Exam 3 Intermediate Review
BBB Leasing purchased a machine for $370,000 and leased it to Jack Tupp Auto Repair on January 1, 2024.
$332,584
Warren Company recorded a right-of-use asset of $800,000 in a 10-year finance lease. The interest rate charged by the lessor was 8%. The balance in the right-of-use asset after two years will be:
$640,000. The lessee amortizes its right-of-use asset at the straight-line amount of $80,000 per year. $80,000 × 2 = $160,000. $800,000 − $160,000 = $640,000
If it is "reasonably certain" that the lessee will exercise a purchase option:
- It's assumed that the lease term end on the date that the option is expected to exercise - Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment. - The lease is classified as a finance/sales-type lease
Why lease?
1. Leasing reduces the upfront cash needed to use an asset 2. Lease payments often are lower than installment payments 3. Leasing offers flexibility and a lower cost when disposing of the asset 4. Leasing might offer protection against the risk of declining asset values 5. Leasing might offer tax advantages
Barr Corporation is the lessee in a finance lease. Barr would record:
A right-use-of asset. The lessee records a right-of-use asset and lease payable initially and then interest expense and amortization expense over the lease term.
For the lessee to account for a lease as a finance lease, the lease must meet:
Any one of the five criteria specified by GAAP regarding accounting for leases.
Damon is the lessee in connection with a finance lease. Damon will not record:
Depreciation expense. In a finance lease, the lessee records amortization expense on its right-of-use asset.
On Jan. 1, Porter Moving leased a truck for a four-year period, possession of the truck will revert back to the lessor. Annual lease payments are $30,000 due on Dec. 31 of each year, using a 5% discount rate. If Porter's revenues exceed a specified amount during the lease term, Porter will pay an additional $12,000 lease payment. Porter estimates a 60% probability of meeting the target revenue amount. What amount, if any should be added to the right-of-use asset and lease payable?
No additional amount should be added. If the amounts of future lease payments are uncertain due to contingencies or otherwise, we don't consider them as part of the lease payments.
The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:
Present value of the lease payments
The indirect method
Starts with net income then adjusts net income by - adding back non-cash expenses - subtracting gains and/or losses - add the change in current liabilities - subtract the change in current assets
When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that:
The expenses of the finance lease and operating lease are equal.
One criterion for an arrangement to constitute a lease is that we have an identified asset. Which of the following is required in order for a contract to contain an identified asset?
The property must be property, plant, or equipment (not inventory, intangibles, or natural resources). The asset can be either explicitly or implicitly identified in the contract. The customer deriving substantially all of the benefits from the asset and the provider not having the right to substitute alternative assets are required for the second criterion for an arrangement to constitute a lease ― that the customer has the right to control the use of the asset.
