Intermediate Chapter 15 Leases part 2

Legal fees for executing lease documents, and the preparation and processing cost of lease documents are referred to as a. initial direct costs. b. lease direct costs. c. leasehold improvements d. nonlease cost components

a. initial direct costs.

An advanced payment on an operating lease should be classified by the lessor as a. a contra-asset. b. deferred rent revenue. c. rent expense for the period. d. a lease receivable.

b. deferred rent revenue.

The lease term includes... 1- the useful life of the asset 2- any period covered by options to extend with significant incentive 3- 75% of the expected life of the asset 4- the contractual term of the lease

1- the useful life of the asset 4- the contractual term of the lease

Initial direct costs incurred by the lessee are a. added to the right-of-use asset. b. deferred and expensed over the lease term. c. expensed at the beginning of the lease.

a. added to the right-of-use asset.

A fixed payment for hazard insurance or property taxes is considered to be a. separate goods or services. b. part of the lease payments. c. payment for non lease components.

b. part of the lease payments.

If a lease contract includes a penalty payment for termination and it is reasonably certain the lessee will terminate the lease, then the lessee should consider the penalty to be an additional_________ ________ .

cash payment

When a bargain purchase option is present, the lessor subtracts the future value of the exercise price from the amount to be recovered to determine the amount to be recovered through rental payments.

Flase The lessor subtracts the present value

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 a. Lease Corp records lease revenue when the variable lease payment is received b. Fit Company records a lease payable when the agreement is made c. Fit Company records lease expense when the variable lease payment is paid d.Lease Corp records a lease receivable when the agreement is made

a. Lease Corp records lease revenue when the variable lease payment is received c. Fit Company records lease expense when the variable lease payment is paid

When is a nonlease component of a lease agreement recorded separately from the lease payments? a. When the amount represents transfer of a good or service to the lessee. b. When the amount is paid for hazard insurance. c. When the amount is greater than 10% of the total lease payment. d. When the amount represents transfer of a good or service to the lessor.

a. When the amount represents transfer of a good or service to the lessee.

If a lease payment depends on an index or rate, any change in the lease payments due to changes in that index or rate a. are used to calculate the right-of-use asset and lease liability only if they are remeasured for another reason. b. cause immediate remeasurement of the liability and right-of-use asset. c. is reported as additional lease expense for the lessee and lease revenue for the lessor.

a. are used to calculate the right-of-use asset and lease liability only if they are remeasured for another reason. c. is reported as additional lease expense for the lessee and lease revenue for the lessor.

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? a. debit cash $105,000 b. credit lease receivable $105,000 c. credit maintenance fee payable $5,000 d. credit lease receivable $100,000 e. debit cash $100,000

a. debit cash $105,000 c. credit maintenance fee payable $5,000 d. credit lease receivable $100,000

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 North Company record the first payment? a. debit lease payable $100,000 b. credit cash $105,000 c. debit maintenance expense $5,000 d. debit lease payable $105,000 e. credit cash $100,000

a. debit lease payable $100,000 b. credit cash $105,000 c. debit maintenance expense $5,000

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: a. debit lease receivable $245,673 b. credit equipment $150,000 c. credit sales revenue $245,673 d. debit cost of goods sold $150,000 e. credit sales revenue $223,255

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

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. Which of the following complete the journal entry for Lease Corp to record this lease? a. debit lease receivable $500,000 b. credit equipment $450,000 c. debit lease receivable $450,000 d. credit equipment $500,000

a. debit lease receivable $500,000 d. credit equipment $500,000

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. a. effective; straight-line b. historical; index c. stated; market d. straight-line; effective

a. effective; straight-line

A purchase option a. gives the lessee the option to purchase the asset during the lease term or at the end of the lease. b. includes a specified exercise price. c. does not include a specified exercise price. d. gives the lessor the option to purchase the asset during the lease term or at the end of the lease.

a. gives the lessee the option to purchase the asset during the lease term or at the end of the lease. b. includes a specified exercise price.

A lessee makes leasehold improvements to leased property that will revert back to the lessor at the end of the lease. During the term of the lease, the leasehold improvements are reported on the a. lessee's balance sheet as an asset. b. lessee's balance sheet as a liability. c. lessor's balance sheet as a liability. d. lessor's balance sheet as an asset.

a. lessee's balance sheet as an asset.

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments. a. reduces b. increases c. has no effect on

a. reduces

An advanced payment on an operating lease is allocated to _____ over the lease term by the lessor. a. rent revenue b. rent expense c. prepaid rent d. unearned revenue

a. rent revenue

When a leased asset is returned at the end of the lease term and the actual residual value is less than the initial estimated residual value, _____ for the difference between estimate and actual. a. the lessor records a loss b. the lessee records a loss c. the lessor records a gain d. the lessee records a gain

a. the lessor records a loss

When a lease includes a termination penalty, a. the penalty amount is considered an additional cash payment if the lessee is reasonably certain to terminate the lease. b. the lease term ends on the expected termination date. c. the lease term ends on initial lease end date regardless of expected termination date. d. the penalty amount is considered an additional cash payment regardless of likelihood of termination.

a. the penalty amount is considered an additional cash payment if the lessee is reasonably certain to terminate the lease. b. the lease term ends on the expected termination date.

If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over a. the useful life of the asset. b. the useful life of the asset or the lease term, whichever is shorter. c. the lease term. d. the useful life of the asset or the lease term, whichever is longer.

a. the useful life of the asset.

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%? a. $60,000 b. $55,990 c. $50,000 d. $41,838 e. $35,714

b. $55,990 Reason: $300,000 - 50,000 = $250,000/4.46511 = $55,990

How is a fixed payment for hazard insurance or property taxes treated in a lease agreement? a. As a separate nonlease component b. As part of the lease payments c. As an expense to the lessor d. As a transfer of goods to the lessee

b. As part of the lease payments

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? a. Debit right of use asset $300,000 b. Credit equipment $300,000 c. Credit residual asset $50,000 d. Debit lease receivable $250,000

b. Credit equipment $300,000

How should the lessee account for an expected cash payment when the value of the leased asset at the end of the lease is expected to be less than the guaranteed residual value a. The lessee should increase the right-of-use asset and lease liability by the amount of the expected cash payment. b. The lessee should increase the right-of-use asset and lease liability by the present value of the expected cash payment. c. The lessee does not have to account for predicted differences between the value of the leased asset and the guaranteed residual value. d. The lessee adjusts the amount of the cash payments paid to the lessor throughout the life of the lease.

b. The lessee should increase the right-of-use asset and lease liability by the present value of the expected cash payment.

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? a. Terminate the original lease and create a new lease with the new terms b. Update the right-of-use asset for the increase in present value c. Recognize straight-line expense of the lease payments d. Reclassify from an operating lease to a finance lease

b. Update the right-of-use asset for the increase in present value d. Reclassify from an operating lease to a finance lease

When are the right-of-use asset and lease liability remeasured and adjusted for changes in the amount of payments due to a change in index or rate a. When current interest rates change b. When the lease is modified giving the lessee an additional right-of-use c. When the consumer price index changes d. When the lease term is reassessed and changed

b. When the lease is modified giving the lessee an additional right-of-use d. When the lease term is reassessed and changed

If the lease term includes a bargain purchase option that is reasonably expected to be exercised, when does the lease term end for accounting purposes? a. Whenever the option is exercised. b. When the option becomes exercisable. c. At the designated end of the lease per the lease contract.

b. When the option becomes exercisable.

When there is a change in lease term a. the original classification of the lease is not changed regardless of change in lease term. b. a lease initially classified as an operating lease may need to be reclassified as a finance lease. c. the previous accounting for the lease is reversed and the lease is accounted for using the new classification effective the first day of the lease.

b. a lease initially classified as an operating lease may need to be reclassified as a finance lease.

When the lessee is given the option of purchasing the leased property at a price significantly lower than its fair value, a _____ is present. a. bargain sale option b. bargain purchase option c. bargain renewal option

b. bargain purchase option

Initial direct costs include a. legal fees for lease negotiations and drafting documents b. costs necessary to acquire the lease c. costs that would not have been incurred if the lease agreement did not exist d. leasehold improvements that extend the life of the leased asset e. costs associated with completing the lease agreement

b. costs necessary to acquire the lease c. costs that would not have been incurred if the lease agreement did not exist e. costs associated with completing the lease agreement

The _____ 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 right-of-use asset and a lease liability. a. lessor b. lessee c. lessee and lessor

b. lessee

In which section of the statement of cash flows should a lessee report payments on an operating lease? a. other significant noncash activities b. operating c. investing d. financing

b. operating

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. a. fair buyout b. purchase option c. lease buyout d. renewal option

b. purchase option

The gain on a sale-leaseback classified as an operating lease is a. deferred and recognized over the lease term as a reduction of rent expense. b. recognized at the time of the sale. c. recognized as a reduction of depreciation expense.

b. recognized at the time of the sale.

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments from the lessee. a. has no effect on b. reduces c. increases

b. reduces

The lease term is typically considered to be a. the contractual term of the lease plus any periods covered by options to extend regardless of certainty of extension. b. the contractual term of the lease plus any periods covered by options to extend if extension is reasonably certain to occur. c. 75% of the expected life of the asset. d. 90% of the economic life of the asset.

b. the contractual term of the lease plus any periods covered by options to extend if

If a bargain purchase option is expected to be exercised, the lease term ends a. at the ending date in the lease contract. b. when the option becomes exercisable. c. when the option is exercised.

b. when the option becomes exercisable.

How does the bargain purchase option affect the calculation of the amount to be recovered through periodic rental payments for the lessor? a. Increases b. No effect c. Decreases

c. Decreases

Who is allowed to reassess lease amounts for variable lease payments? a. Both lessee and lessor b. Neither lessee nor lessor c. Lessee only d. Lessor only

c. Lessee only

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? a. Terminate the original lease and create a new lease with the new terms b. Recognize straight-line revenue of the lease payments c. Record a lease receivable for the present value of remaining lease payments d. Reclassify from an operating lease to a sales-type lease

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

How does a residual value in a finance/sales-type lease affect the lessee a. The residual value is added to the right-of-use asset b. The residual value is added to the lease liability c. The lessee lease payments are lower. d. The lessee lease payments are higher. e. The lessee is unaffected.

c. The lessee lease payments are lower.

What interest rate is used to compute the present value of the remaining lease payments when a lease term is reassessed and changed? a. The lessee's initial incremental borrowing rate b. The lessor's incremental borrowing rate at the time of the reassessment c. The lessee's incremental borrowing rate at the time of the reassessment d. The lessor's initial incremental borrowing rate

c. The lessee's incremental borrowing rate at the time of the reassessment

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: a. are estimated and used to calculate the lessee's lease liability and the lessor's receivable. b. are estimated and recorded as a separate lease liability and lease receivable for the lessee and lessor, respectively. c. have no effect on the lessee's lease liability and lessor's lease receivable.

c. have no effect on the lessee's lease liability and lessor's lease receivable.

A guaranteed residual value ___________ the calculation of the present value of the lease payments when comparing that amount to the fair value of the asset in determining lease classification a. Is irrelevant to b. is not included in c. is included in

c. is included in

A lease is classified as a finance lease by the lessee and a sales-type lease by the lessor if the present value of _____ constitutes "substantially all" of the fair value of the asset. a. lease payments excluding any lessee-guaranteed residual value b. the lessee-guaranteed residual value c. lease payments including any lessee-guaranteed residual value d. lease payments including an unguaranteed residual value

c. lease payments including any lessee-guaranteed residual value

When there is a change in the lease term, the _____ is required to reassess the classification of the lease. A _____ is not permitted to reassess its initial determination of the lease term. a. lessor; lessee b. borrower; creditor c. lessee; lessor

c. lessee; lessor

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. a. financing; operating b. investing; operating c. operating; financing d. operating; investing e. operating; operating

c. operating; financing

Roots, Inc. needed to improve its cash position. Thus, on December 31, it decided to sell one of its warehouses for its fair value of $250,000, and lease it back from the purchaser. Prior to sale, the warehouse had a carrying value of $220,000 (original cost $260,000). Under the 7 year lease agreement, Roots will make annual payments of $33,799, beginning the date of the lease signing. The annual lease payments provide the lessor with a 6% rate of return. On December 31, the date of the lease signing, Roots should a. record a lease liability of $236,593 b. record a loss on sale of $50,000 c. record a gain on sale of $30,000 d. record a cash outflow of $33,799

c. record a gain on sale of $30,000 d. record a cash outflow of $33,799

The present value of a residual asset in a lease a. reduces the lessee's lease payments only when guaranteed b. provides a source of recovery of the lessor's investment only when guaranteed c. reduces the lessee's lease payments regardless of guarantee d. provides a source of recovery of the lessor's investment regardless of guarantee

c. reduces the lessee's lease payments regardless of guarantee d. provides a source of recovery of the lessor's investment regardless of guarantee

When the lessor calculates the periodic lease payments, the present value of the bargain purchase option should be a. added to the amount to be recovered through periodic rental payments. b. ignored in the calculation of periodic rental payments. c. subtracted from the amount to be recovered through periodic rental payments.

c. subtracted from the amount to be recovered through periodic rental payments.

Which of the following is true regarding how a lessor reports cash flows from a sales-type lease? a. Cash receipts are reported as cash inflows from investing activities. b. Cash receipts are reported as cash inflows from financing activities. c. The portion that represents interest revenue is reported as operating, and the remainder is reported as financing. d. Cash receipts are reported as cash inflows from operating activities.

d. Cash receipts are reported as cash inflows from operating activities.

Who is allowed to reassess initial calculation of the lease term or discount rate a. Lessor only b. Neither lessee nor lessor c. Both lessee and lessor d. Lessee only

d. Lessee only

Cloud Corp. sold its equipment and immediately leased it back. The leaseback portion of the transaction was classified as an operating lease. The original cost of the equipment was $300,000. At the time of sale, the equipment had a carrying value of $200,000. The sale price was $250,000. Cloud should a. defer a loss on sale-leaseback and recognize it over the lease term. b. debit loss on sale-leaseback for $50,000 at the time of sale. c. defer a gain on sale-leaseback and recognize it over the lease term. d. credit gain on sale-leaseback for $50,000 at the time of sale.

d. credit gain on sale-leaseback for $50,000 at the time of sale.

The present value of the residual value is ______ in/from the lease receivable, and it is ______ in/from sales and cost of goods sold for the lessor. a. excluded; excluded b. excluded; included c. included; included d. included; excluded

d. included; excluded

When a portion of a lease payment represents the transfer of a good or service to the lessee, it is considered a a. variable lease payment b. residual asset c. bargain purchase option d. nonlease component

d. nonlease component

The ______ of leased property is an estimate of what its commercial value will be at the end of the lease term. a. depreciation expense b. lease payment c. bargain purchase option d. residual value

d. residual value

When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a a. turnaround sale. b. recourse lease. c. contingent sale. d. sale-leaseback.

d. sale-leaseback.

Smith Company leased equipment from FirstLease Corp. The cost of the equipment to FirstLease 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 FirstLease Corp with a return of 10%? a. $76,667 b. $100,000 c. $104,367 d.$96,018 e. $105,619

d.$96,018 Reason: $500,000-40,000 = $460,000/4.79079 = $96,018

Match the treatment of initial direct costs incurred by the lessor with the correct lease classification.

-Sales-type lease with selling profit=Expensed at the beginning of the lease -Sales-type lease with no selling profit=Choice, Deferred and expensed over the lease term by increasing the lease receivable Deferred and expensed over the lease term by increasing the lease receivable -Operating lease=Deferred and expensed over the lease term typically on a straight-line basis

Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value

Debit lease receivable = PV of lease payments plus the PV of the residual value Debit cost of goods sold = Lessor's cost of the equipment less the PV of the residual value Credit sales revenue = Sales less the PV of the residual value Credit Inventory = Lessor's cost of equipment

If a triggering event occurs, a lessor must reassess the lease term and the initial lease classification

False

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

False : The lessee's accounting is unaffected by the residual value other than it causes the lessee's payments to be lower.

Lessor NEVER reassesses its lease receivable for variable lease payments

True

Smith leases a piece of equipment from Marvin Company. The lease has a bargain purchase option which is expected to be exercised at the end of the lease. The useful life of the equipment is 10 years and the lease term is 8 years. Which number of years should be used to compute amortization? a. 10 b. 8 c. 18

a. 10

A lessee makes improvements to leased property. At the end of the lease the property reverts back to the lessor. How should the costs of the improvements be classified? a. Capitalize and amortize over asset useful life to the lessee. b. Deduct from the rent expense for the period. c. Expense in the current period. d. Deduct from the lease account.

a. Capitalize and amortize over asset useful life to the lessee.

Which of the following are included in the lease payments used in present value calculations? a. In-substance fixed lease payments b. Uncertain future additional payments c. Unmeasurable contingent rent payments

a. In-substance fixed lease payments

Which of the following would justify reassessment of a lease term a. Leasehold improvements b. Purchase option c. Residual value d. Change in incremental borrowing rate

a. Leasehold improvements

Who is allowed to reassess initial calculation of the lease term or discount rate a. Lessee only b. Lessor only c. Neither lessee nor lessor d. Both lessee and lessor

a. Lessee only

For a sales-type lease, the lessor should report cash received on the lease as a(n) ______ activity. a. operating b. noncash investing c. financing d. investing

a. operating

If future lease payments are uncertain a. are subject to a maximum. b. are in-substance fixed payments c. increase over time

b. are in-substance fixed payments

Who is the initial owner of the asset in a sale-leaseback transaction? a. Neither the lessee nor the lessor. b. The lessor. c. The lessee.

c. The lessee.

Sales revenue for the lessor ________ the expected residual value to be recovered. a. is equal to b. does include c. does not include

c. does not include

How does a residual value in a finance/sales-type lease affect the lessor? a. The lessor is unaffected. b. The residual value is added to the lease liability computations c. The lessor includes the residual value in lease receivable computations only if guaranteed. d. The lessor includes the residual value in lease receivable computations regardless of guarantee. e. The lessor lease receipts are higher.

d. The lessor includes the residual value in lease receivable computations regardless of guarantee

Sometimes a lease agreement includes a commitment by the lessee that the lessor will recover a specified amount when the asset is returned. This is known as a. guaranteed interest value. b. unguaranteed residual value. c. bargain purchase option. d. guaranteed residual value.

d. guaranteed residual value.

How does a residual value in a finance/sales-type lease affect the lessor? a. The lessor lease receipts are higher. b. The residual value is added to the lease liability computations c. The lessor is unaffected. d. The lessor includes the residual value in lease receivable computations only if guaranteed. e. The lessor includes the residual value in lease receivable computations regardless of guarantee.

e. The lessor includes the residual value in lease receivable computations regardless of guarantee.

In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease? a. investing b. financing c. other significant noncash d. activities e. operating

e. operating

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

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, 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/sales-type

_______ ________ is an estimate of a leased asset's commercial value at the end of the lease term.

residual,value

The exercise of a bargain purchase option is reasonably certain.

ture