Residual value

This notes is additional to the residual value and summary to the Ng Eng Juans book.

17/12/2012

Norazita Marina Abdul Aziz_FAR3

Lets take a look at issue of RV in Finance Lease in the book of Lessee

17/12/2012

Norazita Marina Abdul Aziz_FAR3

Finance Lease : Issues and problems - RV

Guaranteed RV will result in increase the MLP. Therefore, increase in total lease liability. In calculation of depreciation:

Depreciable amount = Leased asset cost Residual value

Therefore:

Balance of lease liability at the end of the lease term

Guaranteed RV

17/12/2012

Norazita Marina Abdul Aziz_FAR3

Finance Lease :
Issues and problems - RV
If at the end of lease term:

1. Guaranteed RV by lessee

> assets FV

- lessee has to pay the different amount to lessor and recognise loss.

2. Guaranteed RV by lessee

< assets FV

- no cash to be paid and no gain to be recognised.

17/12/2012

Norazita Marina Abdul Aziz_FAR3

Finance Lease :
Issues and problems - RV
Illustration 5:

Assume that Sewaman Company (lessor) and Gunawan Company (lessee) sign a lease agreement dated 1 January 2005. The terms are as follows:
1. Term of lease is 5 years, it is non-cancellable, requiring equal rental payments of RM20,000 at the end of each year. 2. The FV = RM75,816 at the inception date, estimated useful life of 5 years. 3. Discount rate agreed by both parties is 10%. 4. Gunawan Co. depreciates on a straight line basis, similar equipment that it owns. 5. Gunawan Co. guaranteed a residual value of RM4,000 at the end of lease term. The residual value at the end of the lease term is estimated to be RM5,000.

17/12/2012

Norazita Marina Abdul Aziz_FAR3

Finance Lease :
Issues and problems - RV
Solution to Illustration 5:

MLP = (20,000 x 5 years) + 4,000 = RM104,000

PV of MLP = [20,000 x PVOA(5, 10%)] + [4,000 x PV(5, 10%)] = (20,000 x 3.7908) + (4,000 + 0.6209) = 75,816 + 2,484 = 78,300 = (78,300 4,000) / 5 = 14,860

Depreciation

Discount amortization schedule?

Norazita Marina Abdul Aziz_FAR3

17/12/2012

Finance Lease :
Issues and problems - RV
Lease amortization schedule: Effective interest method
Date Annual lease payment (A) 20,000 20,000 20,000 20,000 20,000 Interest (10%) (B) 7,830 6,613 5,274 3,802 2,182 Principal payment 12,170 13,387 14,726 16,198 17,818 Lease liability (D) 78,300 66,130 52,743 38,017 21,819 4001

1 Jan 05 31 Dec 05 31 Dec 06 31 Dec 07 31 Dec 08 31 Dec 09

Maximum amount to be paid by lessee

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Finance Lease :
Issues and problems - RV
Journal entries at the end of lease term (31 Dec 2009) , if:
Dr. Lease liability Accumulated depreciation Cr. Leased asset
Dr. Lease liability Accumulated depreciation Loss on finance lease Cr. Leased asset Cash

1. FV = 4,000

4,000 74,300
78,300 4,000 74,300 2,000 78,300 2,000

2. FV = 2,000

3. FV = 6,000

Dr. Lease liability Accumulated depreciation Cr. Leased asset

Norazita Marina Abdul Aziz_FAR3

4,000 74,300 78,300

17/12/2012

Lets take a look at issue of RV in Finance Lease in the book of Lessor

Norazita Marina Abdul Aziz_FAR3

17/12/2012

Finance Lease :
Issues and problems - RV
Refer to Illustration 5: Guaranteed RM4,000 + RM1,000 unguaranted

Gross investment = (20,000 x 5 years) + 5,000 = RM105,000

PV of gross inv. = [20,000 x PVOA(5, 10%)] + [5,000 x PV(5, 10%)] = (20,000 x 3.7908) + (5,000 x 0.6209) = 78,920

Journal entries at the end of lease term (31 Dec 2009) , if: 1. FV = 4,000 2. FV = 2,000 3. FV = 6,000

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Norazita Marina Abdul Aziz_FAR3

17/12/2012

Finance Lease :
Issues and problems - RV
Journal entries as at 31 Dec 2009:

1. FV = 4,000

Dr. Fixed assets 4,000 Loss on finance lease 1,000 Cr. Lease receivable 5,000
Dr. Fixed asset 2,000 Cash 2,000 Loss on finance lease 1,000 Cr. Lease receivable 5,000

2. FV = 2,000

3. FV = 6,000

Dr. Equipment Cr. Lease receivable Gain on finance lease

Norazita Marina Abdul Aziz_FAR3

6,000 5,000
1,000
17/12/2012

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