C15

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School

College of Southern Nevada *

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201

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Accounting

Date

Jan 9, 2024

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C15 – Blake County – GASB 87 Problem/Solution Task 1 Blake County had the following agreements in 20X9. You have been asked to advise on the accounting treatment for each of these agreements. Indicate whether each of these is (1) a short-term lease, (2) a lease, (3) a financed purchase, (4) a sale of an asset, or (5) none of the above. 1. Blake County obtains the right to use equipment that has a market rental rate of $24,000 per year for five years for $1 per year. – None of the above 2. Blake County enters into a 6-month lease on July 1, 20X0, that includes an option to extend the lease an additional 6 months. – Short-term lease 3. Blake County entered into a 12-month lease with an option to renew the lease for 12 months at a time up to 29 times. – Lease 4. Blake County enters into a multiyear contract that conveys the exclusive right to use a building on weekends. Other parties use the building on the other days. – Lease 5. Blake County enters into a 20-year contract on a building that transfers ownership to Blake County at the end of the contract period. – Financed purchase 6. Blake County enters into a 20-year contract on a building that transfers ownership to Blake County at the end of the contract period. The contract contains an option that allows Blake County to terminate the lease at the end of each year. It is likely that Blake County will exercise the option. – Lease 1

C15 – Blake County – GASB 87 Problem/Solution Rationale : 1. GASB Statement 87 specifies that a lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange-like transaction. Blake County’s right to use the equipment for $1 does not meet the description of an exchange or exchange-like transaction. 2. GASB Statement 87 states that a short-term lease is a lease that has a maximum term of 12 months or less, including any options to extend. 3. GASB Statement 87 states that a short-term lease is a lease that has a maximum term of 12 months or less, including any options to extend. Therefore, this is a lease. 4. The contract conveys control of the right to use the building and therefore is a lease. Under GASB Statement 87, the lease definition does not require uninterrupted control of the right to use the facility. 5. A contract that transfers ownership of the underlying asset to the lessee at the end of the contract should be reported as a financed purchase by the lessee. 6. Because Blake County has the option to terminate the lease and it is reasonably likely that Blake County will exercise the option, the contract is a lease and not a financed purchase. 2

C15 – Blake County – GASB 87 Problem/Solution Task 2 Blake City enters into a lease contract to obtain equipment. The lease begins January 1, 20X1, and is for noncancelable period of 36 months. The city has an option to extend the lease for an additional 24 months. The city is doubtful that it will exercise the option to extend the lease. At the end of the lease term (either 36 or 60 months, depending on whether the option to extend is exercised), the lease may be continued on a month-to-month basis for up to 12 months, which either the city or the lessor can cancel. The monthly base rent is $2,000 per month, due on the first of each month, and includes 250 machine-hours per month. There is $10 fee for each machine-hour over 250. In addition, the lease contract requires $100 per month payment for routine repairs and maintenance. The lease contract states an interest rate of 5%. A separate contract for delivery and installation fee of $1,391 is due with the first lease payment. The city chooses to amortize the lease equipment on a straight-line basis. Months Present value interest factors $1 annuity due monthly basis using 5% annual rate 24 22.8889 36 33.5047 37 34.3657 38 35.2231 39 36.0770 40 36.9273 41 37.7740 42 38.6173 43 39.4571 44 40.2933 45 41.1261 46 41.9555 47 42.7814 48 43.6039 49 44.4230 50 45.2386 3

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C15 – Blake County – GASB 87 Problem/Solution Months Present value interest factors $1 annuity due monthly basis using 5% annual rate 51 46.0509 52 46.8598 53 47.6654 54 48.4676 55 49.2665 56 50.0621 57 50.8544 58 51.6433 59 52.4290 60 53.2115 61 53.9907 62 54.7667 63 55.5394 64 56.3090 65 57.0753 66 57.8385 67 58.5985 68 59.3554 69 60.1091 70 60.8597 71 61.6071 72 62.3515 4

C15 – Blake County – GASB 87 Problem/Solution 1. What is the lease term? – 36 months 2. What is initial lease liability amount? - $67,009 3. What is the initial value of the lease asset? $68,400 4. What is the amount of monthly amortization expense? Enter the amount in whole dollars without a $ or comma. – 1,900 Rationale : 1. The initial lease term in the noncancelable 36-month period. The 24-month option to extend is excluded because the lessee is unsure that the option will be exercised. The month-to-month period is excluded because either party can cancel it. 2. The lease liability is the present value of an annuity due 5% annual interest, 36 monthly payments, $2,000 payments = $67,009. The potential variable usage fees based on future use are excluded. The repair and maintenance service fees are also excluded. 3. The initial value of the lease asset is the initial lease liability amount of $67,009 plus delivery and installation charge of $1,391 = $68,400. 4. The amortization expense is the initial lease asset amount of $68,400 allocated on a straight-line basis over 36 months [$68,400/36 = $1,900]. 5