ACTG CH15 SB

Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the

remaining economic life.

Legal fees for executing lease documents, and the preparation and processing cost of lease documents are referred to as

initial direct costs.

Which of the following are required disclosures related to leases?

residual values nonlease payments variable lease cost

When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a

sale-leaseback.

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, (Select all that apply)

Kluge records a lease payable. Kluge records a right-of-use asset.

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 rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.

are not

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

The incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments.

false

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

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

lessee

The _____ must disclose its net investment in the lease.

lessor

A lease is a contractual agreement by which a(n)________ provides a(n) _________ the right to use an asset for a specified period of time.

lessor, lessee

When a portion of a lease payment represents the transfer of a good or service to the lessee, it is considered a

nonlease component

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

operating

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

operating

A reasonable conclusion is that the "major part" of the leased asset's life is included in the lease, if _____ of the remaining economic life of the asset is covered by the lease term. Multiple choice question. 75% or less

75% or more

In which of the following ways can a lease be accounted for? (Select all that apply.)

As a rental agreement. As a purchase/sale agreement with debt financing.

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.

Which of the following occur in a sale-leaseback transaction?

The lessee receives cash from the sale of the asset. The lessee pays periodic rental payments.

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 transfers to the lessee. The lease includes a purchase option the lessee is reasonably certain to exercise.

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.

Which of the following are required disclosures for lessees and lessors?

future payments for total remaining years description of the leasing arrangements future payments in each of the next 5 years

The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.

implicit

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(n)

lease.

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

less than or equal to twelve months

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.

In an operating lease, the lessor

rents the asset to the lessee for a period of time.

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.

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

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 credit

Lease payable for $431,213

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

Which of the following occur in a lease?

Lessee pays the lessor periodic cash payments. Contractual agreement. Lessee has the right to use an asset for a specified period of time.

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

On a straight-line basis

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

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

Straight-line

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.

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.

Depending on the nature of the leasing arrangement, a lease is accounted for

as a rental or a purchase/sale.

Initial direct costs include (Select all that apply)

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

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 lease payment is $100,000. Tucker should recognize the first lease payment on January 1, 20X1 by (Select all that apply)

crediting cash for $100,000 debiting lease payable for $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? (Select all that apply)

debit lease payable $100,000 debit maintenance expense $5,000 credit cash $105,000

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

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

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000. Mitchell should recognize the first lease payment on January 1, 20X1 by

debiting lease payable for $45,000.

A contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time is called a(n) ________. (Enter one word per blank)

lease

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

When the rights and responsibilities of ownership are retained by the lessor, the lease is classified as a(n) ______ lease.

operating

The two basic lease classifications by a lessee are

operating and finance.

The two basic lease classifications by a lessor are

operating and sales-type.

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

The right-of-use asset is amortized straight-line, unless the lessee's __________ of using the asset is different.

pattern

When recording a finance lease, the amount initially recognized for the right-of-use asset is the

present value of the lease payments

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 lessee records the right-of-use asset as

the present value of lease payments.