Chapter 15:Leases

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply)

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

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

interest and a reduction in the principal

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 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

Which of the following are required disclosures related to leases?

nonlease payments residual values variable lease cost

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

reduction in principal only

The ______ of leased property is an estimate of what its commercial value will be at the end of the lease term.

residual value

The lease term includes

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

In an operating lease, interest expense plus amortization expense is equal to

the straight-line lease payment.

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

A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)

lease

A lease that is more true to the nature of a rental agreement is called a(n) ____lease.

operating

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

operating

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

operating

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

operating

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

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

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

Finance

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 reports the interest portion of the payment as a cash outflow from ____activities, and it reports the portion representing principal repayment as a cash outflow from _____activities.

operating financing

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.

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

Finance Lease

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.

Lease payments are often ___than installment payments.

Lower

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

Residual Value

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.

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

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

less than or equal to twelve months

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

The _____ must disclose its net investment in the lease. Multiple choice question.

lessor

The___should recognize amortization of the right-of-use asset.

Lessee

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.

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: Reason: The implicit rate is the desired rate of return of the lessor.

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

How is lease expense recorded by the lessee in an operating lease? Multiple choice question.

On a straight-line basis

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

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

Straight-line

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, 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 (Reason: $100,000-$20,617 interest expense for $20,617 (Reason: ($357,710-$100,000)x.08)

Selling profit exists in a sales-type lease when the

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

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.

Which of the following occur in a lease?

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

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)

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

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

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

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

implicit

A purchase option (Select all that apply)

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.

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

installment