Intermediate Accounting III - D105 accounting for Leases

From the perspective of the lessor, two of the possible lease classifications are a. direct financing or nonoperating. b. operating or indirect financing. c. sales-type or indirect financing. d. operating or sales-type.

Ans d

Company A leases a piece of machinery from Company B on January 1, Year 1. Information pertaining to the lease is as follows: • The lease is non-cancellable with a term of three years. • The machinery has a cost and fair value at the start of the lease of $40,000; an estimated economic life of five years; and a residual value at the end of the lease of $7,500 (unguaranteed). • The lease contains no renewal options, and the machinery reverts to the lessor at the end of the lease. • The present value of the residual value has been calculated as $6,478. How much should Company A record as the right of use asset on January 1, Year 1? a. $33,522 b. $32,500 c. $46,478 d. $40,000

A

A company is looking for additional guidance on which equipment to lease. The company is using a lessor that is good at is developing innovative contracts for lessees. Which lessor is being used by the lessee? a. independents. b. credit unions. c. banks. d. captive leasing companies.

Ans a

When a finance lease is first recorded at the beginning of the lease, the lessee typically debits? a. right of use asset. b. rent expense. c. lease expense. d. Lease receivable.

Ans a

Which of the following is an advantage of banks over the other players in the leasing market? a. they have access to low-cost funds allowing them to purchase assets at lower cost. b. they are good at developing innovative contracts that help avoid accounting problems. c. they provide leasing arrangements for a wider range of products than the parent company's product line. d. they have the point-of-sale advantage in finding leasing customers.

Ans a

Company A has agreed to lease a full body scanner from Company B. The lease has the following information: • The lease is for three years, requiring annual payments at the beginning of the year of $6,352. • At the end of the lease, Company B may purchase the scanner for $5,000, and the company feels certain it will exercise this right. • The scanner has a fair value at the beginning of the lease of $25,000; an estimated economic life of five years; and a guaranteed residual value of $7,800. • Present value of the scanner is $18,333. Which test does the lease pass in order to be classified as a finance lease? a. purchase option. b. alternative use. c. lease term. d. transfer of ownership.

Ans a. The purchase option test is met because Company B is certain it will exercise the right to purchase the scanner at the end of the lease.

Which of the following does a lessor record as part of an operating lease? a. depreciation expense. b. a right-of-use asset. c. amortization expense. d. interest revenue.

Ans a: the lessee, not the lessor, records a right-of-use asset. Straight-line lease revenue is recognized by the lessor in an operating lease. The lessor in an operating lease will not remove the asset from its books, and so would have depreciation on the underlying asset.

A lessor leases a piece of equipment to a lessee, under lease terms that qualify as an operating lease. The lease terms call for total cash rental payments over the life of the lease of $200,000. The present value of those rental payments is $160,000. The estimated residual value of the leased asset is $20,000. The present value of the residual is $16,000. Which amount of lease receivable, if any, should the lessor record? a. $0 b. $160,000 c. $200,000 d. $220,000

Ans a: the lessor records no lease receivable because the lessor retains control of the lease asset on its balance sheet.

A lessee leased an asset at the beginning of the year and classified it as a finance lease. Which journal entry should the lessee record at the end of the year? a. debit interest expense; debit depreciation expense; credit lease liability; credit right of use asset b. debit interest expense; debit amortization expense; credit lease liability; credit right of use asset c. debit lease expense; credit lease liability; credit right of use asset d. debit depreciation expense; credit lease liability; credit right of use asset

Ans b

A lessee made a cash rental payment to a lessor at the end of the current period. The asset was leased at the beginning of the current period and was properly recorded as a finance lease. Which journal entry should the lessee use to record the payment? a. Debit Interest Expense; Debit Cash; Credit Lease Liability b. Debit Interest Expense; Debit Lease Liability; Credit Cash c. Debit Cash; Credit Interest Expense; Credit Lease Liability d. Debit Cash; Debit Lease Liability; Credit Interest Expense

Ans b

Company A (lessee) has reached a lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. This is an operating lease with no renewal option and contains the following information: • The lease is for three years, requiring annual payments at the beginning of the year of $10,213. • The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a nonguaranteed residual value of $12,500. • Present value of the residual value is $10,798. • Company B depreciates assets like the boom lift using straight-line depreciation. How much should Company A record as the right of use asset on January 1, Year 1? a. $18,139 b. $29,202 c. $30,639 d. $40,000

Ans b

Which of the following is an advantage of independent companies over the other players in the leasing market? a. they have access to low-cost funds allowing them to purchase assets at a lower cost. b. they are good at developing innovative contracts that help avoid accounting problems. c. they provide leasing arrangements for a wider range of products than the parent company's product line. d. they have the point-of-sale advantage in finding leasing customers.

Ans b

A company entered into an agreement to lease a backhoe for ten months. The lease agreement provides the option to renew the lease term for an additional three months and the company is reasonably certain that it will exercise the renewal option. What is a valid option for the company's accounting treatment of this lease? a. the company will treat lease payments as expenses when incurred. b. the company will treat the lease as a finance lease. c. the company will treat the lease as an operating lease. d. the company will omit the related liability as long as it records the right-of-use asset.

Ans b OR c: Since the company is certain to exercise the renewal option, the additional months are added to the initial lease term and the lease would need to be booked with a right of use asset and related liability. If there is even one criterion passed of the capitalization criteria (title transfer, bargain purchase option, lease term is 75% or more of economic life, lease payments are 90% of present value, the assets is used up and has no value at end of lease) it would be considered a finance lease.

Company A agrees to lease a robotic welding unit from Company B on January 1, Year 1. The following conditions apply to the lease · The term of the lease is five years, is noncancellable, and requires payments of $101,350 at the beginning of each year. · The robotic welding unit will have a fair value of $50,000 at the end of the lease; an estimated useful life of five years; and $45,000 guaranteed residual value. · There are no renewal options, so the unit will revert to Company B at the termination of the lease. · Company A can borrow at a 5% interest rate. · Company A uses straight-line depreciation on its assets. · Company B set its annual rate of return at 4%, and Company A is aware of this rate. · Present values are as follows: § Present value of lease payments at 4%: $469,240. § Present value of lease payments at 5%: $460,737. § Present value of residual at 4%: $38,457. § Present value of residual at 5%: $37,021. Which amount should be used to record the lease on January 1, Year 1? a. $507,697 b. $469,240 c. $460,737 d. $506,750

Ans b: Company A will record the lease at present value using the implicit rate of Company B (4%). Company is aware of this rate and it is lower than the incremental borrowing rate. Company A ignores the guarantee residual value since the expected residual value ($50,000) is greater than the guaranteed residual value ($45,000) at the end of the lease. Discount Rate To find the present value of minimum lease payments to capitalize as a lease asset and lease liability, the lessee uses a discount rate that is the lower of 1. the lessee's incremental borrowing rate, or 2. the lessor's interest rate implicit in the lease, if known by the lessee.

Company A needs to lease scaffolding for nine months. It enters into an agreement to lease the scaffolding for six months, with an option to extend the term for up to nine additional months in increments of three months. The company expects to complete the project in nine months. How should the company record the lease? a. amortize the lease payments over the 18 months. b. expense the lease payments as they are incurred. c. capitalize the first six months of the lease expense. d. record the right-of-use asset and related lease liability.

Ans b: Expense the payments as the lease is a short-term lease since its term is 12 months or less.

How should the lessee account for a guaranteed residual value for purposes of lease classification a. exclude. b. include.

Ans b: for purposes of lease classification, the present value of the guaranteed residual value is included in determining whether the present value (90%) test is met.

On January 1, 2020, Company A leased an asset from Company B. The asset originally cost Company B $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2020, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Company B record on January 1, 2020? a. Cash 36,000 Lease receivable 36,000 b. Cash 36,000 Unearned lease revenue 36,000 c. Cash 36,000 Lease revenue 36,000 d. Cash 36,000 Lease expense 36,000

Ans b: since the lease payments are made at the beginning of the year, the Company B hasn't earned the revenue and records it as a liability, unearned lease revenue, on the balance sheet.

Company A agrees to lease racks to Company B for five years. The expected economic life of the racks are five years. At the end of the lease, Company B has the right to purchase the racks for $5,000, but the company is not certain it will exercise the right. Which test does the lease most clearly pass to be classified as a finance lease? a. purchase option. b. lease term. c. alternative use. d. transfer of ownership

Ans b: the lease term is for 100% of the expected economic life of the racks, so it meets the requirements of the lease term test.

Company A has agreed to lease a full body scanner from Company B. The lease has the following information • The lease is for three years, requiring annual payments at the beginning of the year of $6,352. • At the end of the lease, Company B may purchase the scanner for $5,000 but doubts that it will. • The scanner has a fair value at the beginning of the lease of $25,000; an estimated economic life of five years; and a guaranteed residual value of $7,800. • Present value of the scanner is $14,700. Which test does the lease pass in order to be classified as a finance lease? a. purchase option. b. present value. c. lease term. d. transfer of ownership.

Ans b: the present value of the lease payments ($14,700 + $7,800) is 90% of the fair value of the asset ($25,000). The guaranteed residual value guarantee at the end of the lease term is included in the present value test. The following items are included in calculating the present value test: the fixed payments specified in the lease plus future variable payments that are based on an index or a rate existing at the date of commencement of the lease plus guaranteed residual value plus purchase or termination options reasonably certain to be exercised.

Company A agrees to lease racks to Company B for three years. The expected economic life of the racks are five years. At the end of the lease, Company B has the right to purchase the racks for $5,000, and the company is reasonably certain it will exercise the right. Company A determines that the racks have alternative use. Which test does the lease pass to be classified as a finance lease? a. lease term. b. purchase option. c. transfer of ownership. d. alternative use.

Ans b: the purchase option test is met since Company B is reasonably certain to exercise the option.

A company is looking for additional guidance on which equipment to lease. The company is using a lessor that has the advantage of being able to purchase assets at a lower cost than their competitors. Which lessor is being used by the lessee? a. independents. b. credit unions. c. banks. d. captive leasing companies.

Ans c

A lessee has two finance leases. Both leases are for assets with the same fair value, residual value, and useful life where the expected value of the residual value is less than the guaranteed residual value. Asset A has a guaranteed residual value, and Asset B has an unguaranteed residual value. Which statement about these assets is accurate a. the cash payment is greater for Asset B than Asset A. b. the interest expense is greater for Asset B than Asset A. c. the original lease liability is greater for Asset A than Asset B. d. the depreciation expense is greater for Asset A than Asset B.

Ans c. A guaranteed residual value is a guarantee made to a lessor by the lessee that the value of the leased asset returned to the lessor at the end of a lease will be at least a specified amount. Since the expected residual value at the end of the lease term is less than the guaranteed residual value, it is expected that the lessee will make up the difference between the guaranteed residual and expected residual. The lessee ignores the unguaranteed residual value.

Company A leased a delivery truck from Company B. The initial measurement of Company A's lease liability is $100,000. Company A paid $2,000 to its attorney for legal assistance with the lease agreement. Company B paid $5,000 to Company A as an incentive to lease the vehicle. What is Company A's initial value of its right-of-use asset for the delivery truck? a. $102,000 b. $100,000 c. $97,000 d. $107,000

Ans c: $100,000 - $5,000 + $2,000 initial direct costs and prepayments are added, and incentives are subtracted when measuring the value of the right-of-use asset.

Company A agrees to lease a robotic welding unit from Company B on January 1, Year 1. The following conditions apply to the lease · The term of the lease is five years, is noncancellable, and requires payments of $101,350 at the beginning of each year. · The robotic welding unit will have a fair value of $50,000 at the end of the lease; an estimated useful life of five years; and $45,000 guaranteed residual value. · There are no renewal options, so the unit will revert to Company B at the termination of the lease. · Company A can borrow at a 5% interest rate. · Company A uses straight-line depreciation on its assets. · Company B set its annual rate of return at 4%, and Company A is unaware of this rate. · Present values are as follows: § Present value of lease payments at 4%: $469,240. § Present value of lease payments at 5%: $460,737. § Present value of residual at 4%: $38,457. § Present value of residual at 5%: $37,021. Which amount should be used to record the lease on January 1, Year 1? a. $507,697 b. $469,240 c. $460,737 d. $506,750

Ans c: Company A will record the lease at present value using the incremental borrowing rate since it is unaware of the lessor's implicit rate even though the rate is higher. Company A ignores the guarantee residual value since the expected residual value ($50,000) is greater than the guaranteed residual value ($45,000) at the end of the lease.

A lessor has two sales-type leases. Both leases are for assets with the same fair value, residual value, and useful life. Asset A has a guaranteed residual value, and Asset B has an unguaranteed residual value. Which statement about these assets is accurate? a. the lease receivable is greater for Asset A than Asset B. b. the lease receivable is less for Asset A than Asset B. c. the lease receivable is the same for Asset A and Asset B. d. none of the answer choices are correct.

Ans c: a guaranteed residual value or unguaranteed residual value in a sales-type does not affect the lease receivable. The amounts are the same. However, sales revenue and cost of goods are affected and are higher with a sales-type lease having a guaranteed residual value. The reason is there is certainty that the guaranteed residual portion of the asset has been sold. In a sales-type with an unguaranteed residual value, there is less certainty the unguaranteed residual portion of the asst has been sold. Therefore, the lessor recognizes sales revenue and cost of goods sold only for the portion of the asset for which recovery is assured. To account for this uncertainty, both sales revenue and cost of goods sold are reduced by the present value of the unguaranteed residual values. Given that the amount subtracted from sales revenue and cost of goods sold are the same, the gross profit computed will still be the same amount as when a guaranteed residual value exists.

A lessor has two sales-type leases. Both leases are for assets with the same fair value, residual value, and useful life. Asset A has a guaranteed residual value, and Asset B has an unguaranteed residual value. Which statement about these assets is accurate? a. the cash payment is greater for Asset B than Asset A. b. the interest expense is greater for Asset B than Asset A. c. the sales revenue is greater for Asset A than Asset B. d. the depreciation expense is greater for Asset A than Asset B.

Ans c: in a sale-type lease the lessor accounts for the guaranteed residual value by including the amount as part of sales revenue and related cost of goods sold.

A construction company leases dump trucks from a leasing company rather than purchasing them outright. The accountant for the leasing company evaluates the leases, and determines that they are operating leases, and then records the transaction on the income statement in the appropriate account. Which account should the accountant use for this purpose? a. lease expense. b. lease liability. c. depreciation expense. d. interest expense.

Ans c: the lessor retains the leased asset on its books and continues to depreciate the underlying lease asset.

On January 1, Year 1, a company signed an agreement to lease a delivery truck for 36 months. The fair market value of the truck was $80,000 as of January 1, Year 1. The company estimates that the truck's fair market value will be $20,000 on December 31, Year 3. The company is reasonably certain it will exercise the lease option to purchase the delivery truck for $1,000 at the end of the lease. The company classifies the lease as a finance lease based on a specific test. Which test did the company use for this purpose based on the information provided a. transfer of ownership. b. alternative use. c. purchase option. d. lease term

Ans c: the purchase option test is met because it is reasonably certain that the lessee will exercise the option.

A company is looking for additional guidance on which equipment to lease. The company is using a lessor that has knowledge about the parent's product that can be passed on to the company. Which lessor is being used by the lessee? a. independents. b. credit unions. c. banks. d. captive leasing companies.

Ans d

A company wishes to avoid classifying a lease as a finance lease. Which criterion will prevent the company from reaching this goal? a. the present value of the minimum lease payments is 80% of the fair value of the leased property. b. the lease fails to transfer the property to the lessee. c. the lease term is 50% of the estimated economic life of the leased property. d. there is a bargain price option.

Ans d

Which of the following is an advantage of captive leasing companies over the other players in the leasing market? a. they have access to low-cost funds allowing them to purchase assets at lower cost. b. they are good at developing innovative contracts that help avoid accounting problems. c. they provide leasing arrangements for a wider range of products than the parent company's product line. d. they have the point-of-sale advantage in finding leasing customers.

Ans d

Company A leases computers from Company B with annual payments of $6,469. The leases are for two years, and the computers have an economic life of three years. At the end of the lease, the computers are expected to have a residual value of $5,000. Company A has an option to purchase the computers for $2,000 at the end of the lease agreement, which it expects to do. The fair value of the lease is $15,000, and the present value of the lease is $12,689. The present value of the option to purchase the computers is $1,849. How does Company A account for the amortization of the computers due to the bargain purchase option? a. it will amortize $15,000 using the lease term of the computers. b. it will amortize $14,538 using the lease term of the computers. c. it will amortize $15,000 using the economic life of the computers. d. it will amortize $14,538 using the economic life of the computers.

Ans d: $12,689 + $1,849. Company A amortizes $14,538 using the economic life of the computers because of the bargain purchase option.

Company A needs to lease scaffolding. It enters into an agreement to lease the scaffolding for nine months, with an option to extend the term for up to nine additional months in increments of three months. The company expects to complete the project in 15 months. How should the company record the lease? a. amortize the lease payments over the 18 months. b. expense the lease payments as they are incurred. c. capitalize the first six months of the lease expense. d. record the right of use asset and related lease liability.

Ans d: since the company expects to complete the project in 15 months and the lease is considered to be either an operating or finance lease. The company records a right of use asset and related liability for both leases.

Company A agrees to lease racks to Company B for three years. The expected economic life of the racks are five years. At the end of the lease, Company B has the right to purchase the racks for $5,000, but the company is not certain it will exercise the right. Company A determines that the racks have no alternative use. Which test does the lease pass to be classified as a finance lease? a. lease term. b. purchase option. c. transfer of ownership. d. alternative use.

Ans d: the alternative use test is met since the racks have no alternative use.

How should the lessee account for a guaranteed residual value in a finance lease? a. excluded from lease payments. b. included as part of lease payments only to the extent that guaranteed residual value is expected to be less than the expected residual value. c. included as part of lease payments at future value. d. included as part of lease payments only to the extent that guaranteed residual value is expected to be more than the expected residual value.

Ans d: the guaranteed residual value is a promise made by the lessee to return a certain value to the lessor which the lessor desires to recover its investment in the asset. If a potential future payment is expected, it must be included in the calculation of the present value of the lessee's future lease payments.

A company is leasing cars for four years at an agreed price of $500 per month, per car. The company provides the option to lease one additional year for $100 per month, per car. Each car has a useful life of six years. The company classifies the lease as a finance lease based on a specific test. Which test did the company use for this purpose based on the information provided? a. transfer of ownership. b. alternative use. c. purchase option. d. lease term.

Ans d: the lease term is for five out of the six years of the economic useful life of the asset, which is greater than 75% of the asset's useful life. The renewal option makes the lease term 5/6 years, therefore 83.33% of its useful life.

A construction company leases dump trucks rather than purchasing them outright. The accountant for the company evaluates the leases, determines that they are finance leases, and then records the transaction on the income statement in the appropriate account. Which account should the accountant use for this purpose? a. lease expense. b. lease liability. c. depreciation expense. d. amortization expense.

Ans d: the lessee reports both interest expense and amortization of the right to use asset separately on the income statement.c

The user, or the borrower, of an asset in a leasing arrangement is referred to as the a. lessee. b. lessor. c. both lessee and lessor. d. neither lessee nor lessor.

Ans: a

The owner of an asset in a leasing arrangement is referred to as the a. lessee. b. lessor. c. both lessee and lessor. d. neither lessee nor lessor.

Ans: b

A start-up company is trying to decide if it should purchase or lease cellular phones for its 2,500 new employees. Which decision should the company make? a. lease, because leasing requires a larger down payment, but smaller monthly payments. b. lease, because leasing agreements can be tailor to the special needs of the lessee. c. purchase, because purchasing equipment offers the flexibility of only using the equipment the desired amount of time. d. purchase, because purchasing creates current tax benefits for a new company with no taxable income.

B

A lessor incurs $10,000 of initial direct costs related to an operating lease. How should the $10,000 cost be treated? a. expense the cost in the period in which the lessor recognizes the profit from the sale. b. add the cost to the net investment in the lease and amortize it over the life of the lease as a yield adjustment. c. defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue. d. allocate the cost using the straight-line method to each period of the lease and expense it each period.

C

Company A leases cars from Company B for their salespeople. The leases are for three years. Company A paid a commission to a third party for helping to negotiate the leases from Company B. How should Company A account for this commission? a. exclude the commission in the amount for the right of use asset but include it in the lease liability. b. exclude the commission in the amount for the right of use asset and from the lease liability. c. include the commission in the amount for the right of use asset but not in the lease liability. d. include the commission in the amount for the right-of-use asset and in the lease liability

C

A start-up company is trying to decide if it should purchase or lease cellular phones for its 2,500 new employees. Which decision should the company make? a. lease, because leasing usually requires a no down payment and the payments are often fixed. b. purchase, because purchasing equipment offers the flexibility of only using the equipment the desired amount of time. c. lease, because leasing can pass the risk of residual value to the lessee. d. purchase, because purchasing creates current tax benefits for a new company with no taxable income.

a

The appropriate right to use asset value reported in the balance sheet by the lessee for an operating lease is: a. present value of the lease payments. b. sum of the lease payments. c. the lessor's book value of the asset at the beginning of the lease. d. zero, unless a prepayment or accrual is involved.

a

The classifications of a lease by the lessee are a. operating and finance leases. b. operating, sales, and finance leases. c. operating and leveraged leases. d. none of these answers are correct.

a

Which two finance lease elements are a part of a lease at year end? a. an increase in the lease liability and the financing cost (interest expense). b. an adjustment to the residual value and the right-of-use. c. a reduction of the lease liability and the financing cost (interest expense). d. a reduction of the lease liability and a valuation adjustment.

a

Which of the following does a lessor record as part of an operating lease? a. depreciation expense. b. a right-of-use asset. c. amortization expense. d. lease revenue.

a & d

A company entered into an agreement to lease a backhoe for ten months. Although the lease agreement provides the option to renew the lease term for an additional three months, the company is certain that it will not exercise the renewal option. What is a valid option for the company's accounting treatment of this lease? a. the company will treat lease payments as expenses when incurred. b. the company will treat this as a finance lease. c. the company will record a right-of-use asset and related liability. d. the company will omit the related liability as long as it records the right-of-use asset.

a . Since the company is certain to not exercise the renewal option, the additional months are ignored and the lease is considered a short-term lease and the payments are expensed. (lease term is also less than 12 months this fails the 5 lease classification tests for finance lease.)

Company A leases a piece of machinery to Company B on January 1, Year 1. Information pertaining to the lease is as follows: • The lease is noncancellable with a term of three years. • The machinery has a cost and fair value at the start of the lease of $60,000; an estimated economic life of five years; and a residual value at the end of the lease of $12,000 (unguaranteed). • The lease contains no renewal options, and the machinery reverts to Company A at the end of the lease. • The present value of the residual value has been calculated as $10,075.44. · The annual lease payments has been calculated as $17,620.08. How much should Company B record as the right of use asset on January 1, Year 1 a. $60,000.00 b. $49,924.56 c. $48,000.00 d. $42,379.92

b

On January 1, Year 1, a company signed an agreement to lease a delivery truck for 36 months. The fair market value of the truck was $80,000 as of January 1, Year 1. The corporation estimates that the truck's fair market value will be $20,000 on December 31, Year 3. The corporation is reasonably certain it will exercise the lease option to purchase the delivery truck for $1,000 at the end of the lease. How will the company report lease payments on its income statement? a. partially as rent expense and partially as interest expense. b. partially as amortization expense and partially as interest expense. c. as interest expense. d. as lease expense.

b

A start-up company is trying to decide if it should purchase or lease cellular phones for its 2,500 new employees. Which decision should the company make? a. lease, because leasing requires a larger down payment, but smaller monthly payments. b. purchase, because purchasing equipment offers the flexibility of only using the equipment the desired amount of time. c. lease, because leasing can pass the risk of residual value to the lessor. d. purchase, because purchasing creates current tax benefits for a new company with no taxable income.

c

Company A leases a piece of machinery to Company B on January 1, Year 1. Information pertaining to the lease is as follows: • The lease is noncancellable with a term of three years. • The machinery has a cost and fair value at the start of the lease of $60,000; an estimated economic life of five years; and a residual value at the end of the lease of $12,000 (unguaranteed). • The lease contains no renewal options, and the machinery reverts to Company A at the end of the lease. • The present value of the residual value has been calculated as $10,075.44. · The annual lease payments are $17,620.08. What is the journal entry Company B makes to record the first payment on January 1, Year 1 a. debit rent expense $17,620.08, credit cash $17,620.08. b. debit rent expense $17,620.08, debit lease liability $17,620.08. c. debit lease liability $17,620.08, credit cash $17,620.08. d. debit right of use asset $17,620.08, credit lease liability $17,620.08.

c

For a sales-type lease: a. the sales price includes the present value of the unguaranteed residual value. b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d. assets are depreciated by the lessor.

c

In computing the present value of the lease payments, the lessee should: a. use its incremental borrowing rate in all cases. b. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. c. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. d. use the implicit rate in all cases.

c

Which of the following statements regarding lessee-guaranteed residual values is true for the lessee? a. the asset and liability at the beginning of the lease should be increased by the amount of the residual value to the extent that guaranteed residual value is expected to exceed the estimated residual value. b. the asset and liability at the beginning of the lease should be decreased by the amount of the residual value to the extent that guaranteed residual value is expected to exceed the estimated residual value. c. the asset and liability at the beginning of the lease should be increased by the present value of the residual value to the extent that guaranteed residual value is expected to exceed the estimated residual value. d. the asset and liability at the beginning of the lease should be decreased by the present value of the residual value to the extent that guaranteed residual value is expected to exceed the estimated residual value.

c

Company A (lessee) enters into a lease agreement with Company B (lessor). The term of the lease is five years with monthly payments of $1,500. Prior to the beginning of the lease, Company A paid $9,000 in advance. What is the journal entry the lessor makes to record the advance payment? a. debit cash $9,000, credit rent revenue $9,000. b. debit lease receivable $9,000, credit rent revenue $9,000. c. debit cash $9,000, credit unearned rent $9,000. d. debit lease receivable $9,000, credit right of use asset $9,000. Ans c: the lessor establishes an unearned revenue liability account for the advance payment amount and will recognize it as revenue over the lease term.

c (make sure to notice if its asking about the lessee or lessor)

A start-up company is trying to decide if it should purchase or lease cellular phones for its 2,500 new employees. Which decision should the company make? a. lease, because leasing requires a larger down payment, but smaller monthly payments. b. purchase, because purchasing equipment offers the flexibility of only using the equipment the desired amount of time. c. purchase, because purchasing creates current tax benefits for a new company with no taxable income. d. lease, because leasing can provide the lessor with tax benefits that can then be passed onto the lessee in the form of lower rental payments.

d

The right-of-use asset is increased by a. initial direct costs incurred by the lessee only. b. lease incentives received. c. prepaid lease payments only. d. lease prepayments made by the lessee and initial direct costs incurred by the lessee.

d

Which of the following does a lessee record as part of a finance lease? a. amortization expense. b. interest expense. c. a right-of-use asset. d. all of the answer choices are correct.

d

Which of the following does a lessee record as part of an operating lease? a. amortization expense. b. interest expense. c. depreciation expense. d. lease expense.

d