 Hello and welcome to the session in which we would look at a leasing problem from LS source perspective. This topic is covered on the CPA exam as well as intermediate accounting. Leasing is an important topic on the CPA exam. So if you are a CPA candidate, what I strongly suggest you do is check out my website farhatlectures.com. I don't replace your CPA review course. You can keep your courses, those are yours. I can't replace them. However, I can be a useful addition. I can add 10 to 15 points to your exam score to help you pass the exam. How so? What's the value that I add? I provide you alternative explanation, backup explanation that's different than your CPA review course, which in turn it might help you tremendously understand your CPA review course. The risk is one month of subscription. The gain is possibly passing the exam. Are you willing to take that risk? Also, my courses mirror image your CPA review course. So it's set up the same way. So you can follow very easily switch between my material and your CPA review course. And if not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have other courses, resources for other courses, for example, intermediate accounting, the topic that we are covering today. Please connect with me on LinkedIn if you haven't done so and take a look at my LinkedIn recommendation. People who already passed the exam using my system like this recording, share it on YouTube and connect with me on Instagram and Facebook. Let's go ahead and get down to business and start to answer these questions, okay? On June 30th, Adam leased warehouse equipment from Manufacturer Inc. The lease agreement calls for Adam to make semi-annual lease payment of $478.77 over a four-year lease term. Also the asset use for life. That's fine. Payable each June 30th and December 31st. This is when we make those two payment. With the first payment on June 30th, 2021, which is the same date that we signed the lease. Adam's incremental borrowing rate is 9%. This is what we're gonna be using. The same rate Manufacturer used to calculate the lease payment. Excellent, so the interest rate is not an issue here. All good. The first thing they want us to compute is determine the price at which the manufacturer is selling the equipment on June 30th, 2021. So notice, we don't have a price for the equipment. So why are they asking for the price for the equipment? It's because you're supposed to be able to compute this, how so? Well, although they're not giving you the price, they're telling you, you're gonna be making eight annual payments, one, two, three, four, five, six, seven, eight. One, two, three, four, five, six, seven, eight. And notice the one, the first payment is due today, okay? And each payment is $478,767. Each payment is that much. What we have to do at this point is find the present value of those payment today. So remember, this is a present value of an annuity. Also be careful, this is the present value of an annuity due. What do I mean by annuity due? The first payment is due immediately. The first payment we received immediately. Therefore, we have to go to the table where it says the present value of annuity due. Be careful. Now, how many payments are we gonna be receiving? We're gonna be receiving N8 payments. Why? Because it's four years times two, which will give us N equal to eight. Now, the interest rate is 9% annually. We're receiving the payment semi-annually. Therefore, the applicable interest rate is 4.5. Here's the applicable interest rate. And they meet at 6.8927. This is the present value factor that we are going to be using to compute the price of this equipment, the price of this equipment. Therefore, we're gonna take 478,767 times the present value factor of 6.89270, which will give us the selling price of 3,299,997. So this is the present value of the payment, almost 3.3 million. Almost 3.3 million. Okay? Rounding, let's make it. I'm gonna be saying 3.3 million. That's the selling price. So we answered the first question. That's the selling price. And basically the selling price is our lease receivable. Simply put, what we have to do, if we are preparing the journal entry, which let's go ahead and prepare the journal entry, we have a lease receivable, a lease receivable of how much? 2., I'm sorry, 3.2,999,997. And we made a sale, because this is basically a capital lease or a finance lease, sales revenue, 3,299,997, 3.3 million rounding. So this is the price. And if you want the journal entry, this is the journal entry. What amount related to the lease would manufacture a report on its balance sheet, December 31st, 2021, ignoring taxes? So what they're asking is what is the balance of the lease receivable six months later? And what happens six months later? We're going to be making two payments by December 31st. Well, we're going to start with the lease receivable of 3,299,997. And immediately we are going to make a payment. We are going to make a payment immediately of four, I'm sorry, not making. We're going to be receiving the payment because we are the lessor. They're going to be making a payment of 478,767. That's going to reduce the lease receivable. Then the let's see it's gonna, we'll make another payment December 31st. Now, first we have to find out what's the balance as of the beginning of the lease payment. So here's what we have to do first. So this on June 30th, the lease was 3.3 million rounding. Then immediately we reduce the lease receivable by 478,767. Therefore the balance is 2,821,230. This amount, it's gonna accrue interest at 4.5%, which is if we multiply it by 0.045. And that's gonna give us around 126,955. That's the interest revenue. That's the interest revenue we're gonna be earning on this lease. Remember, we have a lease receivable. The receivable earns revenue. But remember, after the first payment, it goes down to 2.8 million approximately. So therefore, what we're gonna be receiving the payment on December 31st, we're gonna debit cash 400, this is December 31st, 78,767. We are going to credit interest revenue, interest revenue 126,955. Okay, let's compute the lease receivable. It's the remaining is lease receivable 478,767 minus the interest revenue portion 126,955. Therefore it's 351812. Therefore what I have to do is reduce my balance by an additional 351812. So this balance here, 2,821,230. I'm gonna reduce it by 351812. And that's gonna give me a balance of, if my math is right, 2,469,418. So let me review this. My initial balance was this much, almost 3.3 million. I made a payment immediately, which brought my balance down to 2,021,230. This amount will accrue interest of 126,955. When I received the payment, 126,955 is interest remaining is reduction in the lease. And it will be, my lease will be 2,469,418. And that's the answer for this question. What line item amount related to the lease would manufacture a report on its income statement for the year ended December 31st, ignoring taxes, manufacturers, equipment had a cost of 2.8 million. Well, if the cost of the equipment is 2.8 million, let's find out how much profit we made on this deal. Profit from selling this equipment. We sold it for 3.3 million, rounding, minus 2.8 million. So this is the profit that we made on the deal itself. So 3,200,999,997 minus 2.8 million. So the profit on the sale itself, it was approximately half a million, 499,997. This is the profit from the sale, from the sale of the equipment, which hopefully this makes sense. In other words, we also have to record the cost of this now since we know the cost, we have to record the cost, which is, we're gonna debit cost of goods, cost of goods, 2.8 million. And we're gonna have to credit the equipment because we lease the equipment 2.8 million. So this is the journal entry when we sold it, okay? The cost is there. But the question is, what should go on the income statement in addition to the profit? Remember, we made the interest revenue of 126,955 plus 126,955. As a result, we made total profit from this deal for year 2020, 1,626,952. Part of it is from the sale of the equipment, from the lease, which is technically a sale, and part of it from the interest revenue. Now going forward, we're only gonna make profit every year from the interest revenue because we already booked the profit from the sale itself from the sale of the equipment. I hope this exercise will help you illustrate the concept that you need to know for the exam because leases is very important topic. And if you have any doubts, please take a look at my website, farhatlectures.com. Once again, I don't replace your CPA review course. I help you understand it differently. I'll give you more examples, which will be very beneficial for you. Again, your risk is one month. This is a long-term investment. Take it seriously, pass the exam, focus on your CPA career and stay safe.