BonneSante S
James Huang
Professor Lau
ACCT 495
May 2, 2015
BonneSante S.A.
1. How well do the chief accountant’s assumed lease characteristics line up with the company’s past lease term experience?
Illustration 1:
The truck lease would be accounted for as a regular equipment lease with the interest every month.
Truck Rental Expense 800
Interest Expense 40 Cash 840
Illustration 2:
If we determine the probability of lease terms, for 60% the lease will be for 6 years, so we will use 6 years as the lease term. Then the initial direct cost is factored into total of 72 months, which will be 83 a month. Then we use the PV of the future payments to find out the amount paid over the lease term for the first 5 years and for the last renewed year because the lease amount is different. Also we use 5% for the incremental borrowing rate.
%
Acc. %
Total$
n
Pay $
Ind. Cost/yr
Yearly cost
PV/payment
5 yr
40%
100%
20,000
5
4,000
1,200
5,200
4,074
6 yr
30%
60%
25,000
6
4,167
1,000
5,167
3,855
X
7 yr
20%
30%
30,000
7
4,286
857
5,143
3,655
8 yr
10%
10%
35,000
8
4,375
547
4,922
3,331
The most probable is 6 years. The journal entry will be like this:
Rent Expense 3,855 Cash 3,855
Illustration 3:
Because there is no possibility that it will go beyond 5 years, it will be set for a 5-year lease term for 100%. It will be operational lease because it does not satisfy any of the criteria.
Rent Expense 5,000 Cash 5,000
Illustration 4:
%
Acc. % n Pay $
6 yr
30%
100%
12
400
7 yr
50%
80%
24
500
8 yr
20%
20%
36
600
For year 6 and 7 the lease will be 500 per month for 24 months.
Rent Expense 500 Cash 500
2. How would you view the liability for future lease payments BonneSante would have to record under the ED’s lessee accounting proposal? Is it like regular bank debt? If not, what is it? Would you include at 100 percent of the recognized amount in a debt-to-equity ratio?
Rental lease payments do not satisfy any of the requirements for capital lease, so it is classified as operational
Professor Lau
ACCT 495
May 2, 2015
BonneSante S.A.
1. How well do the chief accountant’s assumed lease characteristics line up with the company’s past lease term experience?
Illustration 1:
The truck lease would be accounted for as a regular equipment lease with the interest every month.
Truck Rental Expense 800
Interest Expense 40 Cash 840
Illustration 2:
If we determine the probability of lease terms, for 60% the lease will be for 6 years, so we will use 6 years as the lease term. Then the initial direct cost is factored into total of 72 months, which will be 83 a month. Then we use the PV of the future payments to find out the amount paid over the lease term for the first 5 years and for the last renewed year because the lease amount is different. Also we use 5% for the incremental borrowing rate.
%
Acc. %
Total$
n
Pay $
Ind. Cost/yr
Yearly cost
PV/payment
5 yr
40%
100%
20,000
5
4,000
1,200
5,200
4,074
6 yr
30%
60%
25,000
6
4,167
1,000
5,167
3,855
X
7 yr
20%
30%
30,000
7
4,286
857
5,143
3,655
8 yr
10%
10%
35,000
8
4,375
547
4,922
3,331
The most probable is 6 years. The journal entry will be like this:
Rent Expense 3,855 Cash 3,855
Illustration 3:
Because there is no possibility that it will go beyond 5 years, it will be set for a 5-year lease term for 100%. It will be operational lease because it does not satisfy any of the criteria.
Rent Expense 5,000 Cash 5,000
Illustration 4:
%
Acc. % n Pay $
6 yr
30%
100%
12
400
7 yr
50%
80%
24
500
8 yr
20%
20%
36
600
For year 6 and 7 the lease will be 500 per month for 24 months.
Rent Expense 500 Cash 500
2. How would you view the liability for future lease payments BonneSante would have to record under the ED’s lessee accounting proposal? Is it like regular bank debt? If not, what is it? Would you include at 100 percent of the recognized amount in a debt-to-equity ratio?
Rental lease payments do not satisfy any of the requirements for capital lease, so it is classified as operational