Accounting Chap 15 SmartBook

After the first lease payment, each lease payment in a finance lease consists of an amount representing -a reduction in the principal only -interest only -interest and a reduction in the principal

interest and a reduction in the principal

In an operating lease, interest expense plus amortization expense is equal to -the straight-line lease payment -the straight-line lease amount plus interest -the straight-line lease amount less interest

the straight-line lease payment

A lease in which the rights and responsibilities of ownership are retained by the lessor is called a(n) ____ lease.

Operating

In a finance lease, the lessee reports the interest portion of the payment as a cash outflow ______ activities, and it reports the portion representing principal repayment as a cash outflow from ______ activities.

operating, financing

Munchin Manufacturing Company leases an asset to Peter Inc in a sales-type lease. The present value of the lease payments is $400,000 and the cost of the asset is $330,000. At the beginning of the five-year lease term, Munchin should recognize a profit of: -$400,000 -$330,000 -$70,000 -$0

$70,000

Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease. -Ludwig records a right-of-use asset -Ludwig records a lease payable -Kluge records a right-of-use asset -Kluge records a lease payable

-Kluge records a right-of-use asset -Kluge records a lease payable

Which of the following occur in a lease? -Lessee has the right to use an asset for a specified period of time -Lessee owns the asset at completion of payments -Lessee pays the lessor periodic cash payments -Contractual agreement

-Lessee has the right to use an asset for a specified period of time -Lessee pays the lessor periodic cash payments -Contractual agreement

What two criteria must be met at the inception of a contract for an arrangement to constitute a lease?

-There must be an identified asset -The lessee must have the right to control the use of the asset

Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by three years, and to change the amount of lease payments. The additional three years were not originally an option. How should Taylor address this lease modification? (Select all that apply)

-Update the right-of-use asset for the increase in present value -Reclassify from an operating lease to a finance lease

Which of the following are required disclosures for lessees and lessors?

-future payments for total remaining years -description of the leasing arrangements -future payments in each of the next 5 years

Which of the following is true regarding how a lessor reports cash flows from a sales-type lease?

Cash receipts are reported as cash inflows from operating activities

True or false: The incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments.

False: effective interest rate

The accounting in which of the following parallels that of an installment purchase? -Finance lease -Installment lease -direct-financing lease -operating lease

Finance Lease

Agatha Corp. leases store space from Christie Company. Agatha agrees to pay $10,000 per month. In addition, if Agatha exceeds specified sales targets, it will pay additional monthly rent based on a percentage of those excess sales. The additional rent payments

Have no effect on the lessee's lease liability and lessor's lease receivable

The accounting for finance leases is similar to the purchase of an asset using an ______ note

Installment

The ____must disclose its net investment in the lease.

Lessor

For a sales-type lease, the lessor should report cash received on the lease as a(n)_____ activity.

Operating

In a typical finance lease, the first lease payment at the beginning of the lease consists of -Interest and reduction in principal -Reduction in principal only -Interest only

Reduction in principal only

Which method should normally be used to amortize the right-of-use asset? -Productive output method -double declining balance method -sum of the years' digits -straight-line

Straight-line

When is a nonlease component of a lease agreement recorded separately from the lease payments?

When the amount represents transfer of a good or service to the lessee.

Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease, Ludwig Corporation should record -a right-to-use asset -a lease receivable -a lease payable -lease expense

a lease receivable

The effective interest rate of return the lease payments provide the lessor is referred to as the

implicit rate

In a sales-type lease with selling profit, accounting by the lessee...

is the same as a sales-type lease without selling profit

A contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time is called a(n)

lease

The short-cut method may be applied only if the maximum possible lease term is

less than or equal to twelve months

Lease payments are often ____ than installment payments.

lower

Lease payments are often _____ than installment payments

lower

The short-cut method of accounting for leases

may be used if the lease has a lease term (including any options to renew or extend) of twelve months or less

When a portion of a lease payment represents the transfer of a good or service to the lessee, it is considered a

nonlease component

How is lease expense recorded by the lessee in an operating lease?

on a straight line basis

In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.

operating

In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?

operating

A lease that is more true to the nature of a rental agreement is called an...

operating lease

The right-of-use asset is amortized straight-line, unless the lessee's _____ of using the asset is different.

pattern or manner

In an operating lease, the lessor -transfers substantially all of the remaining benefits of the asset to the lessee -rents the asset to the lessee for a period of time -receives less than 25% of the remaining benefits of the asset

rents the asset to the lessee for a period of time

The estimated commercial value of a leased property at the end of the lease term is known as

residual value

Residual value is an estimate of

the commercial value of an asset at the end of the lease term

The lease term is typically considered to be

the contractual term of the lease plus any periods covered by options to extend if extension is reasonably certain to occur

On January 1, Smith Co leased equipment from Bentley Corp. The lease agreement includes four annual payments beginning at the inception of the lease. The estimated useful life of the equipment is 7 years. The lease does not contain a purchase option. The present value of the minimum lease payments is $400,000. The fair value of the asset is $500,000. What type of lease is this for Smith Co? -direct financing lease -operating lease -finance lease -sales-type lease

Operating lease

Finance or Sales Type Lease

Rights and responsibilities of ownership are transferred to the lease.

Operating Lease

Rights and responsibilities of ownership are retained by the lessor

The lease term includes

-any periods covered by options to extend with significant incentive -the contractual term of the lease

On January 1, Year 1, Tucker Company leases equipment from Franz Inc. over three years of the equipment's five-year estimated useful life. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The present value of the lease payments is $357,710. The annual lease payment is $100,000; the first payment is due on January 1, Year 1. Franz should recognize the first lease payment by (Select all that apply) -debiting interest expense for $20,617 -debiting cash for $100,000 -crediting deferred lease revenue for $100,000 -debiting lease payable for $100,000 -debiting lease payable for $79,383 -crediting cash for $100,000

-debiting cash for $100,000 -Crediting deferred lease revenue for $100,000

Fit Company leases building space from Lease Corp. Fit Company agrees to pay Lease Corp an additional amount if Lease Corp attracts a higher amount of traffic through the doors resulting in more profit for Fit Company. How are these variable lease payments treated? (Select all that apply.)

-fit company records lease expense when the variable lease payment is paid -lease corp records lease revenue when the variable lease payment is received

A purchase option...

-includes a specified exercise price -gives the lessee the option to purchase the asset during the lease term or at the end of the lease

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? -fear of obsolescence -lower net income -higher debt to asset ratios -insufficient cash flow -tax benefits -lower periodic payments on the asset

-insufficient cash flow -lower periodic payments on the asset -tax benefits -fear of obsolescence

On January 1, Year 1, Tucker Company leases equipment from Franz Inc. over three years of the equipment's five-year estimated useful life. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The present value of the lease payments is $357,710. The annual lease payment is $100,000; the first payment is due on January 1, Year 1. Tucker should recognize the second lease payment by debiting (round to the nearest whole dollar and select all that apply)

-interest expense $20,617 -lease payable for $79,383

In which section of the statement of cash flows should a lessee report payments on an operating lease?

Operating

Which of the following assets are eligible for lease accounting under ASC 842?

Property and Buildings

A ______ is a lease provision giving the lessee the option to buy the leased property at the end of the lease term at a specified exercise price.

Purchase Option

If a lease modification substantially lengthens the amount of time the lessee has the right to use an asset, it is possible that the lessee might need to switch its lease classification from ______ to _____

operating, finance

In a finance lease, the lessee records the interest portion of payments as a cash outflow from ____ activities, and the principal portion as a cash outflow from ______ activities on the Statement of Cash Flows

operating; financing