acct 306 ch15
How does a residual value in a finance/sales-type lease affect the lessor?
The lessor includes the residual value in lease receivable computations regardless of guarantee.
The short-cut method may be applied only if the maximum possible lease term is
less than or equal to twelve months
The _____ must disclose its net investment in the lease.
lessor
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
In an operating lease, the lessor
rents the asset to the lessee for a period of time.
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
The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments from the lessee.
reduces
The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments.
reduces
The lessee records the right-of-use asset as
the present value of lease payments
In an operating lease, interest expense plus amortization expense is equal to
the straight-line lease payment.
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?
Credit equipment $300,000
A bargain purchase option is a provision in a lease contract that
gives the lessee the right to purchase the leased asset at a price significantly less than the expected fair value of the property.
For a sales-type lease, the lessor should report cash received on the lease as a(n) ______ activity.
operating
In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.
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?
operating
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should credit
Equipment for $431,213
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
Which of the following are criteria for classification as a finance lease?
Ownership of the asset transfers to the lessee. The present value of the total lease payments is greater than substantially all of the fair value of the asset. The lease includes a purchase option the lessee is reasonably certain to exercise.
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
Which of the following are required disclosures related to leases?
nonlease payments residual values variable lease cost
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.
The lease term includes
any periods covered by options to extend with significant incentive. the contractual term of the lease.
The two basic lease classifications by a lessee are
operating and finance.
The lessor's gross investment in the lease is the total of periodic rental payments
plus any residual value.
The estimated commercial value of leased property at the end of the lease term is known as
residual value.
should recognize amortization of the right-of-use asset.
the lessee
In which of the following ways can a lease be accounted for?
As a rental agreement. As a purchase/sale agreement with debt financing.
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 interest expense for $20,617 (($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.
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
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? (Select all that apply)
credit cash $105,000 debit lease payable $100,000 debit maintenance expense $5,000
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. 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 would be included in the lessor's gross investment in the lease?
periodic lease payments residual value
Which of the following are possible reasons for leasing an asset rather than purchasing an asset?
tax benefits insufficient cash flow lower periodic payments on the asset fear of obsolescence
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.
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.
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%?
Reason: $300,000 - 50,000 = $250,000/4.46511 = $55,990
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
The residual value of a leased asset impacts the lessee's calculation of effective interest.
False Reason: The lessee's accounting is unaffected by the residual value other than it causes the lessee's payments to be lower.
The accounting in which of the following parallels that of an installment purchase?
Finance lease
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should debit
Lease receivable for $431,213
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)
Reclassify from an operating lease to a finance lease Update the right-of-use asset for the increase in present value
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? (Select all that apply)
credit lease receivable $100,000 credit maintenance fee payable $5,000 debit cash $105,000
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?
debit lease receivable $500,000 credit equipment $500,000
________is a commitment by the lessee that the lessor will recover a specified residual value at the end of the lease term
guaranteed residual value
Sarah Company leases a machine with a fair value of $200,000 from Eden Inc. The present value of the future lease payments is $120,000. At the inception of the lease, Sarah should (Select all that apply.)
debit right-of-use asset for $120,000 credit lease payable for $120,000
From an accounting standpoint, legal ownership of a leased asset is _____ to the accounting method used.
irrelevant
An operating lease
is similar to a typical rental agreement.
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
lease.
The two basic lease classifications by a lessor are
operating and sales-type
Selma leases equipment from ABC Corp. The 4-year lease requires payments of $10,000 per year, beginning at the inception of the lease. The fair value of the equipment at the inception of the lease is $100,000. The equipment has a 6-year life. Selma's incremental borrowing rate is 6%. The lease does not transfer title and does not have a bargain purchase option. How should the lease be classified by Selma?
operating lease=The present value of the minimum lease payments (3.67301 x 10,000 = $36,730) is less than substantially all of the fair value of the leased asset Also, there is no transfer of title, and no purchase option. Therefore, it is an operating lease.
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
operating to 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_____
operating, financing
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
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
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.
The rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.
are not
Depending on the nature of the leasing arrangement, a lease is accounted for
as a rental or a purchase/sale.
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 ($500,000-40,000 = $460,000/4.79079 = $96,018)
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should debit
Right-of-use asset for $431,213 Reason: $100,000 x 4.31213 (PV of lease payments, 8%, 5 years)
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
How does a residual value in a finance/sales-type lease affect the lessee?
The lessee lease payments are lower.
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.
When the lessee is given the option of purchasing the leased property at a price significantly lower than its fair value, a _____ is present.
bargain purchase option
Corr Inc. leases equipment from LM Leasing Corp. The lease requires rental payments of $20,000 per year for 5 years. Title of the property transfers at the end of the lease term. The equipment has a useful life of 10 years. How should the lease be classified by Corr?
finance lease
Which of the following are required disclosures for lessees and lessors?
future payments in each of the next 5 years description of the leasing arrangements future payments for total remaining years
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
installment note
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.
operating; financing
When recording a finance lease, the amount initially recognized for the right-of-use asset is the
present value of the lease payments
