USA Lease Accounting Homework (Sale of lease during middle of lease period) not begging for answers

[Alex LaPorta]

Hi All!

New on the forum. I need some help learning about accounting and I'm doing my best learning from the book. My professor has office hours while I'm at work and doesn't reply to emails.

I already solved this one, I'm trying to improve my knowledge of how accounting works and the book isn't being forthcoming. The question is at the end of the problem.

Smithston Corporation leased equipment to Dayplanner Co. on January 1, 2013.
The terms of the lease called for annual lease payments to be made at the first of each year. Smithston's implicit interest rate for the transaction is 10%. On July 1, 2015, Dayplanner purchased the equipment and paid $118,000 to complete the transaction. After the 2015 payment was made, the following balance relating to the leased equipment was on the books of Smithston as of January 1, 2015:

Remaining Lease Payments Receivable: 151500


Long story short,
Cash D 118000
Loss on Sale D 41075

Lease Revenue C 7575
Lease Payments Rec C 151500​

My question is this: The Interest Revenue value represents the consumed value of payment made in the beginning of the year, but there's also a prepaid value of 7575 as well. Why doesn't that pre-paid value represent a debit value that counts against the loss on the sale of the leased equipment?

Translation: You paid me to lease my equipment in advance. Then you paid me to buy the lease at a loss. Why doesn't the amount that you paid me as the periodic lease pre-payment (minus the amount you consumed) count against how much I lost in the sale?

What I think:

Cash D 118000
Pre-Paid D 7575
Loss on Sale D 33500

Lease Revenue C 7575
Lease Payments Rec C 151500​

P.S. from what I can tell this is a good group of people and I hope you all won't mind me posting more questions in the future!

 

[Alex LaPorta]

I noticed I made a mistake in my explanation. I know that the lessee records prepayment of an expense as an asset and a lessor records a prepayment as a liability. What I meant in the problem is, does a reversal of a prepayment liability influence the gain/loss on the sale of a leased asset.

 

[Triest123]

The cash received 118,000 include the interest income for Jan ~ Jun 2015

 

[Alex LaPorta]

Could you explain what you mean? I feel like I'm not understanding some underlying theory with your answer.

 

[Triest123]

Could you explain what you mean? I feel like I'm not understanding some underlying theory with your answer.

The cash price (i.e. the selling price) of the equipment is the total present value of the annual lease payment. In other words, the lease receivable is recorded at amortised costs.

The cash $118,000 paid by Dayplanner on 1 Jul 2015 include 2 portons (i.e. principle repayment and interest payment). The interest payment for the period 1 Jan - 30 Jun 2015 is $151,500 x 10% x 1/2 = $7,575 is the interest income for Smithston Corporation while the principle repayment (i.e. $118,000 - $7,575 =$110,425) is the settlement of the leased receivable.

So the loss on sale is $151,500 - $110,425 = $41,075

p.s. The $7,575 is not a prepaid value. It is considered as the interest income during the year 2015.

 

[Brande Galvan]

The cash price (i.e. the selling price) of the equipment is the total present value of the annual lease payment. In other words, the lease receivable is recorded at amortised costs.

The cash $118,000 paid by Dayplanner on 1 Jul 2015 include 2 portons (i.e. principle repayment and interest payment). The interest payment for the period 1 Jan - 30 Jun 2015 is $151,500 x 10% x 1/2 = $7,575 is the interest income for Smithston Corporation while the principle repayment (i.e. $118,000 - $7,575 =$110,425) is the settlement of the leased receivable.

So the loss on sale is $151,500 - $110,425 = $41,075

p.s. The $7,575 is not a prepaid value. It is considered as the interest income during the year 2015.

Triest123, thanks for solve my problem.