chapter 15
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 4 year lease term. norma should recognize a profit of how much?
$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 how much?
$70,000
a reasonable conclusion is that the "major part" of the leased asset's life is included in the lease, if (blank) of the remaining economic life of the asset is covered by the lease term
75% or more
a reasonable conclusion is that (blank) of the fair value of the asset amounts to "substantially all" of the fair value
90% or more
depending on the nature of the leasing agreement, a lease is accounted for as what?
a rental or a purchase/sale
depending on the nature of the leasing arrangement, a lease is accounted for as what?
a rental or a purchase/sale
at the inception of a finance lease for computer equipment, the lessee should do what?
debit right-of-use asset credit lease payable
what is the effective rate of return that the lease payments provide the lessor called?
implicit rate
the (blank) must disclose its net investment in the lease
lessor
the (blank) subtracts the present value of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments
lessor
who owns the asset in an operating lease?
lessor
what are the two basic lease classifications by a lessee?
operating and finance
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, what should kluge record?
a lease payable right-of-use asset
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. what would be included in the journal entry for Lease Corp to record this lease?
credit equipment $300,000
how does the bargain purchase option affect the calculation of the amount to be recovered through periodic rental payments for the lessor?
decreases
what is the treatment of an operating lease by the lessor?
deferred and expensed over the lease term typically on a straight-line basis
what is the treatment of a sales-type lease with selling profit by the lessor?
expensed at the beginning of the lease
the desired rate of return for the lessor when determining the lease payments is referred to as the (blank) interest rate
implicit
the present value of the residual value is (blank) in/from the lease receivable, and it is (blank) in/from sales and cost of goods sold for the lessor
included; excluded
from an accounting standpoint, legal ownership of a leased asset is (blank) to the accounting method used
irrelevant
on January 1, 2021, 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 these lease payments is $357,710. the annual lease payment is $100,000; the first payment is due on January 1, 2021. Franz should debit what account for how much?
lease receivable for $431,213 = $100,000 * 4.31213 (pv of lease payments, 8%, 5 years)
lease payments are often (blank) than installment payments
less
how is lease revenue recorded by the lessor in an operating lease?
on a straight-line basis
a lease that is more true to the nature of a rental agreement is called a(n) (blank) lease
operating
for a sales-type lease, the lessor should report cash received on the lease as a(n) (blank) activity
operating
in which section of the statement of cash flows should a lessee report payments on an operating lease?
operating
when the rights and responsibilities of ownership are retained by the lessor, the lease is classified as an (blank) lease
operating
in a finance lease, the lessee reports the interest portion of the payment as a cash outflow from (blank) activities, and it reports the portion representing principal repayment as a cash outflow from (blank) activities
operating; finance
the right-of-use asset is amortized straight-line, unless the lessee's (blank) of using the asset is different
pattern
a (blank) 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
what does it meant to debit lease receivable?
pv of lease payments plus the pv of residual value
the estimated commercial value of leased property at the end of the lease term is known as what?
residual value
which of the following would be included in the lessor's gross investment in the lease?
residual value periodic lease payments
what is an operating lease?
rights and responsibilities of ownership are retained by the lessor
what is a finance or sales-type lease?
rights and responsibilities of ownership are transferred to the lessee
residual value is an estimate of what?
the commercial value of an asset at the end of the lease term
how does a lessor report cash flows from a sales-type lease?
cash receipts are reported as cash inflows from operating activities
initial direct costs include what?
costs necessary to acquire the lease costs that would not have been incurred if the lease agreement did not exist costs associated with completing the lease agreement
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 (blank)
lease
in a lease, the (blank) is the owner of the property, whereas the (blank) is the user of the property
lessor; lessee
in an operating lease, the (blank) records no asset or liability at the inception of the lease and the (blank) records both
lessor; lessee
an opening lease is (blank) to a typical rental agreement
similar
the lessee records the right-of-use asset as what?
the present value of the lease payments
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 what?
a lease receivable
initial direct costs incurred by the lessee are what?
added to the right-of-use asset
the lessor's receipt of payment on an operating lease is what?
all recorded as lease revenue
what does the lease term include?
any periods covered by options to extend with significant incentive the contractual term of the lease
the rights granted to a lessee under a finance lease (blank) the same as those granted to a company that purchases an asset
are not
in what ways can a lease be accounted for?
as a purchase/sale agreement with debt financing as a rental agreement
when the lessee is given the option of purchasing the leased property at a price significantly lower than its fair value, a (blank) is present
bargain purchase option
north company leased equipment from Lease Corp in a finance/sales-type lease. the annual payments equal $105,000. payments include $5,000 which Lease Corp will use to pay the annual maintenance fee on the equipment. how should Lease Corp record the first payment?
debit cash $105,000 credit lease receivables $100,000 credit maintenance fee payable $5,000
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. what would the journal entry for Lease Corp be to record this lease?
debit lease receivable $500,000 credit equipment $500,000
on January 1, 2021, 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 a 5% interest rate for these types of transactions. the annual lease payment is $45,000. Mitchell should recognize the first lease payment on January 1, 2021 by doing what?
debiting lease payable for $45,000
what is the treatment of a sales-type lease with no selling profit by the lessor?
deferred and expensed over the lease term by increasing the lease receivable
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 the implicit rate is the desired rate of return of the lessor
true or false: when a bargain purchase option is present, the lessor subtracts the future vale of the exercise price from the amount to be recovered to determine the amount to be recovered through rental payments
false the lessor subtracts the present value
legal fees for executing lease documents, and the preparation and processing cost of lease documents are referred to as what?
initial direct costs
the accounting for finance leases is similar to the purchase of an asset using an (blank) note
installment
after the first lease payment, each lease payment in a finance lease consists of an amount representing what?
interest and a reduction in the principal
the (blank) adds the present value of the bargain purchase option to the present value of periodic rental payments when computing the amount to be recorded as a tight-of-use asset and a lease liability
lessee
the (blank) should recognize amortization of the right-to-use asset
lessee
what does it mean to credit inventory?
lessor's cost of equipment
in a finance lease, the lessee records the interest portion of payments as a cash outflow from (blank) activities, and the principal portion as a cash outflow from (blank) activities on the statement of cash flows
operating; financing
the lessor's gross investment in the lease is the total of periodic rental payments and what?
plus any residual value
when recording a finance lease, the amount initially recognized for the right-of-use asset is the what?
present vale of the lease payments
the present value of a residual asset in a lease does what?
provides a source of recovery of the lessor's investment regardless of guarantee reduces the lessee's lease payments regardless of guarantee
Taylor company leased an asset from Lease Corp using an operating lease for equipment with a useful life of seven years. the initial lease team 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 Lease Corp address this lease modification?
reclassify from an operating lease to a sales-type lease record a lease receivable for the present value of the remaining lease payments
the residual value of a leased asset (blank) the amount the lessor needs to recover through periodic lease payments
reduces
in a typical finance lease, the first lease payment at the beginning of the lease consists of what?
reduction in principal only
how does a residual value in a finance/sales-type lease affect the lessee
the lessee lease payments are lower
what is the 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
how does a residual value in a finance/sales-type lease affect the lessor?
the lessor includes the residual value in lease receivable computations regardless of guarantee
selling profit exists in a sales-type lease when what happens?
the present value of the lease payments is greater than the cost of the asset
in an operating lease, interest expense plus amortization expense is equal to what?
the straight-line lease payment
what are required disclosures related to leases?
variable lease cost non lease payments residual values
when is a non lease component of a lease agreement recorded separately from the lease payments?
when the amount represents transfer of a good or service to the lessee
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
what does it mean to credit sales revenue?
sales less the pv of the residual value
on January 1, 2021, 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 these lease payments is $357,710. the annual lease payment is $100,000; the first payment is due on January 1, 2021. tucker should recognize the first lease payment by doing what?
depicting lease payable for $100,000 crediting cash for $100,000
what are required disclosures for lessees and lessors?
description of the leasing agreement future payments for total remaining years future payments in each of the next 5 years
sales revenue for the lessor (blank) the expected residual value to be recovered
does not include
the accounting in which of the following parallels that of an installment purchase?
finance lease
sometimes a lease agreement includes a commitment by the lessee that the lessor will recover a special amount when the asset is returned. this is known as what?
guaranteed residual value
what are the criteria for a financial lease?
the agreement specifies that ownership of the asset transfers to the lessee the agreement contains a purchase option that the lessee is responsibly certain to exercise (bargain purchase option) the lease term is for the "major part" of the remaining economic life of the underlying asset (75%=<) the present value of the lease payments equals or exceeds "substantially all" of the fair value of the underlying asset (90%=<) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor 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 = $300,000 - $50,000 = $250,000/4.46511
if a lease is modified and is reclassified from an operating to a sales-type lease, the lessor will record interest revenue at the (blank) rate, instead of the (blank) rate
effective; straight-line
on January 1, 2021, 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 annual rental payment is $100,00; the first payment is due on January 1, 2021. at the commencement of the lease, Franz should credit what account for how much?
equipment for $431,213 (book value of asset)
if the lease payments have a total value that represents "substantially all" of the asset's fair value, it's logical to identify the contract as (blank)
equivalent to a sale
in an operating lease, the lessee reports lease (blank) and the lessor reports lease (blank), both on a straight-line basis
expense; revenue
the (blank) 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
on January 1, 2021, 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 these lease payments is $357,710. the annual lease payment is $100,000; the first payment is due on January 1, 2021. tucker should recognize the second lease payment by debiting what account(s) for how much?
interest expense $20,617 =($357,710-$100,000)*0.08 lease payable for $79,383 $100,000-$20,617
lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the what?
remaining economic life
true or false: the residual value of a leased asset impacts the lessee's calculation of effective interest
false
what are possible reasons for leasing an asset rather than purchasing an asset?
fear of obsolescence tax benefits insufficient cash flow lower periodic payments on the asset
corr inc leases equipment from LM leasing. 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
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?
fit company records lease expense when the variable lease payment is paid Lease Corp records lease revenue when the variable lease payment is received
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. do the additional rent payments have any effect or no?
has no effect on the lessee's lease liability and lessor's lease receivable
at the first lease payment, each lease payment in a finance lease consists of an amount representing what?
interest and a reduction in the principal
what does it mean to debit cost of goods sold?
lessor's cost of the equipment less the pv of the residual value
a lease is a contractual agreement by which a (blank) provides a (blank) the right to use an asset for a specified period of time
lessor; lessee
when a portion of a lease payment represents the transfer of a good or service to the lessee, it is considered a what?
non lease component
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
on January 1, 2021, 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 annual rental payment is $100,00; the first payment is due on January 1, 2021. at the commencement of the lease, tucker should credit what account for how much?
right-of-use asset for $431,213
what is the lease term 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, year 1, Samuel company leases equipment from Lease Corp. the lease agreement specifies five annual payments of $50,000, with the first payment due at lease signing (January 1, year 1) and at each January 1 from year 2 to year 5. at the end of the lease term, the equipment will be returned to the lessor and is expected to have a residual value of $30,000. the estimated useful life of the equipment is six years. the interest rate in the financing arrangement is 6%. the cost to Lease Corp of manufacturing the equipment is $150,000. what would the journal entry be for the lessor on January 1, year 1?
debit lease receivable $245,673 =$50,000*4.46511 = $223,255 + ($30,000*0.74726) credit sales revenue $223,255 credit equipment $150,000
a purchase option does what?
gives the lessee the option to purchase the asset during the lease term or at the end of the lease includes a specified exercise price
a bargain purchase option is a provision in a lease contract that does what?
gives the lessee the right to purchase the leased asset at a price significantly less than the expected fair value of the property
smith company leased equipment from first lease corp. the cost of the equipment to first lease 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 first lease corp with a return of 10%?
$96,018 = $500,000 - $40,000 = $46,000/4.79079
