Argumentative essay Essay Example for Free

Argumentative essay Essay The notion of marriage as an institution which necessarily preserves the vital social values of stability, continuity and propriety, only at the cost of brutally suppressing equally powerful individual needs, naturally comes under scrutiny. During the XX century, there have been heated discussions concerning romantic love and its impact on long-lasting relations. Some people suppose that pre-arranged marriage ensures long-lasting relations based on trust and financial gain, but it is also profoundly dangerous precisely because it can release and feed as many urges as it satisfies. They state that romantic love is not a good basis for marriage. Thesis Romantic love is a good basis for marriage because it ensures warm and friendly relations between spouses; it has a positive impact on human relations and their development, and ensures loving and friendly relations with children as â€Å"product† of love. Help with Argumentative Essay. â€Å"Romantic love is not a good basis for marriage† Help with Argumentative essay. â€Å"Romantic love is not a good basis for marriage† Warm and friendly relations between spouses are the core of successful marriage and trust. When people meet an â€Å"ideal person† their mind has perceived that the situation calls for some emotional reaction. From the psychological point of view love is caused by the feeling of personal freedom and self-realization. Sexual attractiveness is closely connected with an ideal image created by a person, while the desire to have children reflects sexual affection. It is possible to say that fools fall in love because they need sexual satisfaction with an ideal person to give birth to their offspring. Marriage â€Å"is about staying in love and staying together for a lifetime despite the fact that both partners are individuals who change over time† (Marriage is Forever, 2006). The common ground between the sexes, therefore, is getting smaller, and the institution of marriage is beginning to fall to pieces if people do not understand and value each other. A woman when she marries ‘is cut off from men’s society in all but the most formal and intermittent ways. For this reason, love and friendly relations are crucial for successful marriage and happiness. Romantic love has a positive impact on human relations and their further development when love disappears. It is not a secret that many couples. Some researchers underline that love therapy is a useful tool to create or restore positive relations and family happiness. Jennifer Chalmers comments that â€Å"The topic of creating and sustaining the feeling of love was  never discussed in any of the marriage-related workshops that I attended, but the issues [discussed] were not intended to help couples create the feeling of love† (Chalmers, 2006). The author gives special detailed attention to the difficulty which can follow elderly couples, but she underlines that love can be recreated in order to save marriage. In this case, love comes from overcoming the barrier by sharing feelings and comforts. Also, when love disappears, people still bond to each other leaving no space for anger and despair (Wilding, 2003). Divorce is the institution, the ‘custom’, which enables private life to adjust to the pressures of the market, and divorce is the ideal solution for pre-arranged couples without love (Knapp, Stearns, 1993). On the hand, there is little research which could help to indicate that love actually produce real, live marriages among the poor. Romantic love is the main power which forces people to have a family and give birth. To give birth and to become a parent is a natural wish of nearly every person. For this reason, a male or female chooses a healthy and strong, beautiful and successful person for reproduc ­tion. It is an instruct feeling to choose a partner, but it causes falling in love. Every person wants to have good children, and for this reason he/she chooses a â€Å"special† person. Bonding comes with the shared activity afterward, in which people learn about each other through co-operation. Trust emerges not just with sex, but also with shared activity through which people bond by learning to trust each other. Romantic love is a good basis for marriage because it supports an instinct or desire to give birth. It is based on the evolutionary success of pair bonding as a reproduc ­tive strategy. This cause is closely connected with sexual attractiveness, but it has different stimuli (Sternberg, Barnes, 1989). Love as care does not refer to an emotion or a state of mind so much as to a human faculty of identification with others, sympathy with all beings. Also, love is a basis for intimate relations and sexuality. Following O’Sullivan love â€Å"enhances our well-being, improves the quality of our lives, and helps us to prevail over difficult times. Those living without intimate relationships are at risk† (O’Sullivan, 2004, p. 71). In addition, for most couples, sympathetic and compassionate relations help to overcome life grievances and troubles they face. The most appealing feature of romantic love is firm personal standards applied to everything around people. Love is  eternal value which can lead to sufferings, but it does not influence the essence of human existence.

Different Perspectives for Risk Management

Different Perspectives for Risk Management 1 Purpose Risk this is defined as the combination of the probability of an event and its consequences. In all types of undertaking, there is the potential for events and consequences that constitute opportunities for benefit (upside) or threats to success (downside). Risk Management is increasingly recognised as being concerned with both positive and negative aspects of risk. Therefore this policy considers risk from both perspectives. Risk management is a central part of the B W Plant Hire and Sales Ltd strategic management. It is the process whereby we methodically address the risks attaching to their activities with the goal of achieving sustained benefit within each activity and across the portfolio of all activities. The focus of good risk management is the identification and treatment of these risks. Its objective is to add maximum sustainable value to all the activities of the organisation. It marshals the understanding of the potential upside and downside of all those factors which can affect the organisation. It increases the probability of success, and reduces both the probability of failure and the uncertainty of achieving our overall objectives. 2 Process The risks facing an organisation and its operations can result from factors both external and internal to the organisation. Risk identification is the process whereby B W Plant Hire and Sales Ltd sets out to identify its exposure to uncertainty. Risk identification is approached in a methodical way as part of the annual strategic review process to ensure that all significant activities within the organisation have been identified and all the risks flowing from these activities also defined. All associated volatility related to these activities is identified and categorised. Business activities and decisions are classified as: Strategic These concern the long-term strategic objectives of the organisation. They can be affected by such areas as capital availability, sovereign and political risks, legal and regulatory changes, reputation and changes in the physical environment. Operational These concern the day-today issues that the organisation is confronted with as it strives to deliver its strategic objectives. Financial These concern the effective management and control of the finances of the organisation and the effects of external factors such as availability of credit, foreign exchange rates, interest rate movement and other market exposures. Knowledge Based These concern the effective management and control of the knowledge resources, the production, protection and communication thereof. External factors might include the unauthorised use or abuse of intellectual property, area power failures, and competitive technology. Internal factors might be system malfunction or loss of key staff. Compliance These concern such issues as health safety, environmental, trade descriptions, consumer protection, data protection, employment practices and regulatory issues. As part of the annual strategic review each identified risk is described in a structured format is necessary to ensure a comprehensive risk identification, description and assessment process. Risk estimation is assessed as high, medium or low using the guidelines shown in the tables below. Risk identification Categorisation 1. Name of Risk 2. Impact of Risk Qualitative description of the events, their size, type number and dependencies 3. Quantification of Risk Probability and Significance 4. Potential Action for Improvement Recommendations to reduce risk Risk Consequences Threats and Opportunities High: Financial impact on the organisation is likely to exceed  £250,000 Significant impact on the organisations strategy or operational activities Significant stakeholder concern Medium Financial impact on the organisation likely to be between  £150,000 and  £350,000 Moderate impact on the organisations strategy or operational activities Moderate stakeholder concern Low Financial impact on the organisation likely to be less that  £150,000 Low impact on the organisations strategy or operational activities Low stakeholder concern

The Ancient Astronaut Theory Theology Religion Essay

The Ancient Astronaut Theory Theology Religion Essay What if everything that you thought about ancient civilization was false, what if human technology as we know it was catapulted forward by ancient visitors, what if early in human history, the earth was visited by extra-terrestrials and humans came in contact with them. The whole idea of alien visitors is very intriguing, to even think that our earth was a place for outsiders and is so hard to even fathom, this is why it is so interesting. But what other explanations are there for pieces of evidence that have been found that werent humanly possible for humans to create. Ancient visitors is the only theory out there right now that can explain it, and I believe in it because there is just too much evidence and not enough human technology at the time to not believe that something weird was going on. Is it so hard to believe? Is it so hard to believe that ancient hieroglyphs depicting gods and birds coming out of the sky and giving the locals tools and information were actually UFOs comi ng out of the sky and these gods were aliens giving them survival techniques or blueprints for gigantic structures? These are just some of the questions that fuel the ancient alien theory. All of this speculation about human history and contact with ancient aliens started with the Ancient Astronaut Theory which is a culmination of theories of many different scientists particularly in the latter half of the 20th century. The Ancient Astronaut Theory was mainly proposed by a scientist named Erich Von Daniken. He proposed that extraterrestrials with superior knowledge of science and engineering landed on the Earth thousands of years ago, allocating their craft with early civilizations and perpetually changing human history. The fact remains that there is so much evidence and weird happenings in our history that Von Danikens theory has validity. (Erich Von Daniken and Ancient Aliens) The Ancient Astronaut Theory is definitely the umbrella over everything regarding ancient aliens and is what has led to this explosion in the past couple of years about this weird topic. The new show Ancient Aliens on the History Channel has been a harbinger for beliefs like this and has opened the eyes of scientists everywhere. It is one thing to hear about all of these ancient artifacts and crazy buildings that could not have been built by humans, but something entirely different to actually see these practically impossible feats that early humans were able to achieve with no understanding of technology and with nothing but a hammer. http://www.history.com/images/media/slideshow/ancient-aliens-image-gallery/sky-people.jpg -The Sky People: this was found at the Mayan ruins in Tikal, Guatemala and resembles an astronaut in a space helmet. Now there is a definite counterargument against this theory and it is about a couple of different things. Firstly, there is an argument that it would take between 600 and 1,200 light years for a system that could support life to get to Earth. Next, that if aliens actually did get here, why would they help us. And third, why would extra-terrestrials visit us a long time ago and then just stop and not visit us now? (Ljubuncic) These are three of the strongest counterarguments made against theories of ancient visitors and while they are substantial, they are explanations against them, as there are in every argument- which is what makes an argument legitimate. For the first claim, we have no idea how advanced life would be if it were to exist beyond us, they could be 600-1,200 light years ahead of us in technology so that 600-1,200 light year trip to earth is more like a year of travel. Secondly, why not help? I think that if we visited another life form and we were far more advanced tha n them that we would definitely help them out. And lastly, because now we are advanced enough and on our way to huge leaps in technology, the astronauts just helped us get started. There are so many pieces of evidence that just has to raise the question, has the earth been visited my outsiders? Places like Stonehenge, and the Moai of Easter Island are filled with mysterious traits that really does make you think about what if? How could human beings without sophisticated tools or the knowledge of engineering craft, transport such incredible structures? If somebody who told you that there was a deity, who could control the universe and be able to make a planet, would it be that farfetched to believe that there were ancient visitors that came to the planet and helped civilizations with technology and tools? I took a survey asking kids who lived in my dorm if they thought just with prior background knowledge that ancient aliens actually existed or that there was some sort of outside intervention to explain things that are here on earth today. Out of 10 CU students that I asked, there were only 3 of them that thought there was no outside intervention. This is so tr ue that people really dont know what happened explain these structures or depictions of aliens in caves so there had to be something that was going on back then for these impossible feats to happen. All of these monumental places and weird occurrences that had happened in the past are truly amazing considering the technology that they had back then, really almost too amazing to believe that these people built them. All of these different places can all be directly related to one thing- ancient astronauts. A place called Ollantaytambo located in Peru is an absolutely monumental fortification located about 30 miles from Machu Picchu. There is something very strange about Ollantaytambo. The citadel served as both a temple and a fortress. At some time unknown, and for reasons unknown, work mysteriously stopped on this huge project. The gigantic monoliths are part of what was to be a shrine or temple. At some time unknown, and for reasons unknown, work mysteriously stopped on this huge project (Barclay). At the northern end of the Sacred Valley, Ollantaytambo has a weird but special spirit about it. The legend goes that a white bearded God, Wiracocha, came into the town and blessed the people. The people honored him so much that they carved his face in the side of the mountain where you can see it today. Was this white bearded god perhaps a white cloaked alien? How was this giant obelisk put into place so uniformly and well? How were the giant slabs of stone taken to the top of the mountai n where Ollantaytambo resides? How were these intricate cuts made on these stones enabling them to fit together? Truly this is amazing that these stones were forged together with nothing more than a hammer by the Incas. It just doesnt fit the bill, how could these ancient Incans have built this astonishing structure with a chisel? The stones had said to be almost welded together and with such sound precision that the obelisk is perfectly fit together with no cracks or splits after thousands of years of erosion and wear. Ollantaytambo is unbelievable, just look at it. How was it put together by humans? http://www.world-mysteries.com/mpl_8otru.jpg How was this massive structure assembled by ancient humans? It really just doesnt make any sense that this was actually made by early humans with no tractors or welding, ancient aliens? There are so many artifacts on earth are that are affiliated with, or suspected to be the result of ancient alien technology. A location like this is the Carnac Stones located in Carnac, France. These stones are a collection of gigantic rocks that have been set in place in meticulous and calculated assortments. Some configurations resemble straight lines and rows while others are circular shapes. The Carnac stones together, simulate a series of triangles that make up a complicated mathematical formula the Pythagorean Theorem. Another appealing issue around the structure of these stones is the very difficult calculations needed to actually put them in sync to where they are, and just when exactly these stones were assembled. The Carnac Stones were made in 3300 BC which is during the time of the stone ages. Pythagoras didnt invent the Pythagorean Theorem until 530 BC its impossible that people in the stone ages had the competence that was needed to calculate and create the shapes requ ired to execute the Pythagorean Theorem. Because of the size of the stones and the very limited tools available to people of that time its also very doubtful that they were able to lift these humongous stones into their upright place. Researchers have not yet found out the real objective of the Carnac Stones. The stones have places inside of the composition that couldve been antique tombs or burial chambers. Were these stones used to have burial ceremonies for ancient aliens? The Carnac Stones might have even been used to guide alien UFOs as they are one of the three structures on earth that can be seen from space. There is also research that is being done on possible astronomical pieces of the structures. The Carnac Stones are located at the latitude where the sun on winter and summer solstices forms a Pythagorean triangle. https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKHX7TsNebbqVemJNqpWbgf4NTZ9DdZq3esP1gHW1PoEcaGeywhT10RFhwBiXymTSE7ntVnPnUT1TeeBLSIt3-sfwBEeCnvaP-BALHFZyA6IXNth0w95uiy_eKW95icYWh1uSbPdNlWUCV/s1600/carnac-stones.jpg Is this site evidence that ancient aliens came to the Earth and administered our ancestors knowledge of new mathematical calculations and wisdom of great technology from other worlds? How was the Pythagorean Theorem being incorporated into the stones formation when the Pythagorean Theorem hadnt even been invented yet? The Carnac stones are very unusual and something that has to raise the question of ancient extraterrestrial intervention. (Hixon) Another one of the many oddities in the world related to ancient astronauts is called the Nazca Lines in Peru. Drawn into a highland in Perus Nazca Desert, are a series of ancient depictions stretching more than 50 miles has dumbfounded archaeologists. Along with simple lines and intricate shapes, they include drawings of animals, and humans, some measuring more than 600 feet wide. Because of their vast size, the lines can only even be seen clearly from high in the sky-and there is no evidence that these Nazcans, who lived in this area between 300 B.C. and 800 A.D., had any sort of way to see these lines in their full entirety because they couldnt go up in the sky, or could they? According to ancient alien theorists, the figures were used to guide spaceships when they landed, and the lines were used as runways. What on earth would the Nazca people use these ample lines for? http://www.mysterycasebook.com/2007/nazcalines2.jpg The Nazca Lines are a complete mystery. No one has proof of who built them or why they were built. They are truly a befuddling landmark. The Nazca Lines have many explanations including ancient gods, or a landing strip for returning aliens, which would have been very helpful to outsiders to have been able to have an airstrip. The ground patterns are dated back to between 200 BC and 600 AD (Ronquillo). Because these lines are so old it really brings up the question what were they using this airstrip for and how on earth did they even build such precise lines. This plain or plateau where theseslines are located is very dry and calm. Because there is not much wind or rain to erode anything off of this plain, these lines have stayed here for such a long period of time. This place is an ideal setting for someone that wanted to leave their mark. The concentration and precision of the Nazca lines leave no doubt that there was required long-term, intensive labor required to construct them wh ich is strange because they serve an unkown purpose. Why would the Nazca people spend so much time on something that has no apparent purpose? Were they in fact constructing an airstrip for outsiders? Could it have been a place where UFOs landed? Why would the Nazca people do all of this for nothing? They wouldnt just construct this giant sized, stone etched, concrete sheets of earth for a tribal or even practical purpose for like roads or something. Could it have been a DIA for ancient astronauts? (Ronquillo) One of the most troubling questions about our ancient civilizations and ancient aliens has to do with religion. When examining old religious texts there are a number of stories that seem to be describing people coming from the sky, which they thought were angles, demons, and even God. Ancient astronaut theorists believe that these stories and encounters could have actually been contact with ancient aliens. We know that these ancient civilizations would describe things using pictures and hieroglyphs. So if they would create these glyphs based on what they saw is it not strange that we have found countless pictures of what looks like flying objects? These ancient peoples believed that the gods of their religions came down from the sky and had the ability to fly on these machines. When you consider the stories of King Solomon in Israel they talk about him flying around on a magic carpet. It was said that he would fly in the sky and map the surrounding areas. Was this their way of descri bing a real flying machine that was used thousands of years ago? There are also mountains near Tibet that King Solomon would fly to and the tops of the mountains resemble what looks like a runway. It is uncommon for these mountains to have such flat surfaces. Could they have actually constructed runways for these flying machines to land on? One of the things to consider is how ancient civilizations would refer to gods as powerful beings that were superior to man. Its possible that these in fact werent gods but aliens who possessed advanced technology that may have made them seem Godly. It doesnt seem impossible that these people would worship these legendary Gods that came from the sky and seemed so superior. Were they actually Aliens? And is it possible that the aliens wanted these ancient civilizations to worship them? Maybe in return for the praise they were getting the aliens in fact did supply us with equipment and technology and knowledge to advance our civilization. This could have been the very beginning of all religious beliefs. (Ancient Aliens) http://www.history.com/images/media/slideshow/ancient-aliens-image-gallery/ascention-of-solomon.jpg -Ascension of King Solomon: According to some experts, King Solomon of Israel owned a flying machine that let him navigate great distances and be a cartographer of the world. Ancient alien theorists have observed that many religious texts feature numerous types of aircraft. (History.com) If there were ever ancient astronauts that came to the earth and helped human civilization with knowledge and tools, they definitely left some good evidence behind for conspirators to feast on. If there these theories are true, which there is enough evidence to validate it, it would change everything that we know about human history and change our whole perspective on our earth in the universe. This is the world that we live in and to think that if ancient aliens came to earth and altered what we think of as human doings, really affects how each and every one of us live our lives in this world. This whole topic is just so interesting because there are just so many weird things that are happening and have happened in human history and just has to make each and every one of us think, what really went on here? It is so astonishing that some of these things exist today and even more astonishing that we have absolutely no idea how or why some things are the way they are. All we can do is theorize and speculate about ancient outsiders coming down to earth and forever changing the course of human history. What if everything that you thought about ancient civilization was false, what if human technology as we know it was catapulted by ancient visitors, what if early in human history, the earth was visited by extra-terrestrials and humans and these visitors came in contact. What if we were alive because of ancient aliens? What if we are where we are here today because of ancient astronaut technology. You have to wonderà ¢Ã¢â€š ¬Ã‚ ¦

Medical Ethics: Patient Wishes vs Doctor Actions :: Medical Ethics

A conflict between a doctor who wants to treat his patient a certain way, and a patient who wants to be treated by the doctor the way she wants. The doctor feels the that certain treatment that the patient wants is dangerous and warns the patient that he will pronounce the patient mentally unstable. This is exactly what happened in the case of Mrs. Jackson and Dr. Lowell. The conflict in this entire article is if weather the doctor can, or can not, accuse his patient mental instability to go about the treatment as he sees fit. Is this an invasion of the patient’s wants and desire for a certain way of treatment? or does the doctor have moral rights to do anything and everything even though it is against the patient’s wishes. What justifies as moral and immoral procedure for a doctor to treat his patient. When faced with this hard dilemma, the article suggests that is use Rule Utilitarianism and Kantian Deontology, to help me solve the problem of weather this justifiable or morally incorrect. Rule Utilitarianism basically reads that â€Å"a person ought to act in accordance with the the rule that, if generally followed, would produce the greatest balance of good over evil.†(Mappes & Degrazia, 13) According to this, if anyone faces a moral dilemma, they should always try to sort of do a Cost/Benefits analysis on the outcomes of their actions versus the good that they would cause. So even today when I was debating if or not I should personally write my research essay, or, pay somebody else to write my essay for me, it took me all of 30 second to decides that even though I might not like what i would be doing for the next three to four hours, part of me know that the happiness i would get from it was unparalleled to anything. However, now, if you look at the Kantian Deon tology, you will find a lot of things that are different. What this theory of morality says is the outcomes are not at all important, but your duty hold precedence over anything. Similar to Rule Utilitarianism, this theory of morality says that any act, as long as it complies with a rule, is morally justified. When we think about this problem in a rule utilitarian way, we have to abide by the rules which clearly state that the patient has the final say in what treatment is going to be used on them. Medical Ethics: Patient Wishes vs Doctor Actions :: Medical Ethics A conflict between a doctor who wants to treat his patient a certain way, and a patient who wants to be treated by the doctor the way she wants. The doctor feels the that certain treatment that the patient wants is dangerous and warns the patient that he will pronounce the patient mentally unstable. This is exactly what happened in the case of Mrs. Jackson and Dr. Lowell. The conflict in this entire article is if weather the doctor can, or can not, accuse his patient mental instability to go about the treatment as he sees fit. Is this an invasion of the patient’s wants and desire for a certain way of treatment? or does the doctor have moral rights to do anything and everything even though it is against the patient’s wishes. What justifies as moral and immoral procedure for a doctor to treat his patient. When faced with this hard dilemma, the article suggests that is use Rule Utilitarianism and Kantian Deontology, to help me solve the problem of weather this justifiable or morally incorrect. Rule Utilitarianism basically reads that â€Å"a person ought to act in accordance with the the rule that, if generally followed, would produce the greatest balance of good over evil.†(Mappes & Degrazia, 13) According to this, if anyone faces a moral dilemma, they should always try to sort of do a Cost/Benefits analysis on the outcomes of their actions versus the good that they would cause. So even today when I was debating if or not I should personally write my research essay, or, pay somebody else to write my essay for me, it took me all of 30 second to decides that even though I might not like what i would be doing for the next three to four hours, part of me know that the happiness i would get from it was unparalleled to anything. However, now, if you look at the Kantian Deon tology, you will find a lot of things that are different. What this theory of morality says is the outcomes are not at all important, but your duty hold precedence over anything. Similar to Rule Utilitarianism, this theory of morality says that any act, as long as it complies with a rule, is morally justified. When we think about this problem in a rule utilitarian way, we have to abide by the rules which clearly state that the patient has the final say in what treatment is going to be used on them.

Human Rights vs. Sovereignty :: Human Rights Essays

The massive, protracted bombing of Serbia was "the first offensive action for NATO, and the first time that Allied armed forces were unleashed against a sovereign nation with which the United States was not formally at war or without express authorization by the United Nations Security Council," observes Stephen Presser, professor of law at Northwestern University. "What we were doing in the Balkans is part of the post-Vietnam creation of a new set of doctrines of international law. These doctrines lack clearly defined limits," he warns. "We may be witnessing the opening moves in the forging of a New Global order that fundamentally impairs national sovereignty and allows possessors of superior military force to dictate the basic terms of domestic life to other nations without even the formalities of conquest." In the current issue of Orbis, a quarterly publication of the Foreign Policy Research Institute (fpri.org), Presser argues that the real reason for NATO's bombing of a sovereign nation "appears to have been to compel Belgrade to cede autonomy, if not territory, to a minority ethnic group. What is there, then, in the United Nations charter or in international law that would authorize our action in the Balkans," he asks, "and what, if any, are the reach and the limits of our new doctrine of Humanitarian Intervention? The UN Charter seeks to secure both the protection of 'fundamental human rights' and the 'equal rights' of 'nations large and small,'" Presser notes. "The Charter clearly undertakes to protect the territorial integrity and the sovereignty of individual nations, and seems to preclude interference in a nation's domestic affairs unless the Security Council declares a situation a threat to 'international peace and security' and expressly authorizes int ervention. While the UN and its agencies expressed official concern about what went on in the Balkans," he affirms, "the Security Council did not authorize intervention in Kosovo by UN or NATO forces." Presser points out that "a series of international law doctrines wholly outside the UN Charter authorize interference by one state in another's affairs. These have included military actions to protect one's own citizens who are within another's borders, and there have been several armed interventions by individual or groups of nations purportedly to protect the rights of minorities in particular or human rights in general, whether or not the individuals to be protected were citizens of the intervening nations.

Issues Surrounding the Trial Scene Within to Kill a Mockingbird Essay

This essay will identify issues outside of the primary theme of race that come to light during the court case in which Tom Robinson, a black man, is trialled and convicted for raping Mayella Ewell. Throughout the trial, significant action occurs both inside and outside the court room that draws attention to side-lined topics including the definition of courage, the loss of innocence, class relations, and expectation within society. To Kill A Mockingbird was set in the 1930’s, a turbulent decade characterised by struggles between world powers, racial prejudice and economic depression. The aftermath of the Wall Street Crash in 1929 affected America particularly badly, and by the winter of 1932 they were in the depths of the greatest economic depression in their history. These historical events are reflected in the novel by the division within Maycomb’s society according to wealth and class, with families such as the Ewell’s epitomising the term ‘white trash’ and positioning at the bottom of the social hierarchy. Furthermore, despite the American government’s abolition of slavery in 1848, racism was as strong as ever in the Southern States. The black people were forced into racial segregation in schools, public transport and churches. Stemming from this racial prejudice comes a level of expectation that different people in society believe they must adhere too as a result of the segregation and racial prejudice engrained into society. This is shadowed in the book by the minor character of Dolphus Raymond, a drunken white man deemed an outsider by societies norms. All of the action that takes place within To Kill A Mockingbird is concentrated in the fictional county of Maycomb, which can be seen as a microcosm dissecting important issues present in the wider Southern America. The trial in many ways is the most important and dramatic sequence in the novel, as although the trial targets Tom Robinson, in a metaphoric sense it is in fact the entire county of Maycomb that are on trial. Despite Tom’s conviction, the trial does show a small progression within Maycomb, with the jury taking such a long time to make their decision constituting a sign of positive advancement in racial relations, with Miss Maudie stating â€Å"it’s just a baby-step, but it’s a step. † This â€Å"step† is achieved through the books definition of courage, embodied through the character of Mrs Dubose, a ying old woman who embarks on the brave task of facing her addiction to morphine before reaching her end. According to Atticus, Mrs Dubose’s decision shows the possession of â€Å"real courage†¦ when you know you’re licked before you begin but you begin anyway and you see it through no matter what. † It is this attitude that foreshadows and fittingly describes Atticus’s own approach to the Tom Robinson case. It is clear in the novel that even before taking on Tom Robinson’s case, the lawyer knew that he would fail to acquit the accused of his charges because of the rigid prejudicial outlook innate within Maycomb’s inhabitants. Thomas Shaffer, argues that Atticus shows us precisely that what matters in professional ethics is character rather than moral principle which is highlighted by Atticus’s fights to prove Tom’s innocence to the community, even though he knows it will not be acted upon. While Atticus eventually loses the court case, it his courage and steely determination to see it through until the end that successfully reveals the injustice of a stratified society that confines the blacks to a â€Å"coloured balcony†. Furthermore, the involvement of the Ewell family in the trial also highlights issues of class relations within Maycomb County. The term â€Å"white trash† is a pejorative term particularly used in rural Southern America, to describe a collection of lower class people who live by degraded standards. The term suggests outcasts from a respectable society living on the fringes of the social order who are seen as dangerous because they may be of a criminal nature without respect for authority whether it be political, legal, or moral. The audience are aware from the beginning of the novel that the Ewell family epitomise â€Å"white trash† from Burrell Ewell’s refusal to go to school, and his ability to escape the legal system. Moreover, their home behind the town garbage dump in a tin-roofed cabin adheres to the characteristic of ‘living on the outside of town’ and highlights their social and physical segregation from the more respectable members of the community. Their position at the bottom of the social hierarchy is substantiated by Mayella Ewell’s section of the trial – the young girl believes that Atticus is trying to make a fool of her by labelling her as â€Å"Miss† conveying her lack of social skills as a result of her family’s failure to integrate into society. Moreover, the implication that Bob Ewell abuses his daughter creates a perception of him as being violent and criminal, two characteristics that are of course brought to light in the latter parts of the novel. Overall, this highlights that Maycomb County (and the wider South) are not just segregated by race, but also by class. The sad reality however, is that in the racist world of Maycomb, even the Ewell’s have the power to destroy an innocent man. This leads onto a further issue that is at stake throughout the trial: the threat posed to innocence by evil. This theme is revealed primarily through the characters of Tom Robinson and Jem Finch. The audience are made aware that Tom is an innocent man who has been wrongfully accused of a crime he did not commit. This depicts the evil attack of social prejudice on an unoffending man, guilty only of the colour of his skin. Tom Robinson is not prepared for the evil that he encounters, and this consequently leads to his downfall. This concept links to the title of the book â€Å"To Kill a Mockingbird†, which highlights that to destroy someone innocent purely for existing, is a sin. Furthermore, the trial also focuses around the loss of innocence of Jem and his movement into adulthood, linking to the Bildungsroman theme within the novel. The Bildungsroman genre is an example of â€Å"the coming of age† novel, and is evident in the novel from the children’s journey from ignorance to enlightenment. Hereby, Jem witnessing the harsh reality of life revealed by the trial is seen as a necessary growth point that his character must go through in order to reach maturity, summarising the transition from a perspective of childhood innocence, to a more adult perspective in which Jem has confronted evil and must incorporate it into his understanding of the world. This shift is apparent in the trial scene after Atticus reveals to the jury that Bob Ewell is a left-handed man, and that a left-handed man would be more likely to leave bruises on the right side of a girls face. Jem, still clinging to his youthful illusions about life working according to concepts of fairness, doesn’t understand that his father’s efforts will be in vain, commenting â€Å"We’ve got him. † After Tom is found to be guilty, Jem’s hopes are shattered as he cries over the injustice of the verdict. His emergence into a more adulthood perspective is highlighted by his conversation with Miss Maudie, where he reveals that he sed to think that the people of Maycomb were the best in the world, but having witnessed the trial, he doesn’t think so anymore. Ultimately, a final issue brought to light amidst the action of the trial, is the levels of expectation that people are pressured by as a result of the class and racial issues present in Maycomb. Dolphus Raymond’s attendance at the trial is accompanied by Jem’s description of his background – that he is a drunk who had several children by a black woman even though he was from a rich and respectable family. As the prosecution begins to question Tom Robinson, the action is diverted from the courtroom as Dill begins to cry resulting in Scout leading him outside where they encounter the mysterious character of Mr Raymond. It is revealed that he is in actual fact pretending to drink alcohol from the paper bag to provide the white people with an explanation for his lifestyle: â€Å"When I come to town†¦ if I weave a little and drink out of this sack, folks can say Dolphus Raymond’s in the clutches of whiskey—that’s why he won’t change his ways. He can’t help himself, that’s why he lives the way he does†. This highlights that Dolphus Raymond does care very much about what people think of him, and believes that by stereotyping himself as a drunk, the other members of Maycomb county will find his behaviour excusable. The significance of his character is to forefront the pressures that society’s norms exhume on those who wish to be different – Dolphus Raymond simply prefers black people to whites, just as the white community simply dislike blacks with no valid explanation. In conclusion, it is clear that many other relevant issues to the time period occupy the trial at the heart of To Kill A Mockingbird as well as simply racial prejudice.

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