Financial Accounting | SoSe 2024

Prof. Dr. Christoph Sextroh

Financial Accounting
Tutorial 10
Leasing

Task 1
Samson AG leases a building and land. The lease term is 6 years and the annual fixed payments
are €800,000. The lease arrangement gives Samson the right to purchase the building and land for
€11,000,000 at the end of the lease. Based on an economic analysis of the lease at the
commencement date, Samson is reasonably certain that the fair value of the leased assets at the
end of lease term will be much higher than €11,000,000.
Required: What are the total lease payments in this lease arrangement?

Task 2
Fieger Company leases equipment for 8 years with an annual rental of $2,000 per year or $16,000
in total. General Leasing (the lessor) agrees to provide Fieger with $300 for the first 2 years of the
lease to defray needed repairs to the equipment.
Required: Determine the undiscounted lease payments that Fieger will pay for the first 3 years of
the lease agreement.

Task 3
Waterworld Company leased equipment from Costner Company, beginning on December 31,
2021. The lease term is 4 years and requires equal rental payments of $41,933 at the beginning of
each year of the lease, starting on the commencement date (December 31, 2021). The equipment
has a fair value at the commencement date of the lease of $150,000, an estimated useful life of 4
years, and no estimated residual value. The appropriate interest rate is 8%.
Required: Prepare Waterworld’s 2021 and 2022 journal entries, assuming Waterworld depreciates
similar equipment it owns on a straight-line basis.

Task 4
Assume that on December 31, 2021, Stora Enso (FIN) signs a 10-year, non-cancelable lease
agreement to lease a storage building from Sheffield Storage. The following information pertains to
this lease agreement.
1. The agreement requires equal rental payments of €71,830 beginning on December 31,
2021.
2. The fair value of the building on December 31, 2021, is €525,176.
3. The building has an estimated economic life of 12 years, a guaranteed residual value of
€10,000, and an expected residual value of €7,000. Stora Enso depreciates similar
buildings using the straight-line method.

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 Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh

4. The lease is non-renewable. At the termination of the lease, the building reverts to the
lessor.
5. Stora Enso’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not
known by Stora Enso.
Required: Prepare the journal entries on the lessee’s books to reflect the signing of the lease
agreement and to record the payments and expenses related to this lease for the years 2021, 2022,
and 2023. Stora Enso’s fiscal year-end is December 31.

Task 5
Castle Leasing Company signs a lease agreement on January 1, 2022, to lease electronic
equipment to Jan Way Company. The term of the non-cancelable lease is 2 years, and payments
are required at the end of each year. The following information relates to this agreement.
1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the
lease. It is not reasonably certain that Jan Way will exercise this option.
2. The equipment has a cost of $120,000 and fair value of $160,000 to Castle Leasing. The
useful economic life is 2 years, with a residual value of $16,000.
3. Castle Leasing desires to earn a return of 5% on its investment.
4. Collectability of the payments by Castle Leasing is probable.

Required:
a) Prepare the journal entries on the books of Castle Leasing to reflect the payments received
under the lease and to recognize income for the years 2022 and 2023.
b) Assuming that Jan Way exercises its option to purchase the equipment on December 31,
2023, prepare the journal entry to record the sale on Castle Leasing’s books.
[Hint: Present value of an ordinary annuity of 1$ for 2 periods at 5% is 1.85941$.]

Task 6
Suppose that for the a new store, a fashion company leases some showroom equipment from
another lessor. The equipment had a fair value of EUR 62,000 on the date of the lease inception.
The lease term is four years for an initial payment of EUR 30,000 and an annual payment of EUR
8,000 (payable on 31 December). The expected residual value of the equipment after the lease
term is EUR 8,000 of which EUR 3,000 are guaranteed by the lessee. The lessor incurred legal
costs of EUR 1,000 related to drawing up the contract etc. Assume that the economic life of the
equipment is typically 5 to maximum 6 years.
Required:
(1) How should the fashion company account for the lease contract in its financial statements
ending December 31, 2019, and in subsequent periods according to IFRS 16 (ignore
taxes)? Assume that the company expects to pay the residual value guarantee at the end
of the lease term.
(2) How should the lessor account for the lease arrangement?

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 Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh

Task 7
Sanders Fashion enters into a lease arrangement with Highpoint Leasing for 5 years. Sanders
agrees to pay 4% of its net sales as a variable lease payment. Sanders does not pay any fixed
payments. Sanders is a highly successful company that has achieved over £1,000,000 in net sales
over the last 7 years. Both Sanders and Highpoint forecast that net sales will be a much greater
amount than £1,000,000 in subsequent years. As a result, it is highly certain that Sanders will make
payments of at least £40,000 (£1,000,000 × .04) each year.
Required: What is the undiscounted lease payment amount Sanders should use to record its right-
of-use asset?