Ch 15 ACC 4163

In which type of lease does the lessor record a lease receivable at the inception of the lease?

sales-type

If a bargain purchase option is expected to be exercised, the lease term ends

when the option becomes exercisable.

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

Under _________, a lessee remeasures the variable lease payments that depend on an index or rate whenever there is a change in the cash flows resulting from a change in that index or rate; however, under ________ a lessee only remeasures the variable lease payments that depend on an index or rate when the lessee remeasures the ROU asset and lease liability for other reasons.

IFRS; US GAAP

Which of the following are included in the lease payments used in present value calculations?

In-substance fixed lease payments

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

Which of the following is true regarding accounting for an operating lease?

The lessee records both an asset and a liability even when the risks and rewards of ownership do not transfer.

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.

Which of the following amounts represents the cost of goods sold in a sales-type lease?

The lessor's cost of the leased 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? (Select all that apply)

Update the right-of-use asset for the increase in present value 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? (Select all that apply)

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

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

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 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.

included; excluded

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; the first payment is due on January 1, 20X1. Tucker should recognize the second lease payment by debiting (Select all that apply.)

interest expense for $26,497 lease payable for $73,503

The amortization table for an operating lease allows the lessee to allocate each lease payment to __________ and ________.

interest expense; reduction of the lease liability

Amortization of the right-of-use asset for an operating lease

is calculated as the lease payment minus interest expense.

On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Both companies choose the short-cut option. Marion recognizes the first lease payment by debiting

lease expense

On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Assuming that Marion chooses the short-cut method, at the commencement of the lease before the first lease payment is made, Marion should

not make any journal entry

IFRS requires lessees to apply a _____ approach to lease accounting, whereby lessees account for all leases as finance leases.

one-model

In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?

operating

In which type of lease does the lessor report a single lease revenue account with a straight-line amount?

operating

The lease term includes

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

IFRS allows the short-cut method on leases if

the lease term is 12 months or less and does not include a purchase option.

A leasehold improvement should be depreciated or amortized over

the shorter of the physical life of the asset or the lease term.

If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over

the useful life of the asset.

True or false: The lessor never reassesses its lease receivable for variable lease payments.

true

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

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

If a lease payment depends on an index or rate, any change in the lease payments due to changes in that index or rate (select all that apply)

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

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?

10

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

A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value.

90% or more

In its income statement, what two amounts does the lessee combine into a single lease expense amount reported as a straight-line amount each period when accounting for an operating lease?

Amortization expense Interest expense

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.

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?

Capitalize and amortize over asset useful life to the lessee.

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipment's 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, and the first payment is made at the inception of the lease. Donelson should record which of the following in connection with the second payment?

Credit to lease receivable of $35,259.

True or false: If a triggering event occurs, a lessor must reassess the lease term and the initial lease classification.

FALSE

True or false: 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.

FALSE

What type of lease involves a "front loading" of lease expense and revenue due to higher interest in the earlier stages of the lease?

Finance/Sales-type

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, 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 would justify reassessment of a lease term?

Leasehold improvements

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? (Select all that apply)

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

True or false: A lessee and a lessor will use similar amortization schedules for recording interest.

TRUE

True or false: The incremental borrowing rate is the rate the lessee would expect to pay a bank if funds were borrowed to purchase the asset.

TRUE

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.

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?

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

What interest rate is used to compute the present value of the remaining lease payments when a lease term is reassessed and changed?

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

Which of the following amounts represents the selling price in a sales-type lease?

The present value of the lease payments

When is a lease considered a direct financing lease? (Select all that apply.)

When control is not transferred to the lessee. It is probable that the lessor will collect the lease payments. When a third party guarantees the residual value.

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.

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?

When the option becomes exercisable.

For an operating lease, the lessee will report

a single lease expense.

The lessor's receipt of payment on an operating lease is

all recorded as lease revenue.

If future lease payments are uncertain, they are considered as part of present value calculations only if they

are in-substance fixed payments

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

as a rental or a purchase/sale.

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

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

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 maintenance expense $5,000 debit lease payable $100,000

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

credit lease payable debit right-of-use asset

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

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. On January 1, 20X1, Donelson should recognize the receipt of the first lease payment by

crediting lease receivable for $45,000.

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:

debit lease receivable $245,673 credit sales revenue $223,255 credit equipment $150,000

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. Tucker should allocate the cost of the right-of-use asset annually by (round to a whole dollar)

debiting amortization expense for $86,243

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

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

A purchase option (Select all that apply)

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

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.

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

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 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

How does the bargain purchase option affect the calculation of the present value of the lease payments for the lessee?

increases

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

initial direct costs.

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

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

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

irrelevant

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.

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.

lease payments including any lessee-guaranteed residual value

When the lessor's implicit rate is unknown, which rate should be used to calculate the present value of the lease payments for the lessee?

lessee's incremental borrowing rate

The _____ subtracts the present value of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments.

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.

The lessee records an asset and liability for operating leases under

new GAAP only.

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

nonlease component

If a leased asset is of a very specialized nature and has no alternative use to the lessor at the end of the lease term, (Select all that apply.)

only the lessee receives the risks and rewards of ownership. it is accounted for as a finance lease.

In which section of the statement of cash flows should a lessee report payments on an operating lease?

operating

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

The two basic lease classifications by a lessee are

operating and finance.

Lessees prefer the ______ lease classification because it defers expense recognition, as compared to the ______ lease classification, which "front loads" lease expense due to higher interest expense in early years and straight-line amortization expense.

operating; finance

A fixed payment for hazard insurance or property taxes is considered to be

part 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.

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

In a short-term lease, periodic rental payments are

recorded as rent expense by the lessee. recorded as rent revenue by the lessor.

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments.

reduces

An advanced payment on an operating lease is allocated to _____ over the lease term by the lessor.

rent revenue

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

residual revenue periodic payments

Off-balance-sheet financing refers to the practice of

structuring transactions to keep assets and liabilities off the balance sheet by leasing rather than buying them.

When the lessor calculates the periodic lease payments, the present value of the bargain purchase option should be

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

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 lessee records the right-of-use asset as

the present value of lease payments.

the incremental borrowing rate is

the rate the lessee would pay a bank to borrow funds.

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

the straight-line lease payment.

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

Finance lease

Both the lessee and lessor use the same amortization schedule for a finance/sales-type lease. The lessee records interest ___ and the lessor records interest ___

expense revenue

Lease payments are often ___ than installment payments.

lower

The periodic lease payment in an operating lease reduces the outstanding lease balance so that at the end of the lease term the outstanding balance is equal to

zero

Under IFRS, a lessee will remeasure the variable lease payments that depend on an index or rate

when the right-of-use asset is remeasured and when there is a change in cash flows resulting from a change in index or rate.

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

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.

lessee

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.

True or false: 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.

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 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

Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should credit:

equipment for $200,000 sales revenue for $320,000

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? Multiple choice question.

operating

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.

the lessor records a loss

If the lease payments have a total value that represents "substantially all" of the asset's fair value, it is logical to identify the contract as ____________.

equivalent to a sale.

The _____ must disclose its net investment in the lease.

lessor

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

Which of the following best describes the period over which the right-of-use asset is amortized when ownership transfers at the end of the lease?

The asset's estimated useful life

An advanced payment on an operating lease should be classified by the lessor as

deferred rent revenue.

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 lease payable for $79,383

In a direct financing lease, the lessor's primary involvement in the lease is providing financing in exchange for

interest revenue

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

lessee

Residual value is an estimate of

the commercial value of an asset at the end of the lease term

IFRS allows the short-cut method on leases if

the lease has a value of $5,000 or less. the lease term is 12 months or less and does not include a purchase option.

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

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.

The lessee's payment in an operating lease is

- allocated between interest expense and amortization for the right-of-use asset. - reported as a single lease expense.

When a lease includes a termination penalty,

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

First Lease Corp. leases equipment to Taylor. The interest rate implicit in the loan is 8% and is known to both parties. Taylor's incremental borrowing rate is 10%. Market rate on similar leases is averaging 9%. What interest rate should Taylor use to compute the present value of lease payments?

8% Reason: The lessee uses the interest rate implicit in the lease when known.

How is a fixed payment for hazard insurance or property taxes treated in a lease agreement?

As part of the lease payments

How is amortization expense computed on the right-of-use asset by the lessee in an operating lease?

As the payment less the interest expense.

Answer Mode True or False QuestionYour Answer incorrect ErrorBefore moving on, you must review a resource for this question. True or false: When a bargain purchase option exists, a renewal option is considered irrelevant because it is assumed that the purchase option will be exercised.

False Reason: In a bargain purchase option, it is assumed that the lessee will purchase the asset at the end of the lease term. Thus, any renewal option would not be exercised.

Under IFRS No. 16, how are lessees required to account for leases?

Finance only

Who is allowed to reassess initial calculation of the lease term or discount rate?

Lessee only

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

Straight-line

When there is a change in lease term,

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

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.

Initial direct costs incurred by the lessee are

added to the right-of-use asset.

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

are not

Periods covered by renewal options

are not included in the lease term if a bargain purchase option is present.

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 four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Lease Corp account for this lease modification? (Select all that apply)

debit accumulated depreciation for $142,857 debit lease receivable for $300,000 credit sales revenue for $300,000 debit cost of goods sold for $357,143 credit asset $500,000

On January 1, Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment from Electronics Plus at a cost of $500,000. The lease agreement specifies three annual payments of $100,000 beginning at the inception of the lease. The useful life of the asset is estimated to be five years, but Warren will lease the asset for a total of three years. The present value of the three lease payments is $273,554. At the inception of the lease Warren should

debit right-of-use asset $273,554

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 four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Taylor account for this lease modification? (Select all that apply)

debit right-of-use asset for $200,000 credit lease payable for $200,000

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipment's 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. For the year ended 20X1, Mitchell should allocate the cost of the right-of-use asset by

debiting amortization expense of $39,971

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, 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. Franz should recognize receipt of the first lease payment on January 1, 20X1 by

debiting cash for $100,000 crediting lease receivable 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, and the first payment is made at the inception of the lease. Mitchell should recognize the second lease payment by

debiting interest expense for $9,741.

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)

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

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

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.

The primary motivation for the new accounting guidance on leases was to

deter the use of off-balance-sheet financing.

Sales revenue for the lessor ________ the expected residual value to be recovered.

does not include

The lessee amortizes the right-of-use asset over the asset's useful life, when (Select all that apply.)

exercise of a purchase option is reasonably certain. ownership transfers at the end of the lease term.

Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should debit:

lease receivable for $320,000

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; the first payment is due on January 1, 20X1. Franz should recognize receipt of the second lease payment by crediting (Select all that apply)

lease receivable for $73,503 interest revenue for $26,497

Who is allowed to reassess lease amounts for variable lease payments?

lessee only

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

lessee's balance sheet as an asset.

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.

lessee; lessor

Who owns the asset in an operating lease?

lessor

In an operating lease, the ___ records no asset or liability at the inception of the lease and the ___ /records both.

lessor, lessee

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply)

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

On January 1, Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment from Electronics Plus at a cost of $500,000. The lease agreement specifies three annual payments of $100,000 beginning at the inception of the lease. The useful life of the asset is estimated to be five years, but Warren will lease the asset for a total of three years. The present value of the three lease payments is $273,554. At the inception of the lease Best Lease Co. should

no entry to remove the asset from the balance sheet

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

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 Blank 2: financing or finance

The two basic lease classifications by a lessor are

operating and sales-type.

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

operating lease

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

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

payment

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

plus any residual value.

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments from the lessee.

reduces

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

reduction in principal only

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

remaining economic life.

Under the shortcut method, the lessee recognizes

rent expense over the lease term

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 are required disclosures related to leases?

residual values nonlease payments variable lease cost