MGMT 351 1st Edition Lecture 7Last Lecture I. Intro to LeasesII. HP 15-1 BeginningCurrent Lecture Outline I. Leases Cont’dCurrent Lecture HP 15-1 Cont’d2. (b) Lessee’s amortization table – uses lower of implicit (internal rate of return) and borrowing interest rate- 8%AmortizationDate @Rent I/Exp (Reduction) Balance (L/Liab) 1/1/14 - - - 798,54212/31/14 200k 63,883 136,117 662,42312/31/15 200k 52,994 147,006 515,41712/31/16 200k 41,233 158,767 356,65013/31/17 200k 28,532 171,468 185,18212/31/18 200k 14,815 185,185 - 0 -* 201,457 798,543* * round-off errorLessor’s amortization table – uses his own rate alwaysAmortizationDate @Rent I/Rev (Reduction) Balance (Net L/Rec) 1/1/14 - - - 804,72712/31/14 200k 80,473 119,527 685,200These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.12/31/15 200k 68,520 131,480 553,72012/31/16 200k 55,372 144,628 409,09213/31/17 200k 40,909 159,091 250,00112/31/18 200k 25,000 175,000 75,000* 270,274 729,726* * round-off error(c) Roadway (CL) Alcam (STL) 1/1/14 Leased Trailers 798,542 L/Rec (gross) 1,075,000L/Liab. 798,542 CGS 553,431Sales 758,158Inventory 600,000U/I/Rev 270,27312/31/14 Int. exp. 63,883 Cash 200,000(FYE) L/Liab. 136,117 L/Rec(gross) 200,000Cash 200,000 U/I/Rev 80,473I/Rev. 80,473 Ex Costs 7,500 Cash 7,500Cash 7,500 Ex Costs. pay. 7,500 D/Exp 266,181 No entryA/D 266,18112/31/18 Int. Exp. 14,815 Cash 200k(FYE) L/Liab. 185,185 L/Rec (gross) 200kCash 200,000U/I/Rev 25,000I/Rev 25,000 Ex costs 7,500 Cash 7,500Cash 7,500 Accts. pay. 7,500 D/Exp 53,236 No entryA/D 53,236 A/D 798,543 Inventory 75,000Leased Trailers 798,543 L/Rec (gross) 75,0003. In the Amortization table, the amount of the following items change:Roadway Alcam - I/Exp., Reduction, and Balance (L/Liab.) * no change in I/Rev., Reduction, and Balance (Net L/Rec.)In the Journal entries, the amount of the following items change:- Cost of the trailers and L/Liab. at 1/1/14 - CGS and Sales at 1/1/14 and at the end of each year until the lease expires. (no change in GP, U/I/Rev, Inv., - D/Exp., A/D, I/Exp, and the reduction in L/Liab & L/Rec) at each fiscal year-end (payment date).4. Operating LeaseRoadway (Lessee) Alcam (Lessor)1/1/14 No entry No entry12/31/14 Rent Exp. 200k Cash 207.5k(FYE) Ex. Costs 7.5k Rent revenue 200k Cash 207.5k Ex Costs pay. 7.5kNo depreciation for inventory.The same entries at 12/31/15 ~ 18. 5. Roadway (Lessee)Total costs for OL = 200k*5 yrs= 1,000,000Total costs for CL =201,542+ 798,542= 1000k6. Alcam (Lessor)Total Rent Rev from OL = $1,000kTotal (Sales + Interest) Rev from STL = $1,028,432 Total revenue is greater under STL but the extra revenue $28,432 is only on books. Total real revenue over the entire lease term is the same ($1,000k)  All else equal, Alcam likely has no preference bet. the twotypes of lease (as far as total revenues are concerned).But Alcam may wants larger revenue (& profit) in the first year and, if so, it may prefer STL. 7. Alcam (Lessor): DFL no profit/loss (a) PVor = Cost = $600,000 @Rent = $145,994(b) Date @Rent I/Rev Reduction Balance 1/1/14 - - - 600,00012/31/14 145,994 60,000 85,994 514,00612/31/15 145,994 51,401 94,593 419,41312/31/16 145,994 41,941 104,053 315,36013/31/17 145,994 31,536 114,458 200,90212/31/18 145,994 20,090 125,904 75,000*204,968 729,726* * round-off error8. –Use Spreadsheet Lessee Lessee’s total PV will include the down payment of $10,000, so PVee ↑. This means: - L/Iab - Periodic I/Exp - Periodic Amort. (Reduction in L/Liab) - L/Liab balance Lessor Lessor’s total PV will include the down payment of $10,000, so PVor ↑.This means: - L/Rec - Periodic I/Rev - Periodic Amort. (Reduction in L/Rec) - L/Rec balance Sale-Leaseback: you sell the asset, then you lease it back right awayFor tax reasons -You have two documents: a sales contract, and a lease contract No profit or loss; can only be DFL, not STLHP 15-21/1 1/1 1/1|---------1--------|--------2--------|-------3-------|-----------------|------15-------|1. Lessee: PVee = $32k 2. Payment Date @MRP-@ExC InterestReduction Balance 1/1/14 4,195 - 0 - 4,195 27,8051/1/15 4,195 3,337 858 26,9471/1/16 4,195 3,234 961 25,9861/1/17 4,195 3,118 1,077 24,909Debit Credit 1/1/14: - sale: Cash 32k Equip 24kUn/Profit on SLB 8k- lease: Leased equip 32k L/Liab 32k- payment: L/Liab 4,195 Cash 4,19512/14: - interest: I/Exp 3337 I/Pay 3337- deprec: D/Exp 2133 A/D 2133- amort’n.: Un/Profit on SLB 533 Rd/Profit on SLB 533(or D/Exp)1/1/15: I/Pay 3,337 Cash 4,195L/Liab 8583. Lessor (DFL): Same amor. table !! (FV = Cost  no profit)1/1/14: - purch.:Equip 32000 Cash 32000- lease: L/Rec(gross) 62925 Equip 32000U/I/Rev 30925- receipt: Cash 4,195 L/Rec(gross) 4,19512/31/14: - interest: U/I/Rev 3,337 I/Rev 3,337 - deprec: no entry for the depreciation - amort’n.: no entry for the amortization of unearned profit1/1/15: Cash 4,195 L/Rec(gross)