Assignment 1
Assignment 1
By
Jessica Gratton
Daniel Mayer 6786454
Submitted to
Professor Sheldon Weatherston
For the course
Special Topics in Financial Accounting (ADM4348)
University of Ottawa
February 5th, 2015
Lease 1 – Security System
Purchased by RFC by cash at a cost of $41,347 on January 1, 20X1;
Lease contract signed with Customer M on January 2, 20X1;
Two year lease with payments of $11,300 on January 2, 20X1 and January 2, 20X2;
Lease is renewable for 1 year up to three times at a cost of $9,300;
At the end of the lease term, the security system reverts to RFC;
If Customer M doesn’t renew, there is a $30,000 penalty to be paid;
The annual maintenance and insurance are included in the price, $300/year;
Customer M may purchase the security system for the fair value at the end of each lease term;
RFC earns 10% return on this lease contract;
The security system has a useful life of seven (7) years;
System could be out of date after four (4) or five (5) years.
Criteria analysis:
1- There is no transfer of ownership at the end of the lease term;
2- There is no bargain purchase option;
3- Since Customer M does not foresee the need to continually upgrade to the state of the art technology, we will assume that the contract is based on the security system’s useful life of seven (7) years. The first lease term is 28.57% (2/7) of its useful life, with the second lease term we are at 42.86% (3/7), third lease term is 57.14% (4/7) and the last lease term comes up to 71.43% (5/7). By the end of all lease terms, we are still below the 75%, so in this case, the lease term is not a major part of the asset’s useful life;
4- PVMLP:
PVMLP = FV (>90%) Substantially all of the fair value of the leased asset;
5- No indication about the specialized nature of the asset.
CONCLUSION: Finance lease because the PVMLP amounts to at least substantially all of the fair value of the leased asset.
Lease Amortization Schedule
Beginning of the year
By
Jessica Gratton
Daniel Mayer 6786454
Submitted to
Professor Sheldon Weatherston
For the course
Special Topics in Financial Accounting (ADM4348)
University of Ottawa
February 5th, 2015
Lease 1 – Security System
Purchased by RFC by cash at a cost of $41,347 on January 1, 20X1;
Lease contract signed with Customer M on January 2, 20X1;
Two year lease with payments of $11,300 on January 2, 20X1 and January 2, 20X2;
Lease is renewable for 1 year up to three times at a cost of $9,300;
At the end of the lease term, the security system reverts to RFC;
If Customer M doesn’t renew, there is a $30,000 penalty to be paid;
The annual maintenance and insurance are included in the price, $300/year;
Customer M may purchase the security system for the fair value at the end of each lease term;
RFC earns 10% return on this lease contract;
The security system has a useful life of seven (7) years;
System could be out of date after four (4) or five (5) years.
Criteria analysis:
1- There is no transfer of ownership at the end of the lease term;
2- There is no bargain purchase option;
3- Since Customer M does not foresee the need to continually upgrade to the state of the art technology, we will assume that the contract is based on the security system’s useful life of seven (7) years. The first lease term is 28.57% (2/7) of its useful life, with the second lease term we are at 42.86% (3/7), third lease term is 57.14% (4/7) and the last lease term comes up to 71.43% (5/7). By the end of all lease terms, we are still below the 75%, so in this case, the lease term is not a major part of the asset’s useful life;
4- PVMLP:
PVMLP = FV (>90%) Substantially all of the fair value of the leased asset;
5- No indication about the specialized nature of the asset.
CONCLUSION: Finance lease because the PVMLP amounts to at least substantially all of the fair value of the leased asset.
Lease Amortization Schedule
Beginning of the year