ACTY 3110 Chapter 15 SB

Norma Manufacturing Company leases an asset to Maren Inc in a sales-type lease. The present value of the lease payments is $200,000 and the cost of the leased asset is $160,000. At the beginning of the four-year lease term, Norma should recognize a profit of:

$40,000

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:

$70,000

In which of the following ways can a lease be accounted for? (Select all that apply.)

- As a rental agreement. - As a purchase/sale agreement with debt financing.

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, (Select all that apply)

- 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. - Contractual agreement. - Lessee pays the lessor periodic cash payments.

Which of the following are criteria for classification as a finance lease? (Select all that apply.)

- The lease includes a purchase option the lessee is reasonably certain to exercise. - The present value of the total lease payments is greater than substantially all of the fair value of the asset. - Ownership of the asset transfers to the lessee.

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. Franz should recognize the first lease payment by (Select all that apply)

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

Lease Corp leases equipment to Western Company in a sales-type lease. The present value of the lease payments is $450,000. The lease includes an unguaranteed residual value with a present value of $50,000. Which of the following complete the journal entry for Lease Corp to record this lease?

- debit lease receivable $500,000 - credit equipment $500,000

At the inception of a finance lease for computer equipment, the lessee should

- debit right-of-use asset - credit lease payable

Smith leases a piece of equipment from Marvin Company. The lease has a bargain purchase option which is expected to be exercised at the end of the lease. The useful life of the equipment is 10 years and the lease term is 8 years. Which number of years should be used to compute amortization?

10

Lease Corp leases equipment to Samuel Company in a sales-type lease. The present value of the lease payments is $250,000. The lease includes an unguaranteed residual value with a present value of $50,000. The rate implicit in the contract is 6% and the lease term is five years. Which of the following are included in the journal entry for Lease Corp to record this lease?

Credit equipment $300,000

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; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should credit

Equipment for $431,213

True or false: When a bargain purchase option is present, the lessor subtracts the future value of the exercise price from the amount to be recovered to determine the amount to be recovered through rental payments.

False

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 interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should credit

Lease payable for $431,213

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?

Operating lease

___ ___ is an estimate of a leased asset's commercial value at the end of the lease term.

Residual value

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

Corr Inc. leases equipment from LM Leasing Corp. The lease requires rental payments of $20,000 per year for 5 years. Title of the property transfers at the end of the lease term. The equipment has a useful life of 10 years. How should the lease be classified by Corr?

finance lease

The ___ residual value is a commitment by the lessee that the lessor will recover a specified residual value at the end of the lease term.

guaranteed

Sometimes a lease agreement includes a commitment by the lessee that the lessor will recover a specified amount when the asset is returned. This is known as

guaranteed residual value.

The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.

implicit

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

implicit rate.

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

less than or equal to twelve months

The _____ subtracts the present value of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments.

lessor

A lease is a contractual agreement by which a(n) ___ provides a(n) ___ the right to use an asset for a specified period of time.

lessor, lessee

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.

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

operating

The two basic lease classifications by a lessee are

operating and finance.

The two basic lease classifications by a lessor are

operating and sales-type.

In an operating lease, the lessor

rents the asset to the lessee for a period of time.

An operating lease is defined as a lease

that does not meet any of the criteria of a finance or sales-type lease.

Residual value is an estimate of

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

Samuel Company leased equipment from Lease Corp. The cost of the equipment to Lease Corp was $300,000. Lease Corp will require Samuel to make the first payment on the day of the lease signing (January 1 of Year 1), with the next four payments due on January 1 of Years 2 - 5. At the end of Year 5, the equipment is expected to have a residual value of $50,000. The estimated useful life of the equipment is seven years. If the five lease payments are of an equal amount, what payment amount provides Lease Corp with a return of 6%?

$55,990

Smith Company leased equipment from FirstLease Corp. The cost of the equipment to FirstLease was $500,000. The present value of the expected residual value is $40,000. The lease includes six annual payments beginning on the first day of the lease. If the six lease payments are of an equal amount, what payment amount would provide FirstLease Corp with a return of 10%?

$96,018

Depending on the nature of the leasing arrangement, a lease is accounted for

as a rental or a purchase/sale.

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

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

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

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)

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

Which of the following are required disclosures related to leases?

- variable lease cost - nonlease payments - residual values

Which one of the following will determine classification of a lease transaction as a finance lease?

The asset is of a very specialized nature and will have no alternative use to the lessor.

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?

The asset's estimated useful life

True or false: The exercise of a bargain purchase option is reasonably certain.

True

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 lease receivable.

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. For the year ended 20X1, Mitchell should allocate the cost of the right-of-use asset by

debiting amortization expense of $39,971

A lease structured as an installment purchase is called a(n) ___ lease by the lessee.

finance

The ______ is a commitment by the lessee that the lessor will recover a specified residual value when the asset is returned to the lessor.

guaranteed residual value

The _____ must disclose its net investment in the lease.

lessor

If a lease does not meet any of the criteria to be classified as a finance or sales-type lease, it is classified as a(n) ___ lease.

operating

Selma leases equipment from ABC Corp. The 4-year lease requires payments of $10,000 per year, beginning at the inception of the lease. The fair value of the equipment at the inception of the lease is $100,000. The equipment has a 6-year life. Selma's incremental borrowing rate is 6%. The lease does not transfer title and does not have a bargain purchase option. How should the lease be classified by Selma?

operating

When the lessor calculates the periodic lease payments, the present value of the bargain purchase option should be

subtracted from the amount to be recovered through periodic rental payments.

The lessee records the right-of-use asset as

the present value of lease payments.

If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over

the useful life of the asset.

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 interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should debit

Right-of-use asset for $431,213

When the lessee is given the option of purchasing the leased property at a price significantly lower than its fair value, a _____ is present.

bargain purchase option

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

present value of the lease payments

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; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should debit

Lease receivable for $431,213

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 first lease payment by (Select all that apply)

- debiting lease payable for $100,000 - crediting cash for $100,000

Sarah Company leases a machine with a fair value of $200,000 from Eden Inc. The present value of the future lease payments is $120,000. At the inception of the lease, Sarah should (Select all that apply.)

- debit right-of-use asset for $120,000 - credit lease payable for $120,000

The lessee amortizes the right-of-use asset over the asset's useful life, when (Select all that apply.)

- exercise of a purchase option is reasonably certain. - ownership transfers at the end of the lease term.