Analysis of Energy Consumption in Ireland

Analysis of Energy Consumption in Ireland Introduction General Introduction The following chapter will introduce the dissertation topic by means of its intended goals, outline of content within each chapter and the research methodology. The research goals present the authors aims to be achieved, core objectives and hypothesis to test. The chapters shall be briefly described as to their particular topic area. Research methodology will establish the research process, planning, data collection methods utilized and finally mention limitations encountered throughout completing the dissertation. Research Goals Aim To investigate is renewable energy the way of the future, the potential of renewable energy sources and to analyse their long-term capability of meeting Irelands future energy needs. Objectives To consider past and present trends of energy consumption in Ireland. To investigate the suitability of this technology for Ireland. To evaluate the environmental advantage of using the technology. To examine in detail the practical adoption of renewable energy technology in another country. To compare traditional energy sources against renewable sources. To examine the financial implications of changing from the traditional energy supply to a more renewable supply. Hypothesis Renewable energy is a viable option for meeting energy requirements for the future of the Irish energy market. Outline of Chapters Chapter 1: This chapter introduces the dissertation and details the authors core objectives to be researched. The structure of the dissertation is briefly described, which details the key sources of information followed by a short account of the chapters to follow. Chapter 2: The dissertation begins with a short first chapter explaining what is known as renewable energy. Chapter 3: Talks about potential future energy demands. Energy trends are evaluated to prepare an estimated energy forecast for Irelands future. Chapter 4: Investigates into why a renewable energy future? The chapter deals with the rising demand and price of oil and gas. Also the concerns about climate change and Irelands commitment to the EUs Directives on the deployment of renewable energy are dealt within the chapter. Chapter 5: The chapter reviews the renewable energy options available to Ireland. The options are assessed on the extent to which they could be used in meeting future demands. Chapter 6: Examines the Governments present proposal Renewable Electricity A 2020 Vision, which is to set up an All-Island Energy Market between the Republic and Northern Ireland. The Chapter evaluates the proposal to secure future energy supply through renewable energy for the whole island. Chapter 7: This chapter considers nuclear energy through certain areas which may be beneficial or not to Ireland. Chapter 8: This is the final chapter of the dissertation where the author reaches conclusions from the research carried out to date, followed by recommendations and areas for further study. Research Methodology Research may be defined as, the systematic study of materials and sources in order to establish facts and reach new conclusions (Concise Oxford English Dictionary 2005). This section outlines the research methods used to prepare this dissertation. The structure of this dissertation presents the findings of research, clearly identified, which was conducted by the author. Also aspects of data collection associated with problems encountered and limitations will be summarized. Research Process Preliminary research began during the Authors placement year (year 3 of BSc Construction Economics Management in Limerick Institute of Technology). As part of the year a dissertation proposal submission was required. An initial investigation on the availability of information was carried out and being satisfied that the information available was sufficient, I decided to continue with the topic. The initial sources primarily included books, Internet, papers and magazines. Research Planning For the research process consideration was given to the possible methods of approach to the actual dissertation. To carry out the research effectively and in a detailed manner a research plan and programme was established. This plan consisted of giving sufficient time for the detailed research of material both published and unpublished. From this the author got a detailed understanding of the topic and the exact focus of the dissertation was established along with the content and scope of the various chapters. After choosing the title, aim, objectives and hypothesis, a detailed plan had to be formulated to meet each objective of the dissertation. This proved vital to the success of the dissertation, given the limited time frame to review material, engender results and complete the dissertation. Due to the amount of publications and information that needed reviewing for inclusion into the dissertation file, reading and analysis was continuously ongoing. All articles of information were scanned generally to assess their suitability and all relevant information marked accordingly. All relevant information, once analysed, was categorized based on its relevance to a given chapter. Data Collection Methods In order to test the hypothesis of this dissertation effectively detailed information had to be sought on all aspects of renewable energies and the Irish energy market. The types of data used for compiling this dissertation came from both primary and secondary sources. Material from both sources was read in detail and any information relevant to any aspect of the dissertation topic was highlighted and noted. For the actual structure of the separate chapters, this information was subdivided into separate files for each proposed chapter. Primary Sources The dissertation utilized primary sources, as work contained provided accurate information. The volume of the information was obtained from Government organisations and EU reports. The up to date factor of the reports was its main advantage. Other organisations such as Sustainable Energy Ireland published reports which proved very beneficial. As the dissertation subject is topical at present, there have been many related conferences and the proceedings published. Official Government publications were helpful especially for information relating to the All Island Energy Market. Other official publications from the EU were used to gather information on EU Directives and the Kyoto Protocol. Finally structured interviews were conducted in relation to setting up and operating wind farms as the results offered accurate first hand information. Past dissertations have been utilized but for the purpose of guidance. Secondary Sources An in depth documentary review was undertaken by the author, which involved examining various sources of information for factual information. This information was taken from construction journals, textbooks, brochures and magazines. Text books were used only for background information. Magazines and national papers proved helpful in keeping up with new developments affecting the topic, for example the Budget and Government publications. As the dissertation required up to date information on the topic, a large quantity of information was obtained from the Internet. Limitations There were a number of difficulties encountered during the research of this dissertation. The main concern for the author was the realization that new information on the chosen topic was constantly being up dated with new developments. As the dissertation is somewhat based on what may happen in the future, the conclusions and recommendations are based on educated assumptions. There exists a lack of published work in relation to the All Island Energy Market, as the consultation period is still on going. Contact with the Department of Communications, Marine and Natural Resources was made with regard to the topic and all other topics relating to the dissertation. The author was informed that the most up to date information would be available in the Governments Energy White Paper 2007 Delivering a Sustainable Energy Future for Ireland and that information contained within it could not be released until the Governments official launch on the 12th of March 2007. Due to time constraints the author was not able to exploit this source. Based on the limited amount of information available the author utilized a significant amount of secondary sources. Also research questionnaires had to be abandoned due to a lack of response from organisations. Although certain information available was limited, with continued research and perseverance though all possible avenues it is believed that suitable material was compiled delivering a complete dissertation on the subject matter. CHAPTER TWO What Is Renewable Energy? Introduction Renewable energy comes from energy sources that are continuously replenished by nature. They are non-fossil energy sources that are not depleted by utilization. The main sources of renewable energy are the wind, the sun (solar energy), water (hydropower, wave and tidal energy) and biomass (wood, biodegradable waste and energy crops). Renewable energy sources are those which are effectively inexhaustible (such as wind, wave, solar, hydro etc) or which are replenished at or about their rate of consumption (such as managed forests and energy crops and other forms of biomass) (Anon 2005). What are the Benefits of Renewable energy? Renewable energy resources are clean sources of energy. They can be harnessed without damaging the environment, unlike using fossil fuels which release carbon dioxide (a greenhouse gas) and other harmful pollutants into the atmosphere. Increasing the use of renewable energy is therefore a key strategy for reducing greenhouse gas emissions and meeting Irelands Kyoto commitments. Renewable energy resources will not become exhausted. Unlike finite fossil fuels, renewable energy resources are continuously replenished and will not run out. Renewable energy resources are indigenous resources. Ireland is heavily reliant on imported fossil fuels. We now import around 89% of the fuels we need for energy. By tapping the renewable energy resources with which Ireland is richly endowed, we could reduce this reliance on imports. By increasing our use of renewable resources, we can achieve a more secure and stable energy supply for the long term (Sustainable Energy Ireland a). Chapter Summary Renewable energy generally refers to energy derived from non-fossil fuel resources (excluding nuclear). Renewable energy has become more popular in recent times as talks of global warming increase internationally and exhaustion of fossil fuels. Renewable energy will benefit the environment and help reduce our dependency on depleting sources of energy. CHAPTER THREE Irelands Potential Energy Needs Introduction To assess the potential of renewable sources sustaining Irelands energy needs in the future, firstly energy trends have to be evaluated to estimate the future requirements. It is impossible to know for sure what the future will hold but by reviewing different forecasts, a reasonable estimate can be made. Energy Trends Energy trends of the past fifteen years will give a good review of Irelands energy growth. It was within this time that the country experienced significant economic growth which was seen in the energy sector. The amount of energy consumed is shown through the Total Primary Energy Requirement (TPER). Total Energy Requirement (TER) figures represent the total Irish electricity generation at the plant exported level plus imports, less exports. The TER is the amount of electricity required to meet total final consumption in the Republic of Ireland including an allowance for transmission and distribution losses (Anon 2005). Figure 3.1 shows the Total Primary Energy Requirement (TPER) of the Republic of Ireland, broken down by fuel type, over the period 1990 to 2000. Estimates for the period 2001 to 2010 are also included. This figure shows that there was rapidly increasing growth in energy demands in the 90s and in particular, the mid 90s to 2000. It also shows a high dependence on the oil and gas. Energy Forecasts The Government document, All-Island Energy Market: Renewable Electricity A 2020 Vision; Preliminary Consultation Document, (Anon 2005), forecasts energy demands by firstly modifying the 2005 2011 median TER values so as to account for generation plant house load, and then determining the values for 2012 2020 at the assumed growth rates of 3% per annum between 2012 and 2015, and of 2% per annum between 2015 and 2020. This can be clearly seen in Table 3.1. These facts are based on the future for the whole island of Ireland, a joint north and south venture of meeting future energy demands and include Northern Ireland which is discussed in Chapter Six. The above forecast is not alone in believing that there will be a steady growth, although slightly less over a longer period of time. The report (Howley et al 2006) assumes electricity demand to grow significantly. Table 3.2 from the report shows the predicted growth. The prediction assumes the CO2 costs â‚ ¬15/tonne in 2010 and â‚ ¬30/tonne in 2020. Chapter Summary The past energy trends showed that there has been a constant rise in energy demand and this is reflected in the forecasts. The two different reports predicted to 2020 and show a similar prediction. It can then be assumed that to 2010 a 3.0 4.0% increase can be expected and from 2010 2020, a lesser 1.0 2.0%. The forecast for the generating fuel is predicted through past trends and present economic development, predicting oil to be eliminated by 2010 and gas to dominate. Although renewables are predicted to increase, early forecasts report they will only have a minor impact. CHAPTER FOUR Why a Renewable Energy Future? Introduction The future of Irelands energy supply is changing and it can not be stopped but we can adapt. The foremost important issue for the Government is to secure the countries future energy supply. Irelands geographical location and fuel resources means it is of critical importance that the future energy supply is secured now before it is too late. Ireland is too dependant on import fossil fuels for energy and so we need to become more independent, which renewable energy can provide. While Irelands imports of fossil fuels for energy still stand at about 85 per cent, much higher than the EU average of 50 per cent, there is a definite shift towards renewables. But there are other factors steering Ireland towards renewable sources, including EU and Kyoto responsibilities. Oil and Gas Depletion Oil and gas are a finite resource and there so going to completely run out some day. The demand for gas and in particular oil is increasing. This is mainly due to significant economic growth of China and India. The report Exxon-Mobils view of the future of oil and gas predicts demand is expected to rise through the year 2010 at a rate of about 2 per cent per year for oil and 3 per cent per year for gas (Longwell), as shown in Figure 4.1. This is leading to a rise in price, Figure 4.2, which already is affecting Ireland. As stated in the EU Green Paper in 2006, Oil and gas prices are rising. They have nearly doubled in the EU over the past two years, with electricity prices following. This is difficult for consumers. With increasing global demand for fossil fuels, stretched supply chains and increasing dependence on imports, high prices for oil and gas are probably here to stay (Anon 2006). Rising oil prices In its 2001 review BP commented The worlds oil R/P (reserve to production) ratio has fallen modestly since 1990 as world oil production growth has outpaced additions to reserves (Busby 2002). A chart in the 2001 review shows 1990 as the year when the R/P peak ratio of 44 was passed, reducing to 40 by the end of 2000. At the end of 2002 the R/P ratio had reduced further to 39, to rise to 41 at the end of 2003, dropping back to 40.5 at the end of 2004, but shown at 40.6 at the end of 2005. As production continues to rise and additions to reserves fail to match it, the ratio of oil reserves to production (R/P) will continue to decline and the price of crude oil will rise. The world gas R/P ratio in 2005 was 65.1, compared to 40.6 for oil. At 2005 production rates, gas reserves would provide a source of energy for a further 24 years after oil exhaustion. But when oil supplies starts to run out, more gas will be used as a substitute, hence increasing gas depletion. So if oil production peak is predicted at 2010, gas production peak should follow bout the year 2020. The problem starts to become apparent when you realise the decline of oil discovery, as shown in Figure 4.3. The gap between discovery and consumption is widening and this will eventually lead to oil production peaking. Chevron, one of the worlds largest oil companies, admits to the imminent peak and decline of oil. An Oil production peak before or by 2010 seems now to be generally accepted. The not so distant future of Irelands energy market will then have to contend without oil. The oil market is global where the gas market is regional and this is where Ireland could really suffer in the long term. It is predicted that gas will outlast oil but gas has to be piped and Irelands geographical location causes problems. The discovery of the Corrib gas field is potentially very important as it offers temporary relief from increasingly unreliable supplies of gas from the United Kingdom and Europe, says Colin Campbell, petroleum geologist (Campbell). In the near future with oil demand rising pushing up prices and in the distant future oil not been available, we must look to renewables now. The Corrib gas field is small and might get ten or more years out of it at the current rate of consumption but the Government should use this opportunity to draw on the gas to help support renewable energy. The Environment and EU Directive Irelands main source of energy is fossil fuels which produce vast quantities of CO2, add to climate change and which the EU intend to reduce. The emissions that are produced from burning fossil fuels are becoming more serious every year and a much discussed topic at national and international level. Climate Change and the Kyoto Protocol Fossil fuels constitute a significant repository of carbon buried deep under the ground. Burning them results in the conversion of this carbon to carbon dioxide, which is then released into the atmosphere. This results in an increase in the Earths levels of atmospheric carbon dioxide, which enhances the greenhouse effect and contributes to global warming (Wikipedia). As was seen in Figure 4.4, fossil fuels are a major electricity fuel for Ireland. Fossil fuels, particularly coal, contain a dilute radioactive material which is released into the environment leading to low levels of radioactive contamination. Within the EU burden sharing agreement to meet its obligation under the Kyoto Protocol, Ireland must stabilise its Greenhouse gas emissions at 13% above 1990 levels within the period 2008 to 2012 (Department of Communications, Marine and Natural Resources 1998). Intergovernmental Panel on Climate Change (IPCC) latest Assessment Report was released on the 2nd of February 2007 in Paris. The report was produced by some 600 authors from 40 countries. According to the IPCC, the warming of the world is unequivocal, and that humans are very likely (higher than 90% likelihood) behind the warming. The key conclusions were: Possible temperature rise between 1.1C and 6.4C by 2100 Sea level most likely to rise by 18-59cm (7in-23in) Artic summer sea ice disappears in second half of century Increase in heatwaves very likely Increase in tropical storm intensity likely Considering overall greenhouse gas emissions, energy related CO2 emissions accounted for 51% in 1990 compared to a projected 66% in 2010 if we continue in the same direction. Renewable energy would dramatically reduce Irelands CO2 emissions by replacing fossil fuels. This will take time, so if want to have any chance of meeting the requirements, we have to act now. EU Directive The use of renewable energy has a legislative basis in the EU under Directive (2001/77/EC). The Directive asserts the European Countries need to promote renewables to contribute to: †¦environmental protection and sustainable development. In addition this can also create local employment, have a positive impact on social cohesion, contribute to security of supply and make it possible to meet Kyoto targets more quickly'(Anon 2005). The directive forces Ireland to have an output of renewable powered electricity to 13.2% of total electricity consumed in Ireland by 2010. But the Government is hoping to have it up to 15% by 2010 through the Renewable energy Feed In Tariff (ReFIT) programme. The new Renewable energy Feed in Tariff (ReFIT) programme replaces the Governments previous support mechanism, the Alternative Energy Requirement (AER) programme and provides financial support of â‚ ¬119m to renewable energy projects over a fifteen year period The ReFIT programme will support the construction of an initial target of at least 400 megawatts (MW) of new renewable energy powered electricity generating plants. Its main aim is to increase the contribution of renewable energy sources to electricity production. The ReFIT programme will help make renewable energy competitive and is a move closer to reaching the Kyoto Protocol and the EU directive. Failure to meet the Kyoto Protocol and EU Directive (2001/77/EC) will have serious financial implications. On April 4th 2006 the European Commission launched legal proceedings against Ireland, for failing to meet the deadline of October 2003 for taking the necessary measures to transpose Community legislation on renewable electricity into national law. Ireland is now under pressure to act on renewable energy. Future Policies EU Leaders decided on Friday 9th of March 2007 to slash greenhouse gas emissions, which included a binding target for renewable sources to make up a fifth of EU energy use by 2020. The leaders committed to a target of reducing EU greenhouse gas emissions by 20 per cent by 2020 and offered to go to 30 per cent if major nations such as the United States, Russia, China and India follow suit. According to a draft agreement, the EU will aim to go even further in the future, with cuts of 60 to 80 per cent by 2050. Reports of drastic future climate change in the wake of the IPCCs recent assessment, talk of a post Kyoto agreement is been debated. The recent EU summit outcome of reducing greenhouse gas emissions by 20 per cent will form the basis of the EUs position in international talks to replace the U.N. Kyoto Protocol, which expires in 2012. Whatever it may be called, it will aim to severely reduce Greenhouse Gases to coincide with Global Warming reports. Either way it will mean a serious change for Governments and society. Chapter Summary The demand for gas and in particular oil is increasing largely due to the economic growth of China and India. The reserves at the moment show gas will outlast oil. Oil production is predicted to peak around 2010 but as oil resources decrease, demand for gas will increase to make up the slack which will result in gas production peaking sooner rather than later. The large growth in demand at present is increasing prices and with talk of oil production peaking and the politically unstable situation in the Middle East, prices look set to continue escalating. Renewable energy can help Ireland reduce its dependence on imported fossil fuels. Irelands main energy source, fossil fuels, is seriously damaging the environment and the main cause of Global Warming. The Kyoto Protocol requires Ireland to reduce its CO2 emissions. Under EU legislation Ireland must increase the use of renewable energy to 13.2% of all electricity produced but the Government are aiming for 15% with the announcement of the ReFIT programme. The programme will help meet Kyoto and EU obligations. Recent announcement from the EU requires 20% of the EUs electricity generation mix be from renewable sources by 2020. This ambitious target will require serious consideration from the Government. CHAPTER FIVE The Renewable Energy Options for the Future Introduction To meet the future energy demands, the Government will have to put a lot more work into developing renewable sources of energy. The positive from this, is Ireland has vast potential for renewable energy production, especially wind. Although the Government are starting to take more notice of renewable energy technology. Within Budget 2007 Brian Cowan stated scheme of tax relief in place in the form of a deduction from a companys profits for corporate investment in renewable energy products in the solar, wind, hydro or biomass technology categories, shall be continued for a further five years, subject to EU approval (Cowan 2006). But when considering renewable energy options, it is important to realistically assess their full potential. The present renewable energy sources should be looked at in a view of their output and efficiency, then evaluate their future part in securing the countrys energy supply. Wind Power Wind power is one of the most mature renewable energy technologies to date and currently has a good record of reliability and availability. The wind resources in Ireland are among the best in the EU due to the strength of the Atlantic winds. A wind turbine in Ireland will deliver twice as much power as the same turbine in Germany. We are the envy of Europe because of our wind speeds (Seanad Éireann 2005). Wind energy has seen major advances in Ireland recently, especially in the last four years. Wind energy now has the largest installed capacity of all renewable energy technologies in Ireland (Figure 5.1). As per up to date statistics from EirGrid, there is currently a total of 744 MW worth of wind power connected to the main grid and an additional 547.3 MW worth of energy from contracted wind farms currently in production to be connected at various stages in the future. (See Appendix C and Appendix D) Renewable Connections Kinetic energy in airflows is used to run wind turbines; some are capable of producing 5 MW of power, but the most cost effective are currently 500 kW 1.5 MW. Conventional investment costs are about â‚ ¬1,100 per kW installed. Wind energy has been growing significantly over recent years and following the trend, wind power will keep going in the near future, Figure 5.2. Wind Generation since 1992 to 2007 Onshore Wind Onshore wind in Ireland is mainly concentrated on the west coast due to strong winds from the Atlantic. Wind-speed maps help decide on the locations by showing the wind potential of certain areas but sites close to the western sea shore is generally the best region, as with Tursillagh Wind Farm. (Example of Analysis of Wind Potential See Appendix E) Turbines at Tursillagh Winds in an area are often monitored for a year and detailed maps constructed prior to wind generators being installed. Coastlines tend to be the windiest sites for turbines, because a primary source of wind is convection from the differential heating and cooling of land and sea. The erection of a wind farm onshore is becoming straight forward with companies having gained much experience and knowledge. Ireland has had well developed onshore wind energy for many years and has the knowledge to develop bigger wind farms to help meet the countries energy demand. Offshore Wind The offshore electricity production in Ireland is minimal but has made a good start. Arklow Offshore Wind Power Plant is the worlds first offshore project to deploy giant wind turbines in excess of 3megawatts and is Irelands only offshore wind project. But already is showing great prospect, showing excellent reliability and availability, areas where wind power is mainly criticised. The site was chosen as tests proved to be one of the windiest areas in Europe. Offshore turbines cause less aesthetic controversy as usually can not be seen from the shore. It offers fewer obstacles and stronger winds but is also more inaccessible and the conditions are harsh, corrosive and can increase the costs of maintenance. Unlike with onshore wind farms, planning is not an issue. The biggest obstacle at present is the significant capital cost even compared to onshore wind. Irelands offshore potential is an untapped resource and must be harnessed to become a serious contributor to the Irish electricity mix. Offshore wind power generation should be recognised for what it is; Irelands best option for meeting present renewable energy and CO2 targets. Planning for the Future To promote wind as one of the major sources of electricity in the future, it can be beneficial to look at a similar EU country with a successful wind market, for example Denmark. The ESB system is comparable in size to the west Denmark Eltra system. The Transmission System Operator (TSO) in Ireland, ESB National Grid (ESB NG), has asked for a report, explaining the management of the western Danish system Eltra with a focus on handling of wind production (Hilger 2004). This shows the level of interest in the Danish system for wind. The ESB has spotted the potential of assessing Denmarks approach to wind for our own future development. Denmark has only modest wind speeds, compared to Irelands impressive wind energy potential. As can be seen in the Case Study (Appendix F), the key to Denmarks wind power success is the support from the interconnectors to other EU countries. Winds intermittence problem is compensated with bought in electricity from the Nordic power pool at the going rate. The major interest in Denmarks Eltra system for the future will come from Denmarks offshore development, in particular the Horns Rev Wind Park. The Horns Rev Wind Park is a show case of Danish initiative in the large scale promotion of renewable energy. Horns Rev is the largest offshore wind farm in the world, producing two per cent of Denmarks total energy consumption. Much can be learned from Horns Rev in planning the future of wind power generation in Ireland. The offshore turbines produce 150 per cent more electricity than land based turbines. Also Denmarks offshore areas are restricted but the Irish situation is a decentralised approach where the pick of areas is open for private initiative. The Horns Rev project was a result of fourteen years of research and initiated by the Danish Government which was the main factor for its commencement. The turbines used (Vestas V80) which can adapt the output of the turbine to suit the parameters of any electricity grid. Although a lot of p lanning and research went into Horns Rev, construction only took six months which was run through the summer months for improved weather conditions. And finally so successful was Horns Rev, an additional wind farm (Horns Rev 2) is to be built northeast of the existing farm. The new offshore wind farm and the landing facilities will be commissioned in May 2009. (See Appendix F, Case Study) Constraints of Wind P Analysis of Energy Consumption in Ireland Analysis of Energy Consumption in Ireland Introduction General Introduction The following chapter will introduce the dissertation topic by means of its intended goals, outline of content within each chapter and the research methodology. The research goals present the authors aims to be achieved, core objectives and hypothesis to test. The chapters shall be briefly described as to their particular topic area. Research methodology will establish the research process, planning, data collection methods utilized and finally mention limitations encountered throughout completing the dissertation. Research Goals Aim To investigate is renewable energy the way of the future, the potential of renewable energy sources and to analyse their long-term capability of meeting Irelands future energy needs. Objectives To consider past and present trends of energy consumption in Ireland. To investigate the suitability of this technology for Ireland. To evaluate the environmental advantage of using the technology. To examine in detail the practical adoption of renewable energy technology in another country. To compare traditional energy sources against renewable sources. To examine the financial implications of changing from the traditional energy supply to a more renewable supply. Hypothesis Renewable energy is a viable option for meeting energy requirements for the future of the Irish energy market. Outline of Chapters Chapter 1: This chapter introduces the dissertation and details the authors core objectives to be researched. The structure of the dissertation is briefly described, which details the key sources of information followed by a short account of the chapters to follow. Chapter 2: The dissertation begins with a short first chapter explaining what is known as renewable energy. Chapter 3: Talks about potential future energy demands. Energy trends are evaluated to prepare an estimated energy forecast for Irelands future. Chapter 4: Investigates into why a renewable energy future? The chapter deals with the rising demand and price of oil and gas. Also the concerns about climate change and Irelands commitment to the EUs Directives on the deployment of renewable energy are dealt within the chapter. Chapter 5: The chapter reviews the renewable energy options available to Ireland. The options are assessed on the extent to which they could be used in meeting future demands. Chapter 6: Examines the Governments present proposal Renewable Electricity A 2020 Vision, which is to set up an All-Island Energy Market between the Republic and Northern Ireland. The Chapter evaluates the proposal to secure future energy supply through renewable energy for the whole island. Chapter 7: This chapter considers nuclear energy through certain areas which may be beneficial or not to Ireland. Chapter 8: This is the final chapter of the dissertation where the author reaches conclusions from the research carried out to date, followed by recommendations and areas for further study. Research Methodology Research may be defined as, the systematic study of materials and sources in order to establish facts and reach new conclusions (Concise Oxford English Dictionary 2005). This section outlines the research methods used to prepare this dissertation. The structure of this dissertation presents the findings of research, clearly identified, which was conducted by the author. Also aspects of data collection associated with problems encountered and limitations will be summarized. Research Process Preliminary research began during the Authors placement year (year 3 of BSc Construction Economics Management in Limerick Institute of Technology). As part of the year a dissertation proposal submission was required. An initial investigation on the availability of information was carried out and being satisfied that the information available was sufficient, I decided to continue with the topic. The initial sources primarily included books, Internet, papers and magazines. Research Planning For the research process consideration was given to the possible methods of approach to the actual dissertation. To carry out the research effectively and in a detailed manner a research plan and programme was established. This plan consisted of giving sufficient time for the detailed research of material both published and unpublished. From this the author got a detailed understanding of the topic and the exact focus of the dissertation was established along with the content and scope of the various chapters. After choosing the title, aim, objectives and hypothesis, a detailed plan had to be formulated to meet each objective of the dissertation. This proved vital to the success of the dissertation, given the limited time frame to review material, engender results and complete the dissertation. Due to the amount of publications and information that needed reviewing for inclusion into the dissertation file, reading and analysis was continuously ongoing. All articles of information were scanned generally to assess their suitability and all relevant information marked accordingly. All relevant information, once analysed, was categorized based on its relevance to a given chapter. Data Collection Methods In order to test the hypothesis of this dissertation effectively detailed information had to be sought on all aspects of renewable energies and the Irish energy market. The types of data used for compiling this dissertation came from both primary and secondary sources. Material from both sources was read in detail and any information relevant to any aspect of the dissertation topic was highlighted and noted. For the actual structure of the separate chapters, this information was subdivided into separate files for each proposed chapter. Primary Sources The dissertation utilized primary sources, as work contained provided accurate information. The volume of the information was obtained from Government organisations and EU reports. The up to date factor of the reports was its main advantage. Other organisations such as Sustainable Energy Ireland published reports which proved very beneficial. As the dissertation subject is topical at present, there have been many related conferences and the proceedings published. Official Government publications were helpful especially for information relating to the All Island Energy Market. Other official publications from the EU were used to gather information on EU Directives and the Kyoto Protocol. Finally structured interviews were conducted in relation to setting up and operating wind farms as the results offered accurate first hand information. Past dissertations have been utilized but for the purpose of guidance. Secondary Sources An in depth documentary review was undertaken by the author, which involved examining various sources of information for factual information. This information was taken from construction journals, textbooks, brochures and magazines. Text books were used only for background information. Magazines and national papers proved helpful in keeping up with new developments affecting the topic, for example the Budget and Government publications. As the dissertation required up to date information on the topic, a large quantity of information was obtained from the Internet. Limitations There were a number of difficulties encountered during the research of this dissertation. The main concern for the author was the realization that new information on the chosen topic was constantly being up dated with new developments. As the dissertation is somewhat based on what may happen in the future, the conclusions and recommendations are based on educated assumptions. There exists a lack of published work in relation to the All Island Energy Market, as the consultation period is still on going. Contact with the Department of Communications, Marine and Natural Resources was made with regard to the topic and all other topics relating to the dissertation. The author was informed that the most up to date information would be available in the Governments Energy White Paper 2007 Delivering a Sustainable Energy Future for Ireland and that information contained within it could not be released until the Governments official launch on the 12th of March 2007. Due to time constraints the author was not able to exploit this source. Based on the limited amount of information available the author utilized a significant amount of secondary sources. Also research questionnaires had to be abandoned due to a lack of response from organisations. Although certain information available was limited, with continued research and perseverance though all possible avenues it is believed that suitable material was compiled delivering a complete dissertation on the subject matter. CHAPTER TWO What Is Renewable Energy? Introduction Renewable energy comes from energy sources that are continuously replenished by nature. They are non-fossil energy sources that are not depleted by utilization. The main sources of renewable energy are the wind, the sun (solar energy), water (hydropower, wave and tidal energy) and biomass (wood, biodegradable waste and energy crops). Renewable energy sources are those which are effectively inexhaustible (such as wind, wave, solar, hydro etc) or which are replenished at or about their rate of consumption (such as managed forests and energy crops and other forms of biomass) (Anon 2005). What are the Benefits of Renewable energy? Renewable energy resources are clean sources of energy. They can be harnessed without damaging the environment, unlike using fossil fuels which release carbon dioxide (a greenhouse gas) and other harmful pollutants into the atmosphere. Increasing the use of renewable energy is therefore a key strategy for reducing greenhouse gas emissions and meeting Irelands Kyoto commitments. Renewable energy resources will not become exhausted. Unlike finite fossil fuels, renewable energy resources are continuously replenished and will not run out. Renewable energy resources are indigenous resources. Ireland is heavily reliant on imported fossil fuels. We now import around 89% of the fuels we need for energy. By tapping the renewable energy resources with which Ireland is richly endowed, we could reduce this reliance on imports. By increasing our use of renewable resources, we can achieve a more secure and stable energy supply for the long term (Sustainable Energy Ireland a). Chapter Summary Renewable energy generally refers to energy derived from non-fossil fuel resources (excluding nuclear). Renewable energy has become more popular in recent times as talks of global warming increase internationally and exhaustion of fossil fuels. Renewable energy will benefit the environment and help reduce our dependency on depleting sources of energy. CHAPTER THREE Irelands Potential Energy Needs Introduction To assess the potential of renewable sources sustaining Irelands energy needs in the future, firstly energy trends have to be evaluated to estimate the future requirements. It is impossible to know for sure what the future will hold but by reviewing different forecasts, a reasonable estimate can be made. Energy Trends Energy trends of the past fifteen years will give a good review of Irelands energy growth. It was within this time that the country experienced significant economic growth which was seen in the energy sector. The amount of energy consumed is shown through the Total Primary Energy Requirement (TPER). Total Energy Requirement (TER) figures represent the total Irish electricity generation at the plant exported level plus imports, less exports. The TER is the amount of electricity required to meet total final consumption in the Republic of Ireland including an allowance for transmission and distribution losses (Anon 2005). Figure 3.1 shows the Total Primary Energy Requirement (TPER) of the Republic of Ireland, broken down by fuel type, over the period 1990 to 2000. Estimates for the period 2001 to 2010 are also included. This figure shows that there was rapidly increasing growth in energy demands in the 90s and in particular, the mid 90s to 2000. It also shows a high dependence on the oil and gas. Energy Forecasts The Government document, All-Island Energy Market: Renewable Electricity A 2020 Vision; Preliminary Consultation Document, (Anon 2005), forecasts energy demands by firstly modifying the 2005 2011 median TER values so as to account for generation plant house load, and then determining the values for 2012 2020 at the assumed growth rates of 3% per annum between 2012 and 2015, and of 2% per annum between 2015 and 2020. This can be clearly seen in Table 3.1. These facts are based on the future for the whole island of Ireland, a joint north and south venture of meeting future energy demands and include Northern Ireland which is discussed in Chapter Six. The above forecast is not alone in believing that there will be a steady growth, although slightly less over a longer period of time. The report (Howley et al 2006) assumes electricity demand to grow significantly. Table 3.2 from the report shows the predicted growth. The prediction assumes the CO2 costs â‚ ¬15/tonne in 2010 and â‚ ¬30/tonne in 2020. Chapter Summary The past energy trends showed that there has been a constant rise in energy demand and this is reflected in the forecasts. The two different reports predicted to 2020 and show a similar prediction. It can then be assumed that to 2010 a 3.0 4.0% increase can be expected and from 2010 2020, a lesser 1.0 2.0%. The forecast for the generating fuel is predicted through past trends and present economic development, predicting oil to be eliminated by 2010 and gas to dominate. Although renewables are predicted to increase, early forecasts report they will only have a minor impact. CHAPTER FOUR Why a Renewable Energy Future? Introduction The future of Irelands energy supply is changing and it can not be stopped but we can adapt. The foremost important issue for the Government is to secure the countries future energy supply. Irelands geographical location and fuel resources means it is of critical importance that the future energy supply is secured now before it is too late. Ireland is too dependant on import fossil fuels for energy and so we need to become more independent, which renewable energy can provide. While Irelands imports of fossil fuels for energy still stand at about 85 per cent, much higher than the EU average of 50 per cent, there is a definite shift towards renewables. But there are other factors steering Ireland towards renewable sources, including EU and Kyoto responsibilities. Oil and Gas Depletion Oil and gas are a finite resource and there so going to completely run out some day. The demand for gas and in particular oil is increasing. This is mainly due to significant economic growth of China and India. The report Exxon-Mobils view of the future of oil and gas predicts demand is expected to rise through the year 2010 at a rate of about 2 per cent per year for oil and 3 per cent per year for gas (Longwell), as shown in Figure 4.1. This is leading to a rise in price, Figure 4.2, which already is affecting Ireland. As stated in the EU Green Paper in 2006, Oil and gas prices are rising. They have nearly doubled in the EU over the past two years, with electricity prices following. This is difficult for consumers. With increasing global demand for fossil fuels, stretched supply chains and increasing dependence on imports, high prices for oil and gas are probably here to stay (Anon 2006). Rising oil prices In its 2001 review BP commented The worlds oil R/P (reserve to production) ratio has fallen modestly since 1990 as world oil production growth has outpaced additions to reserves (Busby 2002). A chart in the 2001 review shows 1990 as the year when the R/P peak ratio of 44 was passed, reducing to 40 by the end of 2000. At the end of 2002 the R/P ratio had reduced further to 39, to rise to 41 at the end of 2003, dropping back to 40.5 at the end of 2004, but shown at 40.6 at the end of 2005. As production continues to rise and additions to reserves fail to match it, the ratio of oil reserves to production (R/P) will continue to decline and the price of crude oil will rise. The world gas R/P ratio in 2005 was 65.1, compared to 40.6 for oil. At 2005 production rates, gas reserves would provide a source of energy for a further 24 years after oil exhaustion. But when oil supplies starts to run out, more gas will be used as a substitute, hence increasing gas depletion. So if oil production peak is predicted at 2010, gas production peak should follow bout the year 2020. The problem starts to become apparent when you realise the decline of oil discovery, as shown in Figure 4.3. The gap between discovery and consumption is widening and this will eventually lead to oil production peaking. Chevron, one of the worlds largest oil companies, admits to the imminent peak and decline of oil. An Oil production peak before or by 2010 seems now to be generally accepted. The not so distant future of Irelands energy market will then have to contend without oil. The oil market is global where the gas market is regional and this is where Ireland could really suffer in the long term. It is predicted that gas will outlast oil but gas has to be piped and Irelands geographical location causes problems. The discovery of the Corrib gas field is potentially very important as it offers temporary relief from increasingly unreliable supplies of gas from the United Kingdom and Europe, says Colin Campbell, petroleum geologist (Campbell). In the near future with oil demand rising pushing up prices and in the distant future oil not been available, we must look to renewables now. The Corrib gas field is small and might get ten or more years out of it at the current rate of consumption but the Government should use this opportunity to draw on the gas to help support renewable energy. The Environment and EU Directive Irelands main source of energy is fossil fuels which produce vast quantities of CO2, add to climate change and which the EU intend to reduce. The emissions that are produced from burning fossil fuels are becoming more serious every year and a much discussed topic at national and international level. Climate Change and the Kyoto Protocol Fossil fuels constitute a significant repository of carbon buried deep under the ground. Burning them results in the conversion of this carbon to carbon dioxide, which is then released into the atmosphere. This results in an increase in the Earths levels of atmospheric carbon dioxide, which enhances the greenhouse effect and contributes to global warming (Wikipedia). As was seen in Figure 4.4, fossil fuels are a major electricity fuel for Ireland. Fossil fuels, particularly coal, contain a dilute radioactive material which is released into the environment leading to low levels of radioactive contamination. Within the EU burden sharing agreement to meet its obligation under the Kyoto Protocol, Ireland must stabilise its Greenhouse gas emissions at 13% above 1990 levels within the period 2008 to 2012 (Department of Communications, Marine and Natural Resources 1998). Intergovernmental Panel on Climate Change (IPCC) latest Assessment Report was released on the 2nd of February 2007 in Paris. The report was produced by some 600 authors from 40 countries. According to the IPCC, the warming of the world is unequivocal, and that humans are very likely (higher than 90% likelihood) behind the warming. The key conclusions were: Possible temperature rise between 1.1C and 6.4C by 2100 Sea level most likely to rise by 18-59cm (7in-23in) Artic summer sea ice disappears in second half of century Increase in heatwaves very likely Increase in tropical storm intensity likely Considering overall greenhouse gas emissions, energy related CO2 emissions accounted for 51% in 1990 compared to a projected 66% in 2010 if we continue in the same direction. Renewable energy would dramatically reduce Irelands CO2 emissions by replacing fossil fuels. This will take time, so if want to have any chance of meeting the requirements, we have to act now. EU Directive The use of renewable energy has a legislative basis in the EU under Directive (2001/77/EC). The Directive asserts the European Countries need to promote renewables to contribute to: †¦environmental protection and sustainable development. In addition this can also create local employment, have a positive impact on social cohesion, contribute to security of supply and make it possible to meet Kyoto targets more quickly'(Anon 2005). The directive forces Ireland to have an output of renewable powered electricity to 13.2% of total electricity consumed in Ireland by 2010. But the Government is hoping to have it up to 15% by 2010 through the Renewable energy Feed In Tariff (ReFIT) programme. The new Renewable energy Feed in Tariff (ReFIT) programme replaces the Governments previous support mechanism, the Alternative Energy Requirement (AER) programme and provides financial support of â‚ ¬119m to renewable energy projects over a fifteen year period The ReFIT programme will support the construction of an initial target of at least 400 megawatts (MW) of new renewable energy powered electricity generating plants. Its main aim is to increase the contribution of renewable energy sources to electricity production. The ReFIT programme will help make renewable energy competitive and is a move closer to reaching the Kyoto Protocol and the EU directive. Failure to meet the Kyoto Protocol and EU Directive (2001/77/EC) will have serious financial implications. On April 4th 2006 the European Commission launched legal proceedings against Ireland, for failing to meet the deadline of October 2003 for taking the necessary measures to transpose Community legislation on renewable electricity into national law. Ireland is now under pressure to act on renewable energy. Future Policies EU Leaders decided on Friday 9th of March 2007 to slash greenhouse gas emissions, which included a binding target for renewable sources to make up a fifth of EU energy use by 2020. The leaders committed to a target of reducing EU greenhouse gas emissions by 20 per cent by 2020 and offered to go to 30 per cent if major nations such as the United States, Russia, China and India follow suit. According to a draft agreement, the EU will aim to go even further in the future, with cuts of 60 to 80 per cent by 2050. Reports of drastic future climate change in the wake of the IPCCs recent assessment, talk of a post Kyoto agreement is been debated. The recent EU summit outcome of reducing greenhouse gas emissions by 20 per cent will form the basis of the EUs position in international talks to replace the U.N. Kyoto Protocol, which expires in 2012. Whatever it may be called, it will aim to severely reduce Greenhouse Gases to coincide with Global Warming reports. Either way it will mean a serious change for Governments and society. Chapter Summary The demand for gas and in particular oil is increasing largely due to the economic growth of China and India. The reserves at the moment show gas will outlast oil. Oil production is predicted to peak around 2010 but as oil resources decrease, demand for gas will increase to make up the slack which will result in gas production peaking sooner rather than later. The large growth in demand at present is increasing prices and with talk of oil production peaking and the politically unstable situation in the Middle East, prices look set to continue escalating. Renewable energy can help Ireland reduce its dependence on imported fossil fuels. Irelands main energy source, fossil fuels, is seriously damaging the environment and the main cause of Global Warming. The Kyoto Protocol requires Ireland to reduce its CO2 emissions. Under EU legislation Ireland must increase the use of renewable energy to 13.2% of all electricity produced but the Government are aiming for 15% with the announcement of the ReFIT programme. The programme will help meet Kyoto and EU obligations. Recent announcement from the EU requires 20% of the EUs electricity generation mix be from renewable sources by 2020. This ambitious target will require serious consideration from the Government. CHAPTER FIVE The Renewable Energy Options for the Future Introduction To meet the future energy demands, the Government will have to put a lot more work into developing renewable sources of energy. The positive from this, is Ireland has vast potential for renewable energy production, especially wind. Although the Government are starting to take more notice of renewable energy technology. Within Budget 2007 Brian Cowan stated scheme of tax relief in place in the form of a deduction from a companys profits for corporate investment in renewable energy products in the solar, wind, hydro or biomass technology categories, shall be continued for a further five years, subject to EU approval (Cowan 2006). But when considering renewable energy options, it is important to realistically assess their full potential. The present renewable energy sources should be looked at in a view of their output and efficiency, then evaluate their future part in securing the countrys energy supply. Wind Power Wind power is one of the most mature renewable energy technologies to date and currently has a good record of reliability and availability. The wind resources in Ireland are among the best in the EU due to the strength of the Atlantic winds. A wind turbine in Ireland will deliver twice as much power as the same turbine in Germany. We are the envy of Europe because of our wind speeds (Seanad Éireann 2005). Wind energy has seen major advances in Ireland recently, especially in the last four years. Wind energy now has the largest installed capacity of all renewable energy technologies in Ireland (Figure 5.1). As per up to date statistics from EirGrid, there is currently a total of 744 MW worth of wind power connected to the main grid and an additional 547.3 MW worth of energy from contracted wind farms currently in production to be connected at various stages in the future. (See Appendix C and Appendix D) Renewable Connections Kinetic energy in airflows is used to run wind turbines; some are capable of producing 5 MW of power, but the most cost effective are currently 500 kW 1.5 MW. Conventional investment costs are about â‚ ¬1,100 per kW installed. Wind energy has been growing significantly over recent years and following the trend, wind power will keep going in the near future, Figure 5.2. Wind Generation since 1992 to 2007 Onshore Wind Onshore wind in Ireland is mainly concentrated on the west coast due to strong winds from the Atlantic. Wind-speed maps help decide on the locations by showing the wind potential of certain areas but sites close to the western sea shore is generally the best region, as with Tursillagh Wind Farm. (Example of Analysis of Wind Potential See Appendix E) Turbines at Tursillagh Winds in an area are often monitored for a year and detailed maps constructed prior to wind generators being installed. Coastlines tend to be the windiest sites for turbines, because a primary source of wind is convection from the differential heating and cooling of land and sea. The erection of a wind farm onshore is becoming straight forward with companies having gained much experience and knowledge. Ireland has had well developed onshore wind energy for many years and has the knowledge to develop bigger wind farms to help meet the countries energy demand. Offshore Wind The offshore electricity production in Ireland is minimal but has made a good start. Arklow Offshore Wind Power Plant is the worlds first offshore project to deploy giant wind turbines in excess of 3megawatts and is Irelands only offshore wind project. But already is showing great prospect, showing excellent reliability and availability, areas where wind power is mainly criticised. The site was chosen as tests proved to be one of the windiest areas in Europe. Offshore turbines cause less aesthetic controversy as usually can not be seen from the shore. It offers fewer obstacles and stronger winds but is also more inaccessible and the conditions are harsh, corrosive and can increase the costs of maintenance. Unlike with onshore wind farms, planning is not an issue. The biggest obstacle at present is the significant capital cost even compared to onshore wind. Irelands offshore potential is an untapped resource and must be harnessed to become a serious contributor to the Irish electricity mix. Offshore wind power generation should be recognised for what it is; Irelands best option for meeting present renewable energy and CO2 targets. Planning for the Future To promote wind as one of the major sources of electricity in the future, it can be beneficial to look at a similar EU country with a successful wind market, for example Denmark. The ESB system is comparable in size to the west Denmark Eltra system. The Transmission System Operator (TSO) in Ireland, ESB National Grid (ESB NG), has asked for a report, explaining the management of the western Danish system Eltra with a focus on handling of wind production (Hilger 2004). This shows the level of interest in the Danish system for wind. The ESB has spotted the potential of assessing Denmarks approach to wind for our own future development. Denmark has only modest wind speeds, compared to Irelands impressive wind energy potential. As can be seen in the Case Study (Appendix F), the key to Denmarks wind power success is the support from the interconnectors to other EU countries. Winds intermittence problem is compensated with bought in electricity from the Nordic power pool at the going rate. The major interest in Denmarks Eltra system for the future will come from Denmarks offshore development, in particular the Horns Rev Wind Park. The Horns Rev Wind Park is a show case of Danish initiative in the large scale promotion of renewable energy. Horns Rev is the largest offshore wind farm in the world, producing two per cent of Denmarks total energy consumption. Much can be learned from Horns Rev in planning the future of wind power generation in Ireland. The offshore turbines produce 150 per cent more electricity than land based turbines. Also Denmarks offshore areas are restricted but the Irish situation is a decentralised approach where the pick of areas is open for private initiative. The Horns Rev project was a result of fourteen years of research and initiated by the Danish Government which was the main factor for its commencement. The turbines used (Vestas V80) which can adapt the output of the turbine to suit the parameters of any electricity grid. Although a lot of p lanning and research went into Horns Rev, construction only took six months which was run through the summer months for improved weather conditions. And finally so successful was Horns Rev, an additional wind farm (Horns Rev 2) is to be built northeast of the existing farm. The new offshore wind farm and the landing facilities will be commissioned in May 2009. (See Appendix F, Case Study) Constraints of Wind P

Benefits of Healthy Eating

Benefits of Healthy Eating Health Eating Studies show that by improving personal eating habits can prevent some of the leading causes of death in the world, such as heart disease, cancer, stroke, some lung diseases and injuries. While a deficit of nutrients can cause vitamin deficiencies, lowered immunity responses, weak muscles, osteoporosis, anaemia, and slower wound healing, amongst other conditions, eating unhealthy things can lead to overweight, obesity, and raised cholesterol levels, with all the problems that these bring. By having a diet that is low in fat, cholesterol and salt and is high in fruits, vegetables, grains, and fibre will keep your risk of heart disease low. Therefore, it could be said that a healthy diet could save a considerable number of lives, as heart disease is the number one cause of death in some countries, such as Australia (Australia Bureau of Statistics, 2015).ÂÂ   As there are many other factors involved, even someone who eats healthy could develop heart disease, but the benefits of a healthy diet has beneficial consequences for the body in general and could even delay the event of such diseases. The reason for such considerable benefits is mainly because the body has nutritional requirements and when those requirements are satisfied it has large benefits in the function and health of our body. The body on its own cannot produce carbohydrates, proteins, lipids, vitamins and minerals. However, these nutrients can be obtained by consuming healthy food, such as fruits and vegetables. The Department of Health of the Government of the United Kingdom officially issued a dietary advice called the EatwellPlatein2011. It is a pictorial summary of the main food groups and their recommended proportions for a healthy diet, as illustrated in the graphic bellow: This graphic shows that a balanced diet should contain: Large portions of fruit and vegetables Large portions of starchy foods, such as bread, rice, potatoes and pasta Balanced portion of meat, fish, eggs, beans and other non-dairy sources of protein Balanced portion of milk and dairy foods A small amount of food and drinks that are high in fat and/or sugar The human system can generally produce most of these minerals.ÂÂ   However, it cannot produce at least 16 of them. Before, we could only extract minerals from foods, while nowadays we can obtain them from pills that are sold on the pharmacy and even supermarkets. By consuming a variety of different foods throughout the day our bodies will be adequately satisfied and will be able to function properly so one will be in healthy conditions and feel good within themselves.ÂÂ   Eating healthy is about being aware of what is good for our bodies. Eating healthy can also makes a person feel good about themselves, raising ones self esteem. Choosing a healthy food instead of junk food not only helps a person to feel better emotionally but also improves the functions of the body in general. Healthful eating is about creating and maintaining a healthy diet and it starts by educating ourselves with factual knowledge of the great benefits of healthful eating. Many people today enjoy a greater abundance and variety of food than ever before. Nevertheless, countless health and nutritional problems arise from unbalanced diets and overeating. It is not that easy to eat healthy, as the researchers, from the Neuroscience Program in Substance Abuse (N-PISA) at Vanderbilt University, USA mentioned, A high fat diet causes people to eat more, which ultimately impairs the ability of obese people to successfully control their caloric intake, lose weight and maintain weight loss. We have conducted several studies trying to understand why a high fat diet has this effect. This probably explains the reason why people tend to eat unhealthy junk food. To sum up, eating healthy have uncountable benefits and it can lengthen your life by preventing certain diseases such as diabetes, heart disease, and obesity at the same time it increases ones self esteem. Also, as the human body does not produce several nutrients that our body requires for its function, individuals need to have a balanced diet. A balanced and healthy meal would include large portions of fruit, vegetables and starchy foods, a balanced portion of meat, fish, eggs, beans and other non-dairy sources of protein, a balanced portion of milk and dairy foods and a small amount of food and drinks that are high in fat and/or sugar. Even though it could be easier to eat unhealthier, a good knowledge of the benefits of eating healthier could change ones life for better. References: Elsevier. A high fat diet leads to overeating because of faulty brain signaling: Offering low fat foods could help prevent obesity, say researchers. ScienceDaily. ScienceDaily, 21 September 2015. Australian Bureau of Statistics. Causes of Death 2015 (3303.0) September 2016 Department of Health, Government of the United Kingdom;ÂÂ   Eatwell Plate, 2011 Barbuto, J. E. (2006, July). Mental Energy: Assessing the Motivation Dimension. Nutrition Reviews, 64(7).

Is the Watch Industry dominated by an Oligopoly*, which is beneficial E

Is the Watch Industry dominated by an Oligopoly*, which is beneficial to both firms and consumers? *= See glossary for meanings. Hypothesis ========== I believe that the watch industry is dominated by an oligopoly, which is beneficial to both firms and consumers. The watch firms are both price makers*, which is good for the watch firms, and price takers*, which is good for consumers. Aim In this investigation I shall be examining the watch industry. I will use a Mintel report of the watch industry produced in 1995 and information worksheets to test my hypothesis. Findings and Application of Theories Five companies, or the 'C5 ratio', dominate the watch industry. They have 40% of the market share* (see fig.1.). Zeon Ltd. is the market leader*. There have been no recent take-overs or mergers in the watch industry, so the market leadership is slight. The growth of the industry has been organic*. GRAPH This representation makes the watch industry an oligopoly, as opposed to being perfect competition*, imperfect competition, or a monopoly*. There are a number of reasons why the watch industry is an oligopoly. Firstly are there barriers to entry* as opposed to free entry*. One barrier to entry for other prospective watch manufacturers is economies of scale*. The larger, more established firms have a number of cost advantages, such as being able to buy raw materials in bulk or borrow large sums of money. Their production costs are therefore cheaper and therefore they will probably be able to sell their watches at a lower price than smaller, newer firms. Another barrier to entry is branding. All of the firms in the oligopoly have very established names in the... ...a novelty/ luxury item. The success of this strategy depends on maintaining low costs at low volume on a high quality image with few or no competitors. - Price Makers: In a monopoly situation where there is only one, or very few suppliers. The industry can set its prices at whatever level they want without the chance of being undercut by competition (because there is none). - Price Takers: In an industry where there is a lot of competition (ideally perfect competition), the sellers must have the prices of their product low in order to sell them. If they did not have low enough prices, customers would go elsewhere as there will be many substitutes that are cheaper. Bibliography 1) The Watch Industry Mintel Report- 1995 (obtained from Sheffield Hallam University's 'Adsett's Centre') 2) Business and Economics class worksheets Is the Watch Industry dominated by an Oligopoly*, which is beneficial E Is the Watch Industry dominated by an Oligopoly*, which is beneficial to both firms and consumers? *= See glossary for meanings. Hypothesis ========== I believe that the watch industry is dominated by an oligopoly, which is beneficial to both firms and consumers. The watch firms are both price makers*, which is good for the watch firms, and price takers*, which is good for consumers. Aim In this investigation I shall be examining the watch industry. I will use a Mintel report of the watch industry produced in 1995 and information worksheets to test my hypothesis. Findings and Application of Theories Five companies, or the 'C5 ratio', dominate the watch industry. They have 40% of the market share* (see fig.1.). Zeon Ltd. is the market leader*. There have been no recent take-overs or mergers in the watch industry, so the market leadership is slight. The growth of the industry has been organic*. GRAPH This representation makes the watch industry an oligopoly, as opposed to being perfect competition*, imperfect competition, or a monopoly*. There are a number of reasons why the watch industry is an oligopoly. Firstly are there barriers to entry* as opposed to free entry*. One barrier to entry for other prospective watch manufacturers is economies of scale*. The larger, more established firms have a number of cost advantages, such as being able to buy raw materials in bulk or borrow large sums of money. Their production costs are therefore cheaper and therefore they will probably be able to sell their watches at a lower price than smaller, newer firms. Another barrier to entry is branding. All of the firms in the oligopoly have very established names in the... ...a novelty/ luxury item. The success of this strategy depends on maintaining low costs at low volume on a high quality image with few or no competitors. - Price Makers: In a monopoly situation where there is only one, or very few suppliers. The industry can set its prices at whatever level they want without the chance of being undercut by competition (because there is none). - Price Takers: In an industry where there is a lot of competition (ideally perfect competition), the sellers must have the prices of their product low in order to sell them. If they did not have low enough prices, customers would go elsewhere as there will be many substitutes that are cheaper. Bibliography 1) The Watch Industry Mintel Report- 1995 (obtained from Sheffield Hallam University's 'Adsett's Centre') 2) Business and Economics class worksheets

Software Piracy And Its Effects Essay -- essays research papers

Software Piracy and it's Effects Identification and Description of the Issue Copyright law are perhaps those laws which are breached the most by individual on a daily bases. This is because one might not know be informed about these law or because not much is done to enforce these law. Also some countries of the world have no Copyright laws. Software Piracy is a breach of a copyright law as one copies data contained on the medium on to another medium without the consent of the owner of the Software. When one buy a software one buys not the software content and therefore it isn't ones property. Instead one buy the license to use the software with accordance to the licensing agreement. Software companies invest a lot of time and money in creating a Software and the company rely upon the sales of the Software for it's survival. If illegal copies are made of Software the companies earns no money and could therefore be forced into bankruptcy. Software Piracy can be compared to robbing as one is stealing the goods of someone else and using it without paying for it. Up to 13 Billions dollars are lost in computer piracy yearly and in order to overcome these cost the company are force to rise the prices of their product. Brand name are properties of their respected companies and they have the right to protect their properties. Understanding of the IT background of the Issue Software is contained on disc or on a CD-ROM. Pirates copy can easily be made of Software on disc by copying from one disc to another disc. For CD-ROM one needs a CD-ROM burner or one copies the content onto a large hard disc and then on to a floppy disc. There are some underground bulletin boards ( BBS ) that contain pirate software. A user who logs on to one of these BBS can download Full version of Pirate Software provided one too can give something in return. On the Internet there are binary Newsgroup such as alt.binaries.warez, WWW pages and FTP sites that also contain Pirate Software. On the Newsgroup the Files are send upon request from anonymous users. As a result people who have access to the Internet can retrieve these Software Program free of charge. The person posting the Pirate software could be from a countries that has no copyright laws. These methods used in Software Piracy are hard to stop because of the fact it is done on the Internet and between individual form different co... ...e it to unlikely that any new copy protection will not be cracked. To much copy protection could drive away legitimate consumers. Till now politician haven't really looked into the problem of Software piracy and Copyrights very thoroughly as they think that there are bigger problems to solve. Once though legislation are passes and people made aware that Software Piracy is a crime one could see a fall in Software Piracy. In dealing with other country involves a lot of bureaucracy but also a committed government. For anything to occur on the political level could take years for any effects to be seen. It has the greatest chance of solving the problem in the long run. In the technological side one could solve the problem only one a short term but implementation would be fast. Sources Internet Page WWW.pcworld.com/News December 96 Business Software Alliance Information Sheet on Software Piracy Computer Ethics Tom Forester &Perry Morrison Chapter3 "Software Theft" page 51-72 CNN Computer Connection December 96 - January 97 PC Magazine entire 96 Volume Reuters InfoWorld, Vol.19, No.6 Reuters 6 Feb. 97 Media Daily, Jan 30, 1997 Article on FBI crackdown on Software Pirates

Marketing Mix Essay

Marketing is a business function that identifies consumer needs, determines target markets and applies products and services to serve these markets. It also involves promoting such products and services within the marketplace. Marketing is integral to the success of a business, large or small, with its primary focus on quality, consumer value and customer satisfaction. A strategy commonly utilised is the â€Å"Marketing Mix†. This tool is made up of four variables known as the â€Å"Four P’s† of marketing. The marketing mix blends these variables together to produce the results it wants to achieve in its specific target market. The following describes the four P’s of marketing: Product Products are the goods and services that your business provides for sale to your target market. When developing a product you should consider quality, design, features, packaging, customer service and any subsequent after-sales service. Place Place is in regards to distribution, location and methods of getting the product to the customer. This includes the location of your business, shop front, distributors, logistics and the potential use of the internet to sell products directly to consumers. Price Price concerns the amount of money that customers must pay in order to purchase your products. There are a number of considerations in relation to price including price setting, discounting, credit and cash purchases as well as credit collection. Promotion Promotion refers to the act of communicating the benefits and value of your product to consumers. It then involves persuading general consumers to become customers of your business using methods such as advertising, direct marketing, personal selling and sales promotion.

Chapter 21 Lease Answer Problems

CHAPTER 21 ACCOUNTING FOR LEASES CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Time Range (minutes) 5-10 Number E21-1 Content Operating Lease. (Easy) Annual rental payments, no renewable option clause, executory costs. Lessee's journal entries to record agreement, payments, expenses. Capital Lease. (Moderate) Calculation of rental payments made at end of year. Table summarizing lease payments, interest expense. Journal entries. IFRS differences. Capital Lease. (Moderate) Payments made at beginning of year. Table summarizing lease payments, interest expense. Journal entries.Direct Financing Lease. (Moderate) Calculation of rental receipts, made at end of year. Table summarizing rental receipts, interest revenue. Journal entries. Direct Financing Lease. (Easy) Journal entries to record contract, first rental receipt. Direct Financing Lease / Capital Lease. (Moderate) Table summarizing lease and interest payments. Journal entries for lessor and lessee. Sales-Type Lease. (Moderate) Payments made at end of year. Calculation of selling price (fair value). Table summarizing lease receipts, interest revenue. Journal entries. Sales-Type Lease. Moderate) Payments made at beginning of year. Calculation of selling price (fair value). Table summarizing lease receipts, interest revenue. Journal entries. Sales-Type Lease / Capital Lease. (Moderate) Computation of lease payments. Journal entries for lessor and lessee. Operating Lease / Sales-Type Lease. (Moderate) Accounted for as operating, should have been sales-type. Computation of effect on net income. Operating Lease. (Easy) Computation of income derived from lease by lessor, amount of rent expense for lessee. E21-2 15-25 E21-3 10-15 E21-4 10-15 E21-5 E21-6 5-10 10-15E21-7 10-15 E21-8 10-15 E21-9 E21-10 10-15 10-20 E21-11 10-15 21-1 Number E21-12 Content Determining Type of Lease. (Moderate) Title passes at leaseend, collectibility reasonably assured, no uncertainties surrounding costs to be incurred. Table summarizing recei pts, revenue. Lessor's journal entries. Guaranteed and Unguaranteed Residual Values. (Moderate) Calculate residual value. Determine classification of the lease depending on the type of residual value. (Appendix). Sales-Leaseback. (Easy) Calculation of lease payments. Lessor's journal entries to record sale and agreement.Description of how to treat the gain by the lessee. Determining Type of Lease. (Moderate) No bargain purchase option, no agreement to transfer ownership at lease-end, no uncertainties surrounding costs to be incurred. Journal entries for lessee and lessor. Guaranteed residual value. Determining Type of Lease. (Moderate) Lessor's viewpoint. Option to buy, collectibility reasonably assured, no uncertainties surrounding costs. Journal entries, disclosure requirements. Capital Lease. (Moderate) Calculation of rental payments. Table summarizing lease payments, interest expense.Journal entries, partial balance sheet. IFRS differences. Direct Financing Lease. (Challenging) Table summarizing lease receipts, interest revenue. Explanation of lease classification. Journal entries. Partial balance sheets. Comprehensive: Direct Financing and Capital Lease. (Challenging) Computation of rental amounts. Table summarizing lease and interest receipts. Analysis of lessee's lease classification. Journal entries for lessor and lessee. Comparative financial statement presentation. Direct Financing Lease. (Moderate) Unguaranteed residual value. Computation of rental amounts.Table summarizing lease and interest receipts. Journal entries. Sales-Type Lease. (Challenging) Calculation of implied selling price. Table summarizing lease receipts, interest revenue. Explanation of lease classification. Journal entries, partial balance sheet. Various Lease Issues. (Challenging) Journal entries for lessee and lessor to record all lease transactions. Various Lease Issues. (Challenging) Computation of annual rentals if payable at beginning of year, at end of year. Table. Journal e ntries for lessee and lessor. Partial balance sheet disclosures. 21-2Time Range (minutes) 15-20 E21-13 15-25 E21-14 15-20 P21-1 30-40 P21-2 25-35 P21-3 30-50 P21-4 35-50 P21-5 45-60 P21-6 30-40 P21-7 30-45 P21-8 P21-9 30-45 45-60 Number P21-10 Content Initial Direct Costs. (Moderate) Analysis for various lease classifications. Determination of lessor's lease classification. Discussion of lessor's journal entries. Various Lease Issues. (Challenging) Classification of lease for lessee, for lessor. Option to buy, collectibility reasonably assured, no uncertainties. Lessor journal entries. Accounting for a change in residual value. Accounting for Leases. Challenging) Journal entries to record the lease for both the lessee and lessor. (AICPA adapted). Lessor's Income Statement. (Challenging) Preparation of lessor's income statement, including sales-type and operating lease as well as long-term construction contracts. (Appendix). Determining Types of Leases. (Moderate) For lessee, for les sor. Lease of land. No bargain purchase option, collectibility reasonably assured, no uncertainties surrounding costs. (Appendix). Sales-Leaseback. (Moderate) Classification of lease by lessee. Journal entries for both lessee and lessor. Time Range (minutes) 20-30P21-11 30-45 P21-12 P21-13 30-45 50-60 P21-14 10-20 P21-15 20-30 ANSWERS TO QUESTIONS Q21-1 Q21-2 GAAP provides a common set of criteria for determining the classification of leases by both the lessee and the lessor. The advantages of leasing for the lessee include: 1. Financing benefits: a. b. c. The lease provides 100% financing so that the lessee acquires the asset without having to make a down payment. The lease contract may contain fewer restrictive provisions for financing. The leasing arrangement creates a claim that is against only the leased equipment and not against all assets. 2.Risk benefit: The lease may reduce the risk of obsolescence for the lessee. 3. Tax benefit: For income tax purposes, the lessee, through deduction of the lease payment, can write off the full cost of an asset. 4. Financial reporting benefit: For operating leases, the lease does not add an asset or a liability to the lessee's balance sheet. 5. Billing benefit: For certain contract-type work, leasing may permit higher charges because interest on borrowed money to purchase assets is not usually allowed as a contract charge, whereas the interest element contained in the rental payments is allowed as a contract charge. 1-3 Q21-3 By structuring the terms of the lease so that it qualifies as an operating lease, the lessee avoids having to include the asset and the liability in the balance sheet. Exclusion of these items creates more favorable financial ratios, such as rate of return on investment, the current ratio, and the ratio of debt to equity. This, in turn, may increase the borrowing capacity of the lessee. The lessee is practicing â€Å"off balance sheet financing. † A capital lease, on the other hand, would appear in the financial statements and affect financial ratios.It may impede lessee borrowing efforts. a. A lease is â€Å"an agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets), usually for a stated period of time. † b. A sales-type lease for the lessor is a lease that meets any one of the Column A criteria and both of the Column B criteria in Exhibit 20-2, and results in a manufacturer's or dealer's profit. c. A direct financing lease for the lessor is a lease that meets any one of the Column A criteria and both of the Column B criteria, and does not result in a manufacturer's or dealer's profit. d.A sale-leaseback transaction is a lease transaction in which the owner of an asset sells it, and then immediately leases it back from the buyer. e. An operating lease for the lessee is a lease that meets none of the Column A criteria. For the lessor, it is a lease that meets none of the Column A criteria, and fails at least one of t he Column B criteria. f. A leveraged lease is a three-party lease in which one party (the equity participant) buys or manufactures an asset and leases it to another party (the asset user), with a third party (the debt participant) providing nonrecourse financing for the transaction.Q21-4 Q21-5 a. Inception of lease is the date of the lease agreement; or, if the leased property is being constructed, the date that the title passes to the lessor. b. Bargain purchase option is a provision allowing the lessee to purchase the leased property at the end of the life of the lease at a price so favorable that the exercise of the option appears, at the inception of the lease, to be reasonably assured. c. Unguaranteed residual value is the portion of the estimated residual value of the leased property that is not guaranteed by the lessee or by a third party unrelated to the lessor. . Implicit interest rate is the interest (discount) rate that, when applied on a present value basis to the sum of the minimum lease payments and any unguaranteed residual value accruing to the lessor, causes the resulting present value to be equal to the net investment of the leased property to the lessor. 21-4 Q21-5 (continued) e. Initial direct costs are costs incurred by the lessor to originate a lease that (1) result directly from acquiring that lease and (2) would not have been incurred had that leasing transaction not occurred.They also include costs directly related to specified activities performed by the lessor for that lease, such as evaluating the lessee's financial condition, negotiating lease terms, preparing and processing lease documents, and closing the transaction. Q21-6 If there is a bargain purchase option, the components of the minimum lease payments are: (1) the minimum periodic rental payment required by the lease over the lease term, and (2) the payment required by the bargain purchase option.Otherwise, they include (1) the minimum periodic rental payments plus (2) any g uarantee by the lessee of the residual value, and (3) any payments upon failure to renew or extend the lease. The criteria for a capital lease are: 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is 75% or more of the estimated economic life of the asset 4. Present value of minimum lease payments is 90% or more of fair value of the leased property to the lessor One (or more) of these criteria must be met for the lessee to classify a lease as a capital lease.Q21-8 Under an operating lease, the lessee records each rental payment as rent expense; no amount is capitalized. The lessor records each rental receipt as rent revenue. The leased asset is retained on the lessor's books and is depreciated by the lessor. Under a capital lease, the lessee records the present value of the minimum lease payments as both an asset and a liability. The lessee recognizes a portion of each payment as interest expense to produce a constant rate of interest on the book val ue at the beginning of the period, and recognizes the remainder of the payment as a reduction of the lease obligation.The lessee depreciates the asset over the term of the lease, unless there is a bargain purchase option or transfer of ownership at the end of the lease, in which case the depreciation period is the economic life of the asset. The two additional criteria for a sales-type lease are: 1. Collectibility of the minimum lease payments is reasonably assured. 2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. In addition, the lease must result in a manufacturer's or dealer's profit or loss.Q21-7 Q21-9 Q21-10 21-5 Q21-11 The basic difference in accounting for a sales-type lease is that the carrying value of the asset is charged to cost of asset leased (expense), and the present value of the minimum lease payments is recorded as the amount of the sale. In a direct financing lease, no sales or expense is re cognized. Instead, the asset is removed from the books and the difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue.The net investment in a sales type lease is accounted for in a similar manner to that for a direct financing lease. The FASB states that the interest revenue from a lease is recognized so as to yield a constant return on net investment. Compound interest techniques can be used to compute this return if the following are known: (a) the amount of the lease payment, (b) the cost or fair value of the lease, and (c) the number of periods of the lease. Multiplying the interest rate by the amount of the net investment at the beginning of the year results in a constant return on investment.Q21-12 Q21-13 Q21-14 Owens Company records the lease as a capital lease due to the bargain purchase option, and depreciates the asset over its estimated economic life. The original lease was a capital lease and McFarland C ompany is relieved of its obligation. McFarland removes the equipment from its books, and recognizes the gain when the new lease transaction takes place, that is, during the current year. a. Lessee's disclosure: 1. For all leases, a general description of the leasing arrangement 2.For operating leases having lease terms in excess of one year: (a) Future minimum rental payments required as of the date of the latest balance sheet presented, for each of the 5 succeeding fiscal years and in total The total of minimum rentals to be received in the future under noncancellable subleases Q21-15 (b) 3. For all operating leases, rental expense for each period 4. For capital leases: (a) (b) The gross amount of assets recorded under capital leases by major classes according to nature or function Future minimum lease payments for each of the 5 succeeding fiscal years and in total 21-6 Q21-15 (continued) a. 4. continued) (c) (d) The total of minimum sublease rentals to be received in the future u nder noncancellable subleases Assets, accumulated depreciation, depreciation expense, and liabilities b. Lessor's disclosure: 1. A general description of all leasing arrangements 2. For operating leases: (a) The cost and carrying amount, if different, of property on lease or held for leasing by major classes of property, and the amount of the total accumulated depreciation Minimum future rentals on noncancellable leases for each of the 5 succeeding fiscal years and in total Total contingent rentals included in income for each period b) (c) 3. For direct financing and sales-type leases: (a) The components of the net investment in direct financing and sales-type leases including: (1) (2) (3) (4) (b) (c) Q21-16 Q21-17 The future minimum lease payments to be received Including any profit thereon The unguaranteed residual values accruing to the benefit of the lessor For direct financing leases only, initial direct costs Unearned income Future minimum lease payments to be received for eac h of the 5 succeeding fiscal years Total contingent rentals included in income for each periodIFRS classify leases as either finance leases or operating leases. A finance lease is equivalent to a capital lease under U. S. GAAP. In general, IFRS provide a series of indicators that, individually or in combination, normally lead a lease to be classified as a finance lease. U. S. GAAP contains a series of four criteria which, if any one is met, will result in the classification of a lease as a capital lease. While these indicators and criteria are similar, the IFRS indicators are less detailed and require more judgment in classifying leases. Specifically, both IFRS and U.S. GAAP treat leases that transfer title from the lessor to the lessee and leases that contain bargain purchase options as finance (capital) leases. However, if an asset is leased for the major part of an asset’s economic life, IFRS consider this an indicator of a finance lease. IFRS do not define what is meant b y â€Å"substantially all† of the asset’s fair value while U. S. GAAP sets a 90% threshold. 21-7 Q21-18 The primary accounting issue in accounting for a sales-leaseback transaction from the seller-lessee's viewpoint is the recognition of a profit or a loss on the sale.Any profit or loss is deferred and amortized in proportion to the amortization of the leased asset, if a capital lease, or in proportion to the rental payments, if an operating lease. If the fair value of the property is less than its undepreciated cost at the time of the transaction, a loss is recognized immediately on the difference between the undepreciated cost and the fair value. The fact that there are three or four parties (equity participant, asset user, debt participant, and also a manufacturer if the equity participant does not make the product) distinguishes a leveraged lease from other leases.For the lessee there are no new accounting issues. The lessee classifies and accounts for the lease as for a nonleveraged lease. Q21-19 ANSWERS TO MULTIPLE CHOICE 1. 2. a b 3. 4. d b 5. 6. a c 7. 8. b c 9. 10. a d 21-8 SOLUTIONS TO REVIEW EXERCISES RE21-1 1. 2. 3. 4. Classification Criteria Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of minimum lease payments is 90% or more of fair value Criteria Met? No No No No It is 40% (8 ? 20 years) It is 50% ($50,000 ? $100,000) Remarks Therefore, this lease is an operating lease.It does not meet any of the criteria. RE21-2 Rent Expense Cash 10,000 10,000 RE21-3 1. 2. 3. 4. Classification Criteria Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of minimum lease payments is 90% or more of fair value Criteria Met? No No No Yes It is 71% (5 ? 7 years) It is 100% ($250,000 ? $250,000) Remarks Therefore, this lease is a capital lease. It meets one of the four criteria. RE21-4 Jan, 1 Leased Equipment Capit al Lease Obligation Dec. 31 Interest Expense (10% x $250,000) Capital Lease Obligation ($65,949. 7 – $25,000) Cash 250,000. 00 250,000. 00 25,000. 00 40,949. 37 65,949. 37 21-9 RE21-4 (continued) Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 50,000. 00* 50,000. 00 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $50,000 ($250,000 ? 5). RE21-5 Jan, 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Dec. 31 Interest Expense Accrued Interest on Capital Lease Obligation *($275,000 – $65,949. 37) x 0. 0 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 55,000. 00* 55,000. 00 275,000. 00 65,949. 37 275,000. 00 65,949. 57 20,905. 06* 20,905. 06 *The lessee depreciates the asset using the straight-line method over the lease term because there is no transfer of ownership or bargain purchase option, resulting in annual depreciation of $55,000 ($275,000 ? 5). RE21-6 PV of lease payments = $25,000 x 6. 710081 = PV of single sum of $4,000 = $4,000 x 0. 463193 = Present value of minimum lease payments RE21-7 PV of lease payments = $25,000 x 6. 710081 = PV of single sum of $20,000 = $20,000 x 0. 63193 = Present value of minimum lease payments RE21-8 (a) (b) (c) Sales-type lease Direct financing lease Operating lease $167,752 9,264 $177,016 $167,752 1,853 $169,605 21-10 RE21-9 Jan, 1 Lease Receivable ($65,949. 37 x 5) Equipment Unearned Interest: Leases Dec. 31 Cash Lease Receivable Unearned Interest: Leases (0. 10 x $250,000) Interest Revenue: Leases *($329,746. 85 – $79,746. 85) x 0. 10 RE21-10 Jan, 1 Lease Receivable Sales Revenue Unearned Interest: Leases Cost of Asset Leased Merchandise Inventory (or Equipment Held for Lease) Dec. 31 Cash Lease Receivable Unearned Interest: Leases (0. 0 x $250,000) Interest Revenue: Lease s *($329,746. 85 – $79,746. 85) x 0. 10 329,746. 85 329,746. 85 250,000. 00 79,746. 85 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 250,000. 00 79,746. 85 200,000. 00 200,000. 00 65,949. 37 25,000. 00 65,949. 37 25,000. 00* 21-11 SOLUTIONS TO EXERCISES Note to Instructor: Although students may use their calculators or software to make the various present value calculations, any present value calculations in the following solutions to exercises and problems are based on the factors from the appropriate tables in the TVM Module of the book. E21-1 Criteria 1. . 3. 4. Transfer of ownership at end of lease Bargain purchase option 1. Determination of Lease Classification Met No No No Remarks Reverts to lessor Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value 20% ( 10 year lease life ) 50 year economic life) No PV is $485,098. 79* or 24% of the fair value *PV = (Annual lease payment – Annual executory costs) x PV factor fo r 10 payments at 14% = ($100,000 – $7,000) x 5. 216116 = $485,098. 79 The lease is an operating lease, since none of the above criteria are met. 2. 2010 Dec. 2011 Dec. E21-2 1. . 31 Rent Expense Cash Rent Expense Cash 100,000 100,000 31 100,000 100,000 1. Determination of Lease Classification Criteria Transfer of ownership at end of lease Bargain purchase option Met No No Remarks 21-12 E21-2 (continued) 3. 4. Criteria Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met Yes Remarks 100% Yes 100% The lease is a capital lease, since at least one of the Column A criteria is met. 2. Present value = Lease payments x PV factor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 3. 1) Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 aColumn Summary of Lease Payments and Interest Expense for the Sax Company (2) Lease Payment Required $ 83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) (4) (5) Interest Expense Reduction at 12% on of Lease Balance of Obligation Balancea Obligationb Obligationc $300,000. 00 $36,000. 00 $47,222. 92 252,777. 08 30,333. 25 52,889. 67 199,887. 41 23,986. 49 59,236. 43 140,650. 98 16,878. 12 66,344. 80 74,306. 18 8,916. 74 74,306. 18 -0- 5 at beginning of year x 12%. – Column 3. alance – Column 4. 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Interest Expense (12% x $300,000) Cash 300,000 47,222. 92 36,000. 00 b$83,222. 92 cPrevious 4. 2010 Jan. Dec. 300,000 31 83,222. 92 21-13 E21-2 (continued) 4. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000. 00 ? 5) Capital Lease Obligation Interest Expense (12% x $252,777. 08) Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 60,000 60,000 52,889. 67 30,333. 25 2011 Dec. 31 83,222. 92 31 60,000 60,000 5. Under U. S.GAAP, the Sax Company would classify the lease as an operating lease. The lease does not meet either of the first two criteria. The third criterion is not met since the 3-year lease life is 60% of the economic life of 5 years. The fourth criterion is also not met since the present value of the lease payments of $264,201 ($110,000 x 2. 401831) is 88. 1% of the fair value of $300,000. Therefore, the lease would be an operating lease. Under IFRS, the Sax Company would have to exercise judgment but it is likely that it would classify the lease as a â€Å"finance† lease since two of the indicators would probably be considered to be met.The present value of 88. 1% is probably â€Å"substantially all† of the fair value of the asset. Also, it could be argued that 60% is the †major part† of the economic life of the asset. E21-3 1. Application of Criteria for Determination of Lease Classification from Lessee's Viewpoint Group I Criteria 1. 2. 3. 4. Transfe r of ownership Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value* Met No No Yes 100% Remarks Yes 100% = $20,000 x PV factor for 4 payments in advance at 12% = $20,000 x 3. 401831 = $68,036. 62 21-14 *PV of minimum lease paymentsE21-3 (continued) 1. (continued) Since the lease meets at least one of the Column A criteria, it is a capital lease. 2. (1) Summary of Lease Payments and Interest Expense for the Adden Company (2) (3) (4) Balance of Capital Lease Obligation $68,036. 62 48,036. 62a 53,801. 01c 33,801. 01 37,857. 13 17,857. 13 20,000. 00 0 Date January 1, 2010 January 1, 2010 December 31, 2010 January 1, 2011 December 31, 2011 January 1, 2012 December 31, 2012 January 1, 2013 a$68,036. 62 b$48,036. 62 c$48,036. 62 dAdjusted Interest at 12% Annual Lease on Unpaid Payment Obligation Before the initial payment $20,000. 00 0 0 $5,764. 9b 0 20,000. 00 4,056. 12 0 0 20,000. 00 2,142. 87d 0 0 20,000. 00 â₠¬â€œ $20,000 x 12% + $5,764. 39 for $0. 01 rounding error 1 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Interest Expense Accrued Interest on Capital Lease Obligation Insurance Expense Property Tax Expense Cash 68,036. 62 20,000 5,764. 39 5,764. 39 1,500 6,000 3. 2010 Jan. 68,036. 62 20,000 Dec. 31 31 7,500 21-15 E21-3 (continued) 3. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($68,036. 62 ? 4) Accrued Interest on Capital Lease Obligation Capital Lease Obligation CashInterest Expense Accrued Interest on Capital Lease Obligation Insurance Expense Property Tax Expense Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 17,009. 16 17,009. 16 2011 Jan. 1 5,764. 39 14,235. 61 4,056. 12 20,000. 00 Dec. 31 4,056. 12 1,300 5,500 31 6,800 31 17,009. 16 17,009. 16 E21-4 1. Rental receipt = = Fair value of assets PV factor for 8 receipts at 14% $500,000 4. 638864 = $107,785 . 01 21-16 E21-4 (continued) 2. Summary of Lease Payments Received and Interest Revenue Earned by the Rexon Company (1) (2) Annual Lease Payment Received $107,785. 01 107,785. 01 107,785. 01 107,785. 1 107,785. 01 107,785. 01 107,785. 01 107,785. 01 (3) Interest Revenue at 14% on Net Investment $70,000. 00a 64,710. 10 58,679. 61 51,804. 86 43,967. 63 35,033. 20 24,847. 95 13,236. 73f (4) Amount of Net Investment Recovered $37,785. 01b 43,074. 91 49,105. 40 55,980. 15 63,817. 38 72,751. 81 82,937. 06 94,548. 28 (5) Lease Receivable $862,280. 08 754,495. 07c 646,710. 06 538,925. 05 431,140. 04 323,355. 03 215,570. 02 107,785. 01 -0(6) Unearned Interest: Leases $362,280. 08 292,280. 08d 227,569. 98 168,890. 37 117,085. 51 73,117. 88 38,084. 68 13,236. 73 -0(7) Net Investment $500,000. 00 462,214. 99e 419,140. 08 370,034. 8 314,054. 53 250,237. 15 177,485. 34 94,548. 28 -0- Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 Dec ember 31, 2015 December 31, 2016 December 31, 2017 a$500,000 21-17 x 14% – $70,000. 00 – $107,785. 01 – $70,000. 00 b$107,785. 01 c$862,280. 08 d$362,280. 08 e$500,000 fAdjusted – $37,785. 01 for $0. 03 rounding error 21-17 E21-4 (continued) 3. 2010 Jan. 1 Lease Receivable Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 862,280. 8 500,000. 00 362,280. 08 107,785. 01 70,000 Dec. 31 31 107,785. 01 70,000 2011 Dec. 31 31 107,785. 01 64,710. 10 107,785. 01 64,710. 10 E21-5 Proof that the yield is 1%: PVn=48, i=1% is not given in text; it is 37. 973959; thus PV of lease payments received = Monthly lease payment x PV factor for 48 receipts at 1% = $1,600 x 37. 973959 = $60,758 (This is not required for the problem) 2010 Jan. 2 Lease Receivable Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Int erest Revenue: Leases [1% x ($76,800 – $16,042)], (rounded) 76,800 0,758 16,042 1,600 31 1,600 31 608 608 21-18 E21-6 1. Annual lease payment = Cost of the equipmet PV factor for 5 years in advance at 14% = $30,000 3. 913712 = $7,665. 36 Summary Table (1) Lessee Company (2) Lease Payment Required Lease Rental Collected (3) Interest at 14% on Unpaid Obligation Interest at 14% on Net Investment (4) Balance of Lease Obligation Net Investmenta Lessor Company Date January 1, 2010 January 1, 2010 $7,665. 36 December 31, 2010 0 January 1, 2011 7,665. 36 December 31, 2011 0 January 1, 2012 7,665. 36 December 31, 2012 0 January 1, 2013 7,665. 6 December 31, 2013 0 January 1, 2014 7,665. 36 aPrevious balance – Column 2 + Column 3 b$22,334. 64 cAdjusted 0 $3,126. 85b 0 2,491. 46 0 1,767. 11 0 941. 38c 0 $30,000. 00 22,334. 64 25,461. 49 17,796. 13 20,287. 59 12,622. 23 14,389. 34 6,723. 98 7,665. 36 0 x 14% for $0. 02 rounding error 21-19 E21-6 (continued) Date 01/01/10 12/31/10 12/31/11 12/31/12 12/31/13 1$7,665. 36 Lease Receivable $38,326. 801 30,661. 44 22,996. 08 15,330. 72 7,665. 36 x5 – $30,000. 00 – $3,126. 85 – Unearned Net = Interest: Leases Investment $8,326. 802 5,199. 953 2,708. 49 941. 38 0 $30,000. 00 25,461. 9 20,287. 59 14,389. 34 7,665. 36 2$38,326. 80 3$8,326. 80 2. Lessor Leasing Company: 2010 Jan. 1 Lease Receivable ($7,665. 36 x 5) Equipment Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 38,326. 80 30,000. 00 8,326. 80 7,665. 36 3,126. 85 1 Dec. 31 7,665. 36 3,126. 85 Lessee Company: 2010 Jan. 1 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash 30,000 7,665. 36 30,000 7,665. 36 21-20 E21-6 (continued) 2. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($30,000 ? ) Interest Expense Accrued Interest on Capital Lease Obligation Executory Costs (Expenses) Cash 6,000 6,000 3,126. 85 3,126. 85 500 500 31 31 E21-7 1. Selling price (fair value and the net investment) = $50,000 (PVn = 4, i = 12%) = $50,000 x 3. 037349 = $151,867. 45 2. Summary of lease receipts and interest revenue: Information needed to prepare table: Gross investment = Annual lease payment received x Number of payments = $50,000 x 4 = $200,000 Initial PV of the investment: PV of lease payments (see 1) = $151,867. 45 Unearned interest revenue = Gross investment – Initial PV of investment = $200,000 – $151,867. 5 = $48,132. 55 = $151,867. 45 = $130,000. 00 Sales price = PV of minimum lease payments Cost of asset leased = Cost of equipment 21-21 E21-7 (continued) 2. (continued) Gross profit = Sales price – Cost of asset leased = $151,867. 45 – $130,000. 00 = $21,867. 45 (Table follows Requirement 3) 3. 2010 Jan. 1 Lease Receivable Sales Unearned Interest: Leases Cost of Asset Leased Equipment Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Recei vable Unearned Interest: Leases Interest Revenue: Leases 200,000. 00 151,867. 45 48,132. 55 130,000. 00 50,000 18,224. 09 1 Dec. 31 31 2011 Dec. 30,000. 00 50,000 18,224. 09 31 31 50,000 14,410. 98 50,000 14,410. 98 21-22 E21-7 (continued) 2. Summary of Lease Payments Received and Interest Revenue Earned by the Berne Company (1) (2) Annual Lease Payment Received $50,000 50,000 50,000 50,000 (3) Interest Revenue at 12% on Net Investment $18,224. 09a 14,410. 98 10,140. 30 5,357. 18f (4) Amount of Net Investment Recovered $31,775. 91b 35,589. 02 39,859. 70 44,642. 82 (5) Lease Receivable $200,000 150,000c 100,000 50,000 -0(6) Unearned Interest: Leases $48,132. 55 29,908. 46d 15,497. 48 5,357. 18 -0(7) Net Investment $151,867. 45 120,091. 54e 84,502. 52 44,642. 2 -0- Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 a$151,867. 45 b$50,000 21-23 x 0. 12 – $18,224. 09 – $50,000 – $18,224. 09 – $31,775. 91 c$200,000 d$4 8,132. 55 e$151,867. 45 fAdjusted for $0. 04 rounding error 21-23 E21-8 1. Selling price (fair value) = $100,000 (PV in advance) n = 5, i = 14% = $100,000 (3. 913712) = $391,371. 20 2. Summary of lease payments received and interest revenue: Information needed to prepare table: Gross investment 20-24 = = = (Annual lease payment received x Number of payments) + Unguaranteed residual value ($100,000 x 5) + $20,000 $520,000Initial present value of the investment: PV of lease payments (see part 1) PV of unguaranteed residual value: $20,000 x PV of a single sum for 5 years at 14%: $20,000 x 0. 519369 Total initial PV (this is also the net investment) Unearned interest: leases $391,371. 20 10,387. 38 $401,758. 58 = Gross investment – Initial PV of the investment = $520,000. 00 – $401,758. 58 = $118,241. 42 Sales price = = Present value of lease payments $391,371. 20 (see part 1) = Cost of asset – PV of the unguaranteed residual value = $313,000. 00 – $10,387. 3 8 = $302,612. 62 Cost of asset leased 21-24 E21-8 (continued) 2. continued) Gross profit = = = Sales price – Cost of asset leased $391,371. 20 – $302,612. 62 $ 88,758. 58 Summary of Lease Payments Received and Interest Revenue Earned by the Edom Company (1) (2) Annual Lease Payments Received $100,000. 00 100,000. 00 100,000. 00 100,000. 00 100,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $520,000. 00a 420,000. 00 320,000. 00 220,000. 00 120,000. 00 20,000. 00 (5) Unearned Interest: Leases $118,241. 42b 75,995. 22 41,834. 55 16,891. 39 2,456. 18 0 (6) Net Investment $401,758. 58 301,758. 58 344,004. 78d 244,004. 78 278,165. 45 178,165. 45 203,108. 61 103,108. 61 117,543. 2 17,543. 82 20,000. 00f Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 a($100,000 b$520,000 $42,246. 20c 34,160. 67 24,943. 16 14,435. 21 2,456. 18e x 5) + $20,000 x 1 4% + $42,246. 20, or $420,000 – $75,995. 22 residual value Lease Receivable Cost of Asset Leased Sales Equipment (or Inventory) Unearned Interest: Leases 520,000. 00 302,612. 62 – $401,758. 58 c$301,758. 58 d$301,758. 58 eAdjusted for $0. 05 rounding error fUnguaranteed 3. 2010 Jan. 1 391,371. 20 313,000. 00 118,241. 42 21-25 E21-8 (continued) 3. (continued) Jan. Dec. 011 Jan. Dec. E21-9 Summary Table for First 3 Months (1) Bullard Company: Month Anson Company: Month Beginning of 1 Beginning of 1 End of 1 Beginning of 2 End of 2 Beginning of 3 End of 3 (2) Lease Payment Required (3) Interest Expense (4) Balance of Lease Obligation 1 31 Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 100,000 42,246. 20 100,000 42,246. 20 1 31 100,000 34,160. 67 100,000 34,160. 67 Lease Receipt $2,000 0 2,000 0 2,000 0 Interest Revenue 0 $588b 0 574 0 560 Net Investmenta $60,817 58,817 59,40 5c 57,405 57,979 55,979 56,539 1-26 E21-9 (continued) Receivable $70,0001 68,000 66,000 64,000 1($2,000 2$58,817 b1% aLease – Unearned = Interest: Leases $9,183 8,595 8,021 7,461 Net Investment $60,8172 59,405 57,979 56,539 x 35) + $2,000 + $588 Lease Receivable Sales ($58,817 + $2,000) Unearned Interest: Leases ($72,000 – $60,817) Cost of Asset Leased Merchandise Inventory 72,000 60,817 11,183 50,000 2,000 588 2,000 574 2,000 560 50,000 2,000 588 2,000 574 2,000 560 x $58,817 c$58,817 1. At inception Initial receipt At end of 1st month Cash Lease Receivable Unearned Interest: Leases Interest Revenue: LeasesSecond Cash Installment Lease Receivable At end of Unearned Interest: Leases 2nd month Interest Revenue: Leases Third Cash installment Lease Receivable At end of 3rd month Unearned Interest: Leases Interest Revenue: Leases 21-27 E21-9 (continued) 2. Computation of Lessee's Obligation Using the Implicit Interest Rate PV of lease payments = $ 2,000 + PV of remaining 3 5 payments of $2,000 each at 1% = $ 2,000 + $58,817 = $60,817* *Note: By definition, the present value of the lease payments equals the initial payment plus the present value of the remaining lease payments, since the initial payment is at the beginning of the period.At inception Initial payment At end of 1st month Leased Equipment Capital Leases Obligation Capital Lease Obligation Cash Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($60,817 ? 36) Second Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of Interest Expense 2nd month Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment 60,817 2,000 588 588 1,689 1,689 588 1,412 574 574 1,689 1,689 60,817 2,000 ,000 21-28 E21-9 (continued) 2. (continued) Third Accrued Interest on installment Capital Lease Obligation Capital Lease Obligation Cash At end of 3rd month Interest Expense Accrued Interest on Capital Lease Obligation Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment E21-10 Computation of the effect on income before income taxes using the sales-type lease method Sales = PV of lease payments receivable = (PV factor for 8 payments in advance at 12%) x $60,000 = 5. 563757 x $60,000 = $333,825 Cost of asset leased = = Cost of the property $275,000 574 1,426 560 560 1,689 1,689 ,000 21-29 E21-10 (continued) Interest revenue: leases = 12% x [(Lease receivable – Initial payment) Unearned interest: leases] = 12% x [($60,000 x 8) – $60,000) – (Lease rec. – Sales)] = 12% x ($420,000 – $146,175) = $32,859 Incremental effect on income before income taxes Sales Less: Cost of asset leased Gross margin Add: Interest revenue Incremental revenue recognized $333,825 (275,000) $ 58,825 32,859 $ 91,684 Computation of the effect on income before in come taxes using the operating lease method Rental revenue Depreciation expense = $60,000. 0 = = Cost – Residual Value Economic life $275,000 – $0 8 = $34,375 Incremental effect on income before income taxes Rental revenue $60,000 Less: Depreciation expense (34,375) $25,625 Effect on income before income taxes Sales-type lease income Operating lease income Income before income taxes $91,684 (25,625) $66,059 understated 21-30 E21-11 1. Computation of Income Before Income Taxes Derived by Reuben Company for Year Ended December 31, 2010 Rental revenue Maintenance expense Depreciation expense Income before income taxes *10/12 x $180,000 #$900,000 150,000* (20,000) (90,000)# $ 40,000 ? 10 (It should be depreciated for a full year) 2. Rent expense = 10/12 x $180,000 = $150,000 E21-12 1. Application of Criteria for Determination of Lease Classification from Lessor's Viewpoint Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met Yes No Y es 80% ( Remarks Lease term is 75% or more of economic life 4 year lease life ) 5 year economic life 4. Present value of lease payments is 90% or more of fair value Column B Criteria 1. Collectibility assured 2.No uncertainties Yes Present value is $8,400, or 100% of the fair value Yes Yes Since the lease meets at least one of the Column A criteria and both of the Column B criteria, and there is no dealer's profit (PV of lease payments – Cost of car = $8,400 – $8,400 = $0), the transaction should be classified as a direct financing lease. 21-31 E21-12 (continued) 2. Summary of lease payments received and interest revenue: Computation of amount of lease receipts: Yearly lease receipt = Cost of the car PV factor for 4 payments at 10% $8,400 3. 169865 = $2,649. 96 (Table follows Requirement 3) 3. 2010 Jan. 1 1 Automobile Held for Lease Cash Lease Receivable Automobile Held for Lease Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue : Leases (from table) Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases (from table) 8,400. 00 10,599. 84 8,400. 00 8,400. 00 2,199. 84 2,649. 96 Dec. 31 31 2,649. 96 840. 00 840. 00 2,649. 96 659. 00 659. 00 2011 Dec. 31 31 2,649. 96 21-32 E21-12 (continued) 2.Summary of Lease Payments Received and Interest Revenue Earned by the Ravis Rent-A-Car Company (by Interest Method) (1) (2) Annual Lease Payments Received $2,649. 96 2,649. 96 2,649. 96 2,649. 96 (3) Interest Revenue at 10% on Net Investment $840. 00a 659. 00 459. 90 240. 94f (4) Amount of Net Investment Recovered $1,809. 96b 1,990. 96 2,190. 05 2,409. 02 (5) Lease Receivable $10,599. 84 7,949. 88c 5,299. 92 2,649. 96 -0(6) Unearned Interest: Leases $2,199. 84 1,359. 84d 700. 84 240. 94 -0(7) Net Investment $8,400. 00 6,590. 04e 4,599. 08 2,409. 02Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 a$8,400. 00 b$2,649. 96 21-33 x 10% – $840. 00 – $2 ,649. 96 – $840. 00 – $1,809. 96 c$10,599. 84 d$2,199. 84 e$8,400. 00 fAdjusted for $0. 04 rounding error 21-33 E21-13 1. Present value of lease payments = $10,000 x PV factor for 6 payments at 10% = $10,000 x 4. 355261 = $43,552 (rounded down for simplicity) = $50,000 fair value of the machine – $43,552 = $6,448 = $6,448 x FV of 1 factor for 6 periods at 10% = $6,448 x 1. 771561 = $11,421 (rounded) Present value of residual valueResidual value at the end of the lease term 2. 20-34 Since the first three criteria are not met, the classification of the lease depends on the fourth criterion. A guaranteed residual value is not included in the minimum lease payments. Therefore, Baker Company would classify the lease as a capital lease because the fourth criterion is met as follows: Present value of minimum lease payments = = $43,552 + $6,448 $50,000, or 100% of the fair value of the machine 3. Since the first three criteria are not met, the classification of the leas e depends on the fourth criterion.An unguaranteed residual value is included in the minimum lease payments. Therefore, Baker Company would classify the lease as an operating lease because the fourth criterion is not met as follows: Present value of minimum lease payments = $43,552, or 87. 1% of the fair value of the machine E21-14 1. 2010 Jan. 1 Cash Land Unearned Profit on Sales-Leaseback Leased Land Capital Lease Obligation Insurance and Property Tax Expense Cash 31 Capital Lease Obligation Interest Expense – Leases (14% x $2,500,000) Cash 21-34 2,500,000 2,000,000 500,000 2,500,000 12,000 1 During the year Dec. ,500,000 12,000 7,007 350,000 357,007 E21-14 (continued) 2. The $500,000 unearned profit is amortized by the straight-line method over the 25 year term of the lease. The yearly entry is 2010 Dec. 31 Unearned Profit on Sales – Leaseback Realized Profit on Sales – Leaseback 20,000 20,000 21-35 SOLUTIONS TO PROBLEMS P21-1 1. Application of Criteria for De termination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic lifePV of $268,685. 58* is 88% of fair value 4. Present value of lease payments is 90% or more of fair value *PV No = (Yearly lease payments – Executory costs) x PV factor for 5 payments in advance at 12% = ($70,000 – $3,450) x 4. 037349 = $66,550 x 4. 037349 = $268,685. 58 This lease is an operating lease for both the Alice Company (lessee) and the Superior Equipment Company (lessor). Reasons: None of the Column A criteria are met. 2. Alice Company (lessee): 2010 Jan. 1 Rent Expense Cash 70,000 70,000 21-36 P21-1 (continued) 2. (continued) Superior Equipment Company (lessor): 2011 Jan.During the year Dec. 31 1 Cash Rental Revenue Property Tax Expense Maintenance Expense Insurance Expense Cash 70,000 650 1,600 1,200 70,000 3,450 Depreciation Expense: Equipment 49,500 Accumulated Depreciation: Equipment [($500,000 – $5,000) ? 10] Application of Criteria for Determination of Lease Classification 49,500 3. Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Met No No No Remarks Lease term is 75% or more of economic life 5 year lease life 50% ( ) 10 year economic life PV of $305,000* (rounded) 100% of fair value . Present value of lease payments is 90% or more of fair value *PV Yes = [(Yearly lease payments – Executory costs) x PV factor for 5 payments in advance at 12%] + PV of guaranteed residual value = = = = [($70,000 – $3,450) x 4. 037349] + ($64,000 x 0. 567427) ($66,550 x 4. 037349) + $36,315. 33 $268,685. 57 + $36,315. 33 $305,000 (rounded) This lease is a capital lease for both the Alice Company (lessee) and the Superior Equipment Company (lessor). Reasons: †¢ The lessee would classify the lease as a capital lease because one of the Column A criteria i s met. The lessor would classify the lease as a direct financing lease because (a) one of the Column A criteria is met, (b) both of the Column B criteria are met, and (c) there is no profit at the inception of the lease (fair value = present value of the minimum lease payments). 21-37 P21-1 (continued) 3. (continued) Alice Company (lessee): 2010 Jan. 1 1 Leased Equipment Capital Lease Obligation Executory Costs Expense Capital Lease Obligation Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment [($305,000 – $64,000) ? ] Interest Expense [12% x ($305,000 – $66,550)] Accrued Interest on Capital Lease Obligation Executory Costs Expense Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment Interest Expense [12% x ($305,000 – $66,550 – $37,936)] Accrued Interest on Capital Obligation 305,000 3,450 66,550 305,000 70,000 Dec. 31 48,200 48,200 28,614 28,614 3,450 28,614 37,936 31 2011 Jan. 1 70,000 Dec. 31 48,200 48,200 24,061. 68 24,061. 68 31 21-38 P21-1 (continued) 3. continued) 2014 Dec. 31 Capital Lease Obligation Cash 64,000 64,000 Superior Equipment Company (lessor): 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($66,550 x 5 + $64,000) Equipment Leased to Others Unearned Interest: Leases Cash Lease Receivable Property Tax Expense Maintenance Expense Insurance Expense Cash Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Property Tax Expense Maintenance Expense Insurance Expense Cash Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable 305,000 305,000 396,750 05,000 91,750 66,550 1 During The Year Dec. 31 2011 Jan. During The Year Dec. 31 2014 Jan. 66,550 650 1,600 1,200 28,614 3,450 28,614 1 66,550 650 1,600 1,200 24,061. 68 66,550 3,450 24,061. 68 1 64,000 64,000 21-39 P21-2 1. Application of Criteria for Determination of Lease Classific ation Column A Criteria 1. 2. 3. 4. Transfer of ownership at end of lease Bargain purchase option Lease term is 75% or more of economic life Present value of lease payments is 90% or more of fair value Met No Yes Yes 100% Present value is $185,090. 68 or 100% of fair value Remarks YesThis is a sales-type lease for Ballieu Company, since one or more of the Column A criteria are met, both of the Column B criteria are met, and there is a dealer's profit (PV of lease payments – Cost of asset = $185,090. 68 – $150,000 = $35,090. 68) 2. (1) Two-Year Table of Lease Payment Receipts and Interest Revenue Recognition (2) Annual Lease Payments Received $35,000. 00 35,000. 00 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $280,000. 00a 245,000. 00 210,000. 00 (5) Unearned Interest: Leases $94,909. 32b 73,896. 62 (6) Net Investment $185,090. 8 150,090. 68 171,103. 38d 136,103. 38 155,157. 85 Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 a$35,000 $21,012. 70c 19,054. 47 x8 – $185,090. 68 x 14% + $21,012. 70 b$280,000 c$150,090. 68 d$150,090. 68 21-40 P21-2 (continued) 2. (continued) 2010 Jan. 1 Lease Receivable ($35,000 x 8) Sales Unearned Interest: Leases ($280,000 – $185,090. 68) Cost of Asset Leased Specialty Equipment (Inventory) Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 280,000. 0 185,090. 68 94,909. 32 1 1 Dec. 2011 Jan. Dec. 3. 31 150,000. 00 35,000 21,012. 70 150,000. 00 35,000 21,012. 70 1 31 35,000 19,054. 47 35,000 19,054. 47 The lessor must disclose: a. A general description of the leasing arrangements b. (1) The components of the net investment at the date of each balance sheet presented: (a) The future lease payments to be received (b) The unearned interest revenue: leases (2) Future lease payments to be received for each of the 5 succeeding fiscal years as of the date of the latest ba lance sheet presented P21-3 1.Present value = Lease payments x PV factor for 5 payments at 12% (asset and liab) = $83,222. 92 x 3. 604776 = $300,000 (rounded) 21-41 P21-3 (continued) 2. (1) Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 a$300,000 Summary Table of Lease Payments and Interest Expense for Timmer Company (2) Lease Payment Required $83,222. 92 83,222. 92 83,222. 92 83,222. 92 83,222. 92 (3) Interest Expense at 12% on Obligation Balancea $36,000. 00a 30,333. 25 23,986. 49 16,878. 12 8,916. 74d (4) Reduction of Lease Obligation $47,222. 2b 52,889. 67 59,236. 43 66,344. 80 74,306. 18 (5) Balance of Lease Obligation $300,000. 00 252,777. 08c 199,887. 41 140,650. 98 74,306. 18 -0- x 12% – $36,000. 00 – $47,222. 92 b$83,222. 92 c$300,000. 00 3. 2010 Jan. Dec. 1 31 Leased Equipment Capital Lease Obligation Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense Cash Depre ciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000. 00 ? 5) Capital Lease Obligation Interest Expense Cash Insurance Expense Property Tax Expense Cash 21-42 300,000 47,222. 2 36,000. 00 3,760 5,440 300,000 83,222. 92 31 9,200 31 60,000 60,000 52,889. 67 30,333. 25 3,100 5,330 2011 Dec. 31 83,222. 92 31 8,430 P21-3 (continued) 3. (continued) Dec. 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment TIMMER COMPANY Balance Sheet (Partial) December 31, 2010 Assets Property, Plant, and Equipment Leased property less accumulated amortization $240,000. 00 (Note X) a$83,222. 92 60,000 60,000 4. Liabilities Current Capital lease obligation Noncurrent Capital lease obligation (Note X) $ 74,306. 17a,c $178,470. 1b,c x 0. 892857 – $74,306. 17 b$252,777. 08 cThese amounts computed by the â€Å"change in present value approach† are $52,889. 67 and $199,887. 41, respectively Under U. S. GAAP, the Timmer Company would classify the lease as an operating lease. The lease does not meet either of the first two criteria. The third criterion is not met since the 3-year lease life is 60% of the economic life of 5 years. The fourth criterion is also not met since the present value of the lease payments of $269,507 ($120,000 x 2. 245890) is 89. 8% of the fair value of $300,000.Therefore, the lease would be an operating lease. Under IFRS, the Timmer Company would have to exercise judgment but it is likely that it would classify the lease as a â€Å"finance† lease since two of the indicators would probably be considered to be met. The present value of 89. 8% is probably â€Å"substantially all† of the fair value of the asset. Also, it could be argued that 60% is the â€Å"major part† of the economic life of the asset. 5. 21-43 P21-4 1. Summary Table of Lease Payments Received and Interest Revenue Earned by the Calden Company (1) (2) Lease Payment Received $65,000. 0 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 65,000. 00 (3) Interest Revenue at 15% on Net Investment $46,203. 16c 43,383. 63 40,141. 17 36,412. 35 32,124. 20 27,192. 83 21,521. 76 14,999. 87h (4) Reduction of Net Investment $18,796. 84d 21,616. 37 24,858. 83 28,587. 65 32,875. 80 37,807. 17 43,478. 24 50,000. 13 (5) Lease Receivable $570,000a 505,000e 440,000 375,000 310,000 245,000 180,000 115,000 50,000 (6) Unearned Interest: Leases $261,978. 97 215,775. 81f 172,392. 18 132,251. 01 95,838. 66 63,714. 46 36,521. 63 14,999. 7 -0(7) Net Investment $308,021. 03b 289,224. 19g 267,607. 82 242,748. 99 214,161. 34 181,285. 54 143,478. 37 100,000. 13 50,000. 00i Date January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 a$570,000 21-44 is the undiscounted value of the lease payments plus the unguaranteed residual value is the present value of the lease payments plus the present valu e of the unguaranteed residual x 15% b$308,021. 03 value c$308,021. 03 d$65,000. 00 e$570,000 $46,203. 16 – $46,203. 16 – $18,796. 84 residual value – $65,000 f$261,978. 97 g$308,021. 03 hAdjusted for $0. 15 rounding error iUnguaranteed 21-44 P21-4 (continued) 2. Criteria for direct financing lease: Application of Criteria for Determination of Lease Classification Column A Criteria 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is 75% or more of eonomic life 4. Present value of lease payments is 90% or more of fair value *PV of minimum lease payments Met No No Yes 89% ( 8 year lease life ) 9 year economic life Remarks 0-45 Yes PV is 94. 7% of the fair value of the leased asset* = $65,000 x PV factor for 8 payments at 15% = $65,000 x 4. 487322 = $291,675. 93 Column B Criteria 1. Collectibility assured 2. No uncertainties Met Yes Yes Remarks The lease is properly classified as a direct financing lease because at least one of the Column A criteria is met, both of the Column B criteria are met, and there is no dealer's profit. 3. 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($520,000 + $50,000) Equipment Leased to Others Unearned Interest: Leases 308,021. 3 308,021. 03 570,000 308,021. 03 261,978. 97 21-45 P21-4 (continued) 3. (continued) Dec. 31 31 2011 Dec. Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases CALDER COMPANY Balance Sheet (Partial) Assets Current Assets Net investment in direct financing leases (Note X) Noncurrent Assets Net investment in direct financing leases (Note X) a$65,000 65,000 46,203. 16 5,000 46,203. 16 31 31 65,000 43,383. 63 65,000 43,383. 63 2012 Dec. 31 31 65,000 40,141. 17 65,000 40,141. 17 4. December 31, 2011 2010 $ 56,521. 73a,d $ 56,521. 73a,c $211,086. 09b,d $232,702. 46b,c x 0. 869565 $289 ,224. 19 – $56,521. 73; 12/31/11: $267,607. 82 – $56,521. 73 b12/31/10: cThese amounts computed by the â€Å"change in present value approach† are $21,616. 37 and $267,607. 82, respectively amounts computed by the â€Å"change in present value approach† are $24,858. 83 and $242,748. 99, respectively dThese 21-46 P21-5 1. a) Landlord Company computation of annual rental amount Annual rental amount = = Cost of equipment PV factor for 6 receipts in advance at 14% $300,000 4. 433081 = $67,673. 02 (b) Tenant Company computation of the present value of the lease rights: To find the present value of the lease rights, Tenant Company would multiply the annual rental payment ($67,673. 02) by the PV factor for 6 periods paid in advance at i%. The percentage i would be the lower of 14% or Tenant Company's incremental borrowing rate. This incremental borrowing rate is the additional information needed.Summary Table of Lease Payments Received and Interest Revenue Recog nition for the Landlord Company (1) (2) Annual Lease Payments Received $67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 67,673. 02 2. Date Jan. 1, 2010 Jan. 1, 2010 Dec. 31, 2010 Jan. 1, 2011 Dec. 31, 2011 Jan. 1, 2012 Dec. 31, 2012 Jan. 1, 2013 Dec. 31, 2013 Jan. 1, 2014 Dec. 31, 2014 Jan. 1, 2015 a$67,673. 02 (3) Interest Revenue at 14% on Net Investment (4) Lease Receivable $406,038. 12a 338,365. 10 270,692. 08 203,019. 06 135,346. 04 67,673. 02 0 (5) Unearned Interest: Leases $106,038. 12b 73,512. 4 45,907. 18 23,911. 52 8,310. 69 0 (6) Net Investment $300,000. 00 232,326. 98 264,852. 76d 197,179. 74 224,784. 90 157,111. 88 179,107. 54 111,434. 52 127,035. 35 59,362. 33 67,673. 02 0 $32,525. 78c 27,605. 16 21,995. 66 15,600. 83 8,310. 69e x6 – $300,000. 00 x 14% d$232,326. 98 eAdjusted + $32,525. 78 b$406,038. 12 c$232,326. 98 for $0. 04 rounding error This table would also be suitable for Tenant Company if Tenant's incremental borrowing rate is ? 14%. 21-47 P21-5 (continued) 3. Journal entries: Tenant Company (lessee): 2010 Jan. 1 1 During the year Dec. 1 Leased Equipment Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment ($300,000 ? 6) Interest Expense Accrued Interest on Capital Lease Obligation Accrued Interest on Capital Lease Obligation Capital Lease Obligation Cash Insurance Expense Property Tax Expense Cash 31 Depreciation Expense: Leased Equipment Accumulated Depreciation: Leased Equipment Interest Expense Accrued Interest on Capital Lease Obligation 300,000 67,673. 2 700 800 300,000 67,673. 02 1,500 50,000 50,000 32,525. 78 32,525. 78 31 2011 Jan. 1 32,525. 78 35,147. 24 600 750 67,673. 02 During the year Dec. 1,350 50,000 50,000 27,605. 16 27,605. 16 31 21-48 P21-5 (continued) 3. (continued) Landlord Company (lessor): 2010 Jan. 1 1 Equipment Leased to Others Cash Lease Receivable ($67,673. 02 x 6) Equipm ent Leased to Others Unearned Interest: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases Cash Lease Receivable Unearned Interest: Leases Interest Revenue: Leases 300,000. 0 406,038. 12 300,000. 00 300,000. 00 106,038. 12 67,673. 02 32,525. 78 1 Dec. 2011 Jan. Dec. 4. 31 67,673. 02 32,525. 78 1 31 67,673. 02 27,605. 16 67,673. 02 27,605. 16 Income statements and balance sheets: Tenant Company Disclosure (Lessee) Comparative Balance Sheets (Partial) December 31 Assets 2011 2010 Liabilities 2011 2010 Leased equipment less accumulated amortization (Notes 1 and 2) $200,000. 00 $250,000. 00 Current Capital lease obligation $ 67,673. 02 Noncurrent Capital lease obligation 157,111. 88 (Notes 1 and 2) $ 67,673. 02 197,179. 74