Accounting II

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.

A purchase option (Select all that apply) Multiple select question. includes a specified exercise price. does not include a specified exercise price. gives the lessee the option to purchase the asset during the lease term or at the end of the lease. gives the lessor the option to purchase the asset during the lease term or at the end of the lease.

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.

An operating lease is defined as a lease

that does not meet any of the criteria of a finance or sales-type lease

An operating lease is defined as a lease

that does not meet any of the criteria of a finance or sales-type lease.

Which one of the following will determine classification of a lease transaction as a finance lease?

the asset is of a very specialized nature and will have no alternative use to the lessor.

the lease term includes

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

If the lessee is expected to take ownership of a leased asset at the end of the lease term, the lessor must use an estimated residual value when calculating the lease payments necessary to achieve a desired rate of return.

true

In accounting for operating leases, the lessee will recognize lease expense on a straight-line basis.

true

Munchin Manufacturing Company leases an asset to Peter Inc in a sales-type lease. The present value of the lease payments is $400,000 and the cost of the asset is $330,000. At the beginning of the five-year lease term, Munchin should recognize a profit of:

$70,000 (400,000-330,000)

Barr Corp. is the lessee in a finance lease. Barr would record:

A right-of-use asset

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.)

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

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

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.

Purchase option

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

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

A bargain purchase option is defined as the option of purchasing leased property at a price that is equal to the expected fair value of a leased asset.

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

rights and responsibilities of ownership are transferred to the lessee

finance or sales-type

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

implicit rate

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

installment

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

interest and a reduction in the principal

an operating lease

is similar to a typical rental agreement

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

less than or equal to twelve months

The should recognize amortization of the right-of-use asset.

lessee

Lease payments are often____ than installment payments.

lower

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

How is lease expense recorded by the lessee in an operating lease

on a straight-line basis

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

operating

ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease may be classified as

operating or sales-type

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.

reduces

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

Which of the following would be included in the lessor's gross investment in the lease? Multiple select question. residual value periodic lease payments executory costs depreciation expense

residual value periodic lease payments

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than:

substantially all of the fair value of the asset

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.

The lease term includes

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

Finance leases are agreements that are formulated outwardly as leases, but are installment purchases in substance.

true

The accounting in which of the following parallels that of an installment purchase? Multiple choice question. Installment lease Direct-financing lease Operating lease Finance lease

Finance lease

the two basic lease classifications by a lessee are

Operating and finance

From the perspective of the lessee, leases may be classified as either: Multiple Choice Sales-type without selling profit or sales-type with selling profit. Finance or sales-type without selling profit. Finance or operating. Sales-type or operating.

Finance or operating

rights and responsibilities of ownership are retained by the lessor

operating

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%?

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

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%?

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

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)

Interest Expense for $20,617 (357,710-100,000)x.08 Lease payable for $79,383 100,000-20,617

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

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

Straight-line

Which of the following are criteria for classification as a finance lease? (Select all that apply.) The present value of the total lease payments is greater than substantially all of the fair value of the asset. Ownership of the asset is retained by the lessor. Ownership of the asset transfers to the lessee. The asset will have an alternative use to the lessor at the end of the lease term. The lease includes a purchase option the lessee is reasonably certain to exercise. The present value of the total lease payments is less than substantially all of the fair value of the asset.

The present value of the total lease payments is greater than substantially all of the fair value of the asset. Ownership of the asset transfers to the lessee. The lease includes a purchase option the lessee is reasonably certain to exercise.

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)

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

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply) fear of obsolescence higher debt to asset ratios lower net income tax benefits insufficient cash flow lower periodic payments on the asset

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

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

guaranteed residual value

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

in a lease, the ____ is the owner of the property, whereas the ____ is the user of the property.

lessor; lessee

The short-cut method of accounting for leases Multiple choice question. may be used if the lease has a lease term (including any options to renew or extend) of twelve months or less. may be used if the lease has a lease term of twelve months with an option to renew the lease at the end of twelve months. may be used if the lease has a lease term of twelve months or less with an option for the lessee to purchase the asse

may be used if the lease has a lease term (including any options to renew or extend_ of twelve months or less

In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.

operating

the two basic lease classifications by a lessor are

operating and sales-type

Which of the following would be included in the lessor's gross investment in the lease?

periodic lease payments residual value

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

plus any residual value

The present value of a residual asset in a lease

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

__________ ______________is an estimate of a leased asset's commercial value at the end of the lease term. (Enter only one word per blank.)

residual value