Chapter 15 smartbook

The accounting in which of the following parallels that of an installment purchase?

Finance Lease

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

Interest expense for $26,497. lease payable for $73,503.

From an accounting standpoint, legal ownership of a leased asset is _____ to the accounting method used.

Irrelevant

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

Initial direct costs incurred by the lessee are

added to the right-of-use asset.

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. The journal entry for the Lessor on January 1, Year 1 will include the following in its entry:

credit sales revenue $223,255. credit equipment $150,000. debit lease receivable $245,673.

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

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

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

debit right-of-use asset credit lease payable

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

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)

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

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. Mitchell should recognize the first lease payment on January 1, 20X1 by

debiting lease payable for $45,000

The primary motivation for the new accounting guidance on leases was to

deter the use of off-balance-sheet financing

If a lease is modified and is reclassified from an operating to a sales-type lease, the lessor will record interest revenue at the ____________ rate, instead of the ___________ rate.

effective;straight-line

True or false: The residual value of a leased asset impacts the lessee's calculation of effective interest.

false

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

implicit rate

After the first lease payment, each lease payment in a finance lease consists of an amount representing

interest and a reduction in the principal.

Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should debit:

lease receivable for $320,000.

Lease payments are often ____ than installment payments.

lower

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

operating

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

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

The lessor's gross investment in the lease is the total of periodic rental payments

plus any residual value

Selling profit exists in a sales-type lease when the

present value of the lease payments is greater than the cost of the asset.

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments from the lessee.

reduces

In a typical finance lease, the first lease payment at the beginning of the lease consists of

reduction in principal only

Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should credit:

sales revenue for $320,000 equipment for $200,000

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

sales-type

Which method should normally be used to amortize the right-of-use asset?

straight line

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.

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.

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 lease payable. Kluge records a right-of-use 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 Lease Corp address this lease modification? (Select all that apply)

Reclassify from an operating lease to a sales-type lease. Record a lease receivable for the present value of remaining lease payments.

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

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. Tucker should recognize the first lease payment on January 1, 20X1 by (Select all that apply)

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

Sales-type lease with selling profit Sales-type lease with no selling profit Operating lease

Expensed at the beginning of the lease Deferred and expensed over the lease term by increasing the lease receivable Deferred and expensed over the lease term typically on a straight-line basis

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.

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

The rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.

are not

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, 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 Best Lease Co. should

no entry to remove the asset from the balance sheet

Debit lease receivable Debit cost of goods sold Credit sales revenue Credit Inventory

PV of lease payments plus the PV of the residual value Lessor's cost of the equipment less the PV of the residual value Sales less the PV of the residual value Lessor's cost of equipment

Which of the following amounts represents the cost of goods sold in a sales-type lease?

The lessor's cost of the leased asset.

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