ACCTG SB CH15

On January 1, Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment from Electronics Plus at a cost of $500,000. The lease agreement specifies three annual payments of $100,000 beginning at the inception of the lease. The useful life of the asset is estimated to be five years, but Warren will lease the asset for a total of three years. The present value of the three lease payments is $273,554. At the inception of the lease Warren should

debit right-of-use asset $273,554

If the lease payments have a total value that represents "substantially all" of the asset's fair value, it is logical to identify the contract as ____________.

equivalent to a sale.

Under IFRS No. 16, how are lessees required to account for leases?

finance only

IFRS requires lessees to apply a - approach to lease accounting, whereby lessees account for all leases as finance leases.

one model

In which type of lease does the lessee report a single straight-line lease expense amount in its income statement?

operating

When recording a finance lease, the amount initially recognized for the right-of-use asset is the

present value of the lease payments

Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the

remaining economic life.

A reasonable conclusion is that the "major part" of the leased asset's life is included in the lease, if _____ of the remaining economic life of the asset is covered by the lease term.

75% or more

First Lease Corp. leases equipment to Taylor. The interest rate implicit in the loan is 8% and is known to both parties. Taylor's incremental borrowing rate is 10%. Market rate on similar leases is averaging 9%. What interest rate should Taylor use to compute the present value of lease payments?

8%

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipment's entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000, and the first payment is made at the inception of the lease. Donelson should record which of the following in connection with the second payment?

Credit to lease receivable of $35,259

The lessee records an asset and liability for operating leases under

New GAAP only

Match each lease with its description.

Operating- Rights and responsibilities of ownership are retained by the lessor. Finance or sales-type- Rights and responsibilities of ownership are transferred to the lessee.

Which of the following is true regarding accounting for an operating lease?

The lessee records both an asset and a liability even when the risks and rewards of ownership do not transfer.

The lessee's payment in an operating lease is

allocated between interest expense and amortization for the right-of-use asset. reported as a single lease expense.

Periods covered by renewal options

are not included in the lease term if a bargain purchase option is present.

Which of the following best describes the period over which the right-of-use asset is amortized when ownership transfers at the end of the lease?

assets useful life

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000. On January 1, 20X1, Donelson should recognize the receipt of the first lease payment by

crediting lease receivable for $45,000.

On January 1, 20X1, 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, 20X1. Tucker should recognize the second lease payment by debiting (round to the nearest whole dollar and select all that apply) Multiple select question.

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

The amortization table for an operating lease allows the lessee to allocate each lease payment to __________ and ________.

interest expense; reduction of the lease liability

Amortization of the right-of-use asset for an operating lease

is calculated as the lease payment minus interest expense.

On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Both companies choose the short-cut option. Marion recognizes the first lease payment by debiting

lease expense

When the lessor's implicit rate is unknown, which rate should be used to calculate the present value of the lease payments for the lessee?

lessee's incremental borrowing rate

The periodic lease payment in an operating lease reduces the outstanding lease balance so that at the end of the lease term the outstanding balance is equal to

zero

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual lease payment is $100,000. Franz should recognize receipt of the first lease payment on January 1, 20X1 by

debiting cash for $100,000 crediting lease receivable for $100,000

In which type of lease does the lessor record a lease receivable at the inception of the lease?

sales type

Off-balance-sheet financing refers to the practice of

structuring transactions to keep assets and liabilities off the balance sheet by leasing rather than buying them.

In an operating lease, who reports the leased asset on their balance sheet?

lessor

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual lease payment is $100,000; the first payment is due on January 1, 20X1. Franz should recognize receipt of the second lease payment by crediting (Select all that apply)

lease receivable for $73,503 interest revenue for $26,497

In which type of lease does the lessee report interest expense and amortization expense separately in the income statement?

finance

True or false: A lessee and a lessor will use similar amortization schedules for recording interest

true

What type of lease involves a "front loading" of lease expense and revenue due to higher interest in the earlier stages of the lease?

finance/salestype

FRS allows the short-cut method on leases if

the lease term is 12 months or less and does not include a purchase option. the lease has a value of $5,000 or less.

True or false: The incremental borrowing rate is the rate the lessee would expect to pay a bank if funds were borrowed to purchase the asset.

true

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000. Tucker should allocate the cost of the right-of-use asset annually by (round to a whole dollar)

debiting amortization expense for $86,243

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000, and the first payment is made at the inception of the lease. Mitchell should recognize the second lease payment by

debiting interest expense for $9,741.