000. 00 ? 5) Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense Cash 21-42 300,000 47,222. 2 36,000. 00 3,760 5,440 300,000 83,222. 92 31 9,200 31 60,000 60,000 52,889. 67 30,333. 25 3,100 5,330 2011 Dec. 31 83,222. 92 31 8,430 P21-3 (continued) 3. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment TIMMER COMPANY Balance Sheet (Partial) December 31, 2010 Assets Property, Plant, and Equipment Leased property less accumulated amortization $240,000. 00 (Note X) a$83,222. 92 60,000 60,000 4. Liabilities Current Capital lease obligation Noncurrent Capital lease obligation (Note X) $ 74,306. 17a,c $178,470. 1b,c x 0. 892857 – $74,306. 17 b$252,777. 08 cThese amounts computed by the â€Å"change in present value approach† are $52,889. 67 and $199,887. 41, respectively Under U. S. GAAP, the Timmer Company would classify the lease as an operating lease. The lease does not meet either of the first two criteria. The third criterion is not met since the 3-year lease life is 60% of the economic life of 5 years. The fourth criterion is also not met since the present value of the lease payments of $269,507 ($120,000 x 2. 245890) is 89. 8% of the fair value of $300,000.Therefore, the lease would be an operating lease. Under IFRS, the Timmer Company would have to exercise judgment but it is likely that it would classify the lease as a â€Å"finance† lease since two of the indicators would probably be considered to be met. The present value of 89. 8% is probably â€Å"substantially all† of the fair value of the asset. Also, it could be argued that 60% is the â€Å"major part† of the economic life of the asset. 5. 21-43 P21-4 1. Summary Table of Lease Payments Received and Interest Revenue Earned by the Calden Company (1) (2) Lease Payment Received $65,000. 0 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 (3) Interest Revenue at 15% on Net Investment $46,203. 16c 43,383. 63 40,141. 17 36,412. 35 32,124. 20 27,192. 83 21,521. 76 14,999. 87h (4) Reduction of Net Investment $18,796. 84d 21,616. 37 24,858. 83 28,587. 65 32,875. 80 37,807. 17 43,478. 24 50,000. 13 (5) Lease Receivable $570,000a 505,000e 440,000 375,000 310,000 245,000 180,000 115,000 50,000 (6) Unearned Interest: Leases $261,978. 97 215,775. 81f 172,392. 18 132,251. 01 95,838. 66 63,714. 46 36,521. 63 14,999. 7 -0(7) Net Investment $308,021. 03b 289,224. 19g 267,607. 82 242,748. 99 214,161. 34 181,285. 54 143,478. 37 100,000. 13 50,000. 00i Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 a$570,000 21-44 is the undiscounted value of the lease payments plus the unguaranteed residual value is the present value of the lease payments plus the present valu e of the unguaranteed residual x 15% b$308,021. 03 value c$308,021. 03 d$65,000. 00 e$570,000 $46,203. 16 – $46,203. 16 – $18,796. 84 residual value – $65,000 f$261,978. 97 g$308,021. 03 hAdjusted for $0. 15 rounding error iUnguaranteed 21-44 P21-4 (continued) 2. Criteria for direct financing lease: Application of Criteria for Determination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is 75% or more of eonomic life 4. Present value of lease payments is 90% or more of fair value *PV of minimum lease payments Met No No Yes 89% ( 8 year lease life ) 9 year economic life Remarks 0-45 Yes PV is 94. 7% of the fair value of the leased asset* = $65,000 x PV factor for 8 payments at 15% = $65,000 x 4. 487322 = $291,675. 93 Column B Criteria 1. Collectibility assured 2. No uncertainties Met Yes Yes Remarks The lease is properly classified as a direct financing lease because at least one of the Column A criteria is met, both of the Column B criteria are met, and there is no dealer's profit. 3. 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($520,000 + $50,000) Equipment Leased to Others Unearned Interest: Leases 308,021. 3 308,021. 03 570,000 308,021. 03 261,978. 97 21-45 P21-4 (continued) 3. (continued) Dec. 31 31 2011 Dec. Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases CALDER COMPANY Balance Sheet (Partial) Assets Current Assets Net investment in direct financing leases (Note X) Noncurrent Assets Net investment in direct financing leases (Note X) a$65,000 65,000 46,203. 16 5,000 46,203. 16 31 31 65,000 43,383. 63 65,000 43,383. 63 2012 Dec. 31 31 65,000 40,141. 17 65,000 40,141. 17 4. December 31, 2011 2010 $ 56,521. 73a,d $ 56,521. 73a,c $211,086. 09b,d $232,702. 46b,c x 0. 869565 $289 ,224. 19 – $56,521. 73; 12/31/11: $267,607. 82 – $56,521. 73 b12/31/10: cThese amounts computed by the â€Å"change in present value approach† are $21,616. 37 and $267,607. 82, respectively amounts computed by the â€Å"change in present value approach† are $24,858. 83 and $242,748. 99, respectively dThese 21-46 P21-5 1. a) Landlord Company computation of annual rental amount Annual rental amount = = Cost of equipment PV factor for 6 receipts in advance at 14% $300,000 4. 433081 = $67,673. 02 (b) Tenant Company computation of the present value of the lease rights: To find the present value of the lease rights, Tenant Company would multiply the annual rental payment ($67,673. 02) by the PV factor for 6 periods paid in advance at i%. The percentage i would be the lower of 14% or Tenant Company's incremental borrowing rate. This incremental borrowing rate is the additional information needed.Summary Table of Lease Payments Received and Interest Revenue Recog nition for the Landlord Company (1) (2) Annual Lease Payments Received $67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 2. Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 Jan. 1, 2015 a$67,673. 02 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $406,038. 12a 338,365. 10 270,692. 08 203,019. 06 135,346. 04 67,673. 02 0 (5) Unearned Interest: Leases $106,038. 12b 73,512. 4 45,907. 18 23,911. 52 8,310. 69 0 (6) Net Investment $300,000. 00 232,326. 98 264,852. 76d 197,179. 74 224,784. 90 157,111. 88 179,107. 54 111,434. 52 127,035. 35 59,362. 33 67,673. 02 0 $32,525. 78c 27,605. 16 21,995. 66 15,600. 83 8,310. 69e x6 – $300,000. 00 x 14% d$232,326. 98 eAdjusted + $32,525. 78 b$406,038. 12 c$232,326. 98 for $0. 04 rounding error This table would also be suitable for Tenant Company if Tenant's incremental borrowing rate is ? 14%. 21-47 P21-5 (continued) 3. Journal entries: Tenant Company (lessee): 2010 Jan. 1 1 During the year Dec. 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000 ? 6) Interest Expense Accrued Interest on Capital Lease Obligation Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment Interest Expense Accrued Interest on Capital Lease Obligation 300,000 67,673. 2 700 800 300,000 67,673. 02 1,500 50,000 50,000 32,525. 78 32,525. 78 31 2011 Jan. 1 32,525. 78 35,147. 24 600 750 67,673. 02 During the year Dec. 1,350 50,000 50,000 27,605. 16 27,605. 16 31 21-48 P21-5 (continued) 3. (continued) Landlord Company (lessor): 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($67,673. 02 x 6) Equipm ent Leased to Others Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 300,000. 0 406,038. 12 300,000. 00 300,000. 00 106,038. 12 67,673. 02 32,525. 78 1 Dec. 2011 Jan. Dec. 4. 31 67,673. 02 32,525. 78 1 31 67,673. 02 27,605. 16 67,673. 02 27,605. 16 Income statements and balance sheets: Tenant Company Disclosure (Lessee) Comparative Balance Sheets (Partial) December 31 Assets 2011 2010 Liabilities 2011 2010 Leased equipment less accumulated amortization (Notes 1 and 2) $200,000. 00 $250,000. 00 Current Capital lease obligation $ 67,673. 02 Noncurrent Capital lease obligation 157,111. 88 (Notes 1 and 2) $ 67,673. 02 197,179. 74

Database Final Exam

1. (Chapter 06): Describe a relational DBMS (RDBMS), its underlying data model, data storage structures, and manner of establishing data relationships: a. A relational DBMS (or RDMBS) is a data management system that implements a relational data model, one where data are stored in a collection of tables and the data relationships are represented by common valves, not links. Pg. 247 b. Data are stored in a collection of tables and the data relationships are represented by common values not links.String| CARACTER (CHAR)CHARACTER VARYING (VARCHAR or VARCHAR2)BINARY LARGE OBJECT (BLOB)| Stores string values containing any character in a character set. CHAR is defined to be a fixed length. Stores string values containing any characters in a character set but of definable variable length. Stores binary string values in hexadecimal format. BLOB is defined to be a variable length. (Oracle also has CLOB and NCLOB, as well as BFILE for storing unstructured data outside the database. )| Number| NUMERICINTERGER(INT)| Stores exact numbers with a defined precision and scale.Stores exact numbers with a predefined precision and scale of zero| Temporal| TIMESTAMPTIMESTAMP WITH LOCAL TIME ZON| Stores a moment an event occurs, using a definable fraction-of-a-second precision. Value adjusted to the user’s session time zone (available in Oracle and MySQL)| Boolean| BOOLEAN| Stores truth values: TRUE, FALSE or UNKNOWN| c. The relational data model assumes that you have completed the activity ‘An ER Model d. The power of the RDBMS is realized through†¦. The relationship existing between the tables. The relationships are established by including common column or columns in every table where a relationship is needed. . (Chapter 06): What are six potential benefits of achieving an SQL standard? Pg. 245-246 a. Reduce training cost b. Productivity c. Application portability d. Application longevity e. Reduce dependence on a single vendor f. Cross-system communication 3. (Chapter 07): Define each of the following key terms: a. Dynamic SQL: Specific SQL code generated on the fly while an application is processing. Pg. 326 b. Correlated subquery: Use the result of the outer query to determine the processing of the inner query. Pg. 303 c. Embedded SQL: Hard-coded SQL statements included in a program written in another language, such as C or Java.Pg. 323 d. Procedure: A collection of procedural and SQL statements that are assigned a unique name within the schema and stored in the database. Pg. 323 e. Join: A relational operation that causes two tables with a common domain to be combined into a single table or view. Pg. 290 f. Equi-join: A join in which the joining condition is based on equality between vales in the common columns. Common columns appear (redundantly) in the result table. P 291 g. Self-join: There are times when a join requires matching rows in a table with other rows in that same table – that is, joining table with itself. Pg. 297 . Outer join: A join in which rows that do not have matching values in common columns are nevertheless included in the result table. Pg. 293 i. Function: A stored subroutine that returns one value and has only input parameters. Pg323 j. Persistent Stored Modules (SQL/PSM): Extensions defined in SQL:1999 that include the capability to create and drop modules of code stored in the database schema across user sessions. Pg. 319 4. (Chapter 07): Write the SQL Query needed to: Display CourseID and CourseName for all courses in the Course Table where the CourseID has an ‘ISM’ prefix: Query: SELECT [CourseTable].CourseID, [CourseTable]. CourseName FROM CourseTable WHERE((([CourseTable]. CourseID)=†ISM†)); 5. (Chapter 08): What are the advantages/disadvantages of two-tier architectures? Pg. 339 An advantage of two-tier architecture The advantage of the two-tier design is its simplicity. The TopLink database session that builds the two-tier architecture provides all the TopLink features in a single session type, thereby making the two-tier architecture simple to build and use. A disadvantage of the two-tier architecture is The most important limitation of the two-tier architecture is that it is not scalable, ecause each client requires its own database session. * 6. (Chapter 08): What are six common steps to access databases? Pg. 340 * a. Identify and register a database driver b. Open a connection to a database c. Execute a query against the database d. Process the results of a query e. Repeat step 3-4 as necessary f. Close the connection to the database * * * 7. (Chapter 09): What are the three major components of Data Warehouse architecture? Pg. 389 a. Operational data are stored in the various operational systems of record throughout the organization (and sometimes in external systems). . Reconciled data are the type of data stored in the enterprise data warehouse and an operational data stored. c. Derived data are the type of data stored i n each of the data marts. * * 8. (Chapter 09): What are the four characteristics of a data warehouse? a. Subject Orientation: Data organized by subject b. Integration: Consistency of defining parameters c. Non-volatility: Stable data storage medium d. Time-variance: Timeliness of data and access terms * 9. (Chapter 09): What are the five claimed limitations of independent data marts? Pg. 384 . A separate ETL process is developed for each data mart, which can yield costly redundant data and processing efforts. b. Data marts may not be consistent with one another because they are often developed with different technologies, and thus they may not provide a clear enterprise-wide view of data concerning important subjects such as customers, suppliers, and products. c. There is no capability to drill down into greater detail or into related facts in other data marts or a shared data repository, so analysis is limited, or at best very difficult. . Scaling costs are excessive because every new application that creates a separate data mart repeats all the extract and load steps. e. if there is an attempt to make the separate data marts consistent, the cost to do so is quite high. * 10. (Chapter 09): What are the three types of operations that can be easily performed with OLAP tools? Pg. 214-215 a. Relational OLAP (ROLAP) –Star Schema based b. Multidimensional OLAP (MOLAP) –Cube based c. Hybrid OLAP (HOLAP) * 11. (Chapter 10): What are the four key components of a data governance program? Pg. 435 . Sponsorship from both senior management and business units b. A data steward manager to support, train, and coordinate the data stewards c. Data stewards for different business units, data subjects, source systems, or combinations of these elements d. A governance committee, headed by one person, but composed of data steward managers, executives and senior vice presidents, IT leadership and others business leaders, to set strategic goals, coordinate activities, and provide guidelines and standards for all data management activities. * * 12. Chapter 10): What are the four ways that data capture processes can be improved to improve data quality? According to Inmon (2004), there are several actions that can be taken at the original data capture step: Pg. 441 a. Enter as much of the data as possible via automatic, not human, means (e. g. , from data stored in a smart card or pulled from a database, such as retrieving current values for addresses, account numbers, and other personal characteristics). b. Where data must be entered manually, ensure that it is selected from preset options (e. . , drop-down menus of selections pulled from the database), if possible. c. Use trained operators when possible (help systems and good prompts/examples can assist end users in proper data entry). d. Follow good user interface design principles that create consistent screen layouts, easy to follow navigation paths, clear data entry masks and formats (which ca n be defined in DDL), minimal use of obscure codes can be looked up and displayed from the database, not in the application programs), etc. . Immediately check entered data for quality against data in the database, so use triggers and user-defined procedures liberally to make sure that only high-quality data enter the database; wen questionable data are entered (e. g. , â€Å"T for gender), immediate and understandable feedback should be given to the operator, questioning the validity of the data.

Analysis of Activity Based Accounting The WritePass Journal

Analysis of Activity Based Accounting Bibliography: Analysis of Activity Based Accounting IntroductionActivity Based Costing AdvantagesAdvantages of switching to machine hours as an overhead recovery base:Comparison among three accounting methods: Multiple volume based allocation method:ABC Method:Bibliography: References:Related Introduction Activity-Based Costing (ABC), a tool for cost management, has recently gained popularity, is based on a simple idea: in an enterprise, overhead (or operating expenses) are measured by a number of activities needed to successfully perform manufacturing and business processes. The total cost of a product is the sum of the costs of activities that are the real cause of the overhead include establishing vendor relations, purchasing, receiving, setting up a machine, running the machine, disbursing, reorganizing the production flow, redesigning the product, and taking a customer order (Turney, 1989). By design, ABC provides not only relatively accurate cost data, but also information about the origin of the cost (Cooper and Kaplan, 1988).In ABC, the manufacturing overhead are assigned to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. It permits the very important distinction between resource usage and resource spend ing (Cooper and Kaplan, 1992). Traditional cost models apply resources to products in two ways. So called direct costs like material and direct labour are attributed directly to the product and other resources are arbitrarily allocated to the product, typically through the mechanism of direct labour hours, labour dollars or machine hours. Sales, marketing and administrative costs are not included in product costs. But, Activity Based Costing (ABC) does not change the way material and direct labour are attributed to manufactured products with the exception that direct labour loses its special place as a surrogate application method for overhead resources. Direct labour is considered another cost pool to be assigned to processes and products in a meaningful manner, no different than any other resource. The primary task of activity based costing is to break out indirect activities into meaningful pools which can then be assigned to processes in a manner which better reflects the way costs are actually incurred. The system must recognize that resources are consumed by processes or products in different proportions for each activity Activity Based Costing Advantages   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   More accurate costing of products/services, customers and distribution channels.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Better understanding overhead for everyone.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Utilizes unit cost rather than just total cost.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Integrates well with Six Sigma and other continuous improvement programs.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Makes visible waste and non-value added.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Supports performance management and scorecards.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Enables costing of processes, supply chains and value streams.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Here mirrors way work is done.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Support facilitates benchmarking.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   One of benefit of ABC is,   it enhance the strategic decision making for managers in a company .They can bring new information that they haven’t noticed before so they can take better decision about cost.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Help the manager to understand where there are lot more cost and prod it breaks action as we can see in power drip packing in labour and maintenances. Advantages of switching to machine hours as an overhead recovery base: 1. With machine hour rate, the Cylinder manufacturing company (CMC) can accuse almost all operating expenses on the basis of machines. 2. With the help of under absorption of machine overhead, CMC can find the idle time of machine. Then, can try to reduce it. 3. It is useful to increase efficiency of machine, because CMC can use it effective way and all overheads depends on it. 4. It is a scientific method to calculate factory overhead cost. 5. By this, CMC can firstly calculate total production cost, after this, it is very easy to calculate selling price of any product. 6. If we absorbed overheads on the basis of machine hours, CMC can get more meaningful and accurate product cost compared to labour hours. If we look at the Cylinder manufacturing company case study, then we will find the following overheads based on machine hours and labour hours. For overheads based on labour hours The Budgeted labour rate =  £149.825 per dlh Total overheads for Standard products =  £149.825 per dlh x 2,500 dlh =  £374,562.5 Total overheads for Specialised products =  £149.825 per dlh x 1,500 dlh =  £224,737.5 Overheads based on machine hours Total machine hours=6500. Total overheads to be distributed= £599,300 Budgeted overhead burden/machine hour=599300/6500 = £92.2 pounds. Total Overhead burden for standard products=92.2*3500= £322,700. Total Overhead burden for specialized products=92.2*3000= £276,600. If Cylinder manufacturing company uses machine hours for overhead calculation instead of labour hours, then the output will be more accurate. It is quite easy to find the machine hours correctly than labour hours. As the machine is in automated system, from a machine they can find the correct information about the total machine hours used by a product. Moreover the efficiency of all machines are all most same but it’s vary a lot for labours, because all human beings efficiency is not same. In the case of labour hour the difference between overheads for standard product and specialised product is high. But for machine hours it is relatively low. But we know, specialised product needs more machine hours than the standard products. Therefore, the gap should be low. So, we can say absorbed overheads on the basis of machine hours give more accurate output than absorbed overheads on labour hours. Then the manager can know the cost of sell more accurately and select correct pricing for the product and maximizing the profit. Comparison among three accounting methods: Here, I will be working through the provided data three times. Firstly, I will show how traditional cost accounting methods might deal with them; secondly to look at the multiple volume based overhead method; and, finally, I will illustrate the ABC method using all of   the data in great detail. Traditional allocation method (direct labour hours basis): The direct labour hour rate is total overheads total number of labour hours 599,300 4,000  £149.825 per dlh The overheads recovered are: Direct labour hour rate x number of direct labour hours per product For Standard products, the calculation is:  £149.825 per dlh x 2,500 dlh =  £374,562.5 For Specialised products, the calculation is:  £149.825 per dlh x 1,500 dlh =  £224,737.5 Multiple volume based allocation method: This method has an advance on the traditional allocation method in that it does make some allowance for activities to influence the absorption of overheads. In the case of Cylinder manufacturing company, two absorption rates to apply here: the receiving department overhead rate, and the other overhead rate The reasoning here is that, the organisation I am simulating is using a two rate basis of apportioning overheads: firstly, a material handling overhead rate is used to assign overhead to a separate cost centre on the basis of the number of number of stores orders; secondly all of the other overheads are assigned using a general machine hour rate on the basis that the number of machine hours far exceeds the number of labour hours. The Materials handling overhead rate is Total Materials handling overheads Total number of stores orders  £119,600 460  £260 per stores orders For Standard products,  £260 per stores orders x 160 stores orders =  £41,600 For Specialised products,  £260 per stores orders x 300 stores orders =  £78,000 The other overhead rate, calculated by dividing the total other overheads by the number of machine hours applied, is:  £599,300  £119,600 6,500 machine hours  £479,700 6,500 machine hours  £73.8 per machine hours For Standard products other overheads cost is,  £73.8 per machine hours x 3500 machine hours =  £258,300 For Specialised products other overheads cost is,  £73.8 per machine hours x 3000 machine hours =  £221,400 Therefore, Total overhead burden for standard product=  £299,900 Total overhead burden for standard product=  £299,400 ABC Method: To apply the ABC method, we need to identify cost drivers for two stages: 1 cost drivers tracing the costs of inputs into cost pools; and 2 cost drivers tracing the cost pools into product costs The workings that follow illustrate clearly how such cost drivers work through the ABC system in these two stages: an initial overhead amount being further subdivided into two parts according the needs of the situation. Cost of machines driven by machine hours Standard product = 3,500/6,500*279,500= £150,500 Specialized 3,000/6,500*279,500= £129,000. Set up and engineering support cost driven by number of set ups. Standard product = 80/280*200,200= £57,200 Specialized product = 200/280*200,200= £143,000 Material handling cost driven by number of stores orders Standard product = 160/460*119,600= £41,600 Specialized product = 300/460*119,600= £78,000 Total overhead burden for standard product =  £249,300 Total overhead burden for specialized product =  £350,000 Total overheads for standard and specialised product in three accounting methods are shown in the following table Standard  Ã‚   product Specialised   product DLH  £374,562.5  £224,737.5 Multi Volume  £299,900  £299,400 ABC  £249,300  £350,000 From the above comparisons, it is cleared that multiple volume based allocation method gives more accurate data than daily labour hour method. But activity based costing system is the best as it gives more meaningful data than others, therefore Cylinder manufacturing company should try it for their cost reduction. How Cylinder manufacturing company can implement activity based costing system: As we know ABC is little bit heard to implement and more time consuming, because so much informative can be required about lots of items. And there is a cost of buying, implementing and maintaining activity based system. According to me, in order to implementation Cylinder manufacturing company require a lot of preparation, because as it mention before there are a lot activities and information that needs to be gathered .So before going to implement ABC, Cylinder manufacturing company must be prepared it self by gathering lot of information for understand what exactly they are going to doing. During the setup time of activity based costing, they can temporally use old marginal and absorption account method. Management focus need to be changed on not just the performance but the activities that going into that performance need to be paradise here, the organization should not just focus on one area, the overall view of the company. It has to change the manager view of the company here managers are not just looking at the cost there are going go back to the activities, needs to change their attitude towards those cost activities. Overall, if the company implemented it properly they understood what they doing with ABC methods and they can see the benefit of the actually using this. Bibliography: Cooper, R. (1988) â€Å"The Rise of Activity-Based Costing – Part One: What is an Activity-Based Cost System?† Journal of Cost Management (Summer), pp. 45-54. Cooper, R. (1988) â€Å"The Rise of Activity-Based Costing – Part Two: When Do I Need an Activity-Based Cost System?† Journal of Cost Management (Fall), pp. 41-58 Gunasekaran, A. and Singh, D. (1999) â€Å"Design of activity-based costing in a small company: a case study† Computers Industrial Engineering 37, pp. 413–416 Kaplan, R. S. (1988). One Cost System Isnt Enough, Harvard Business Review, January-February, pp. 61-66. Kelline S. C., Downet, R. G. and Smitt L.G. (2001) â€Å"Activity-based costing and higher education: Can it work?†Ã‚   Available at: iupindia.org/books/ABC%20of%20Activity-Based%20Costing_Cont.asp. [Accessed on May 15, 2011] Williamson, D. (1996) â€Å"Cost and Management Accounting† Prentice Hall. Available at: http://business.fortunecity.com/discount/29/abcworkex.htm [Accessed on May 15, 2011] Oulu University Library (2000) â€Å"Implementation of design to profit in a complex and dynamic business context:Chapter 2. Life cycle analysis and product costing†. Available at: http://herkules.oulu.fi/isbn9514264509/html/x1194.html [Accessed on May 16, 2011] MBAbullshit.com (2010) â€Å"Activity Based Costing Example Part 1 to 8† You Tube. Available at: http://herkules.oulu.fi/isbn9514264509/html/x1194.html [Accessed on May 17, 2011] References: Cooper, R. and Kaplan, R. S. (1988) Measure Costs Right: Make the Right Decisions Harvard Business Review, September/October, pp. 96-102. Turney, P. B. B. (1989). Activity-Based Costing: A Tool for Manufacturing Excellence Target, summer, pp. 13-19. Cooper, R. and Kaplan, R. S. (1992). Activity-Based Systems: Measuring the Costs of Resource Usage Accounting Horizons, September, pp. 1-13.