Ch. 15

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

interest and a reduction in the principal

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.

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

remaining economic life

The estimated commercial value of leased property at the end of the lease term is known as

residual value

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

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 three years of the equipment's 5-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

1) Debit cash for $100,000 2) Credit deferred lease revenue for $100,000

In a typical finance lease, the first lease payment at the beginning of the lease consists of

reduction in principal only

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

straight line

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.

In which ways can a lease be accounted for?

1) As a purchase/sale agreement with debt financing 2) As a rental agreement

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.)

1) Fit Company records lease expense when the variable lease payment is paid 2) Lease Corp records lease revenue when the variable lease payment is received

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,

1) Kluge records a right-of-use asset 2) Kluge records a lease payable

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

False

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

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)

Lease

Lease payments are often _______ than installment payments

Lower

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

Pattern

The residual value of a leased asset ____ the amount the lessor needs to recover through periodic lease paymenrs

Reduces

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

are not

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

From an accounting standpoint, legal ownership of a leased asset is _____ to the accounting method used.

irrelevant

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

operating

What are the criteria for classification as a finance lease?

1) The present value of the total lease payments is greater than substantially all of the fair value of the asset 2) Ownership of the asset transfers to the lessee 3) The lease includes a purchase option the lessee is reasonably certain to exercise

The lease term includes

1) any periods covered by options to extend with significant incentive. 2) the contractual term of the lease.

At the inception of a finance lease for computer equipment, the lessee should

1) debit right-of-use asset 2) credit lease payable

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 and Finance

What are possible reasons for leasing an asset rather than purchasing an asset?

1) Tax benefits 2) Lower periodic payments on the asset

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?

1) Reclassify from an operating lease to a finance lease 2) Update the right-of-use asset for the increase in present value

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

Lease Payable for $431,213 100,000 x 4.31213 (PV of lease payments, 8%, 5 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.

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

as a rental or a purchase/sale.

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

The accounting in which of the following parallels that of an installment purchase?

finance lease

In an operating lease, interest expense plus amortization expense is equal to

The straight-line lease payment

The two basic lease classifications by a lessor are

Operating and Finance

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

Residual Value

an operating lease

is similar to a typical rental agreement.

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

lease receivable

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

The two basic lease classifications by a lessor are

operating and sales-type. (Sales type is also finance)

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.

75% or more

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 ______ 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

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

implicit

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

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

The lessee records the right-of-use asset as

present value of the lease payments

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.