Ch 15 LS - Leases

Under the short-cut method, the lessee recognizes

rent expense over the lease term

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

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 120,000Credit Lease payable for 120,000

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

The lessor's cost of the leased asset

Initial direct costs incurred by the lessee are

added to the right-of-use asset

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

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

present value of the lease payments

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

Implicit rate

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

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

*Periodic lease payments *Residual value

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?

-Interest expense; -Amortization expense;

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

As a rental or a purchase/sale

In an operating lease, the lessee reports lease ______ and the lessor reports lease ______ , both on a straight-line basis. (Enter only one word per blank.)

Expense; Revenue

A lease structured as an installment purchase is called a(n) ______ lease by the lessee.

Finance

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

Implicit

______ ______ 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

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

Sales-type

Match the treatment of initial direct costs incurred by the lessor with the correct lease classification.

Sales-type lease with selling profit = Expensed at the beginning of the lease; Sales-type lease with no selling profit = Deferred and expensed over the lease term by increasing the lease receivable; Operating lease = Deferred and expensed over the lease term typically on a straight-line basis;

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. (Enter one word per blank)

guaranteed

The gain on a sale-leaseback classified as an operating lease is

recognized at the time of the sale

Which of the following are required disclosures related to leases?

residual values; nonlease payments; variable lease cost;

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

True or 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

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

Lessee only

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

The _____ must disclose its net investment in the lease.

lessor

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.

On January 1, 2018, 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, 2018. 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

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

less than or equal to twelve months

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)

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

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

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

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%

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

All recorded as lease revenue

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 occur in a lease?

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

Initial direct costs include (Select all that apply)

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

On January 1, 2018, 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, 2018. At the commencement of the lease, Franz should debit

Lease Receivable for $431,213

The gain on a sale-leaseback classified as a(n) _____ lease is recognized at the time of the sale.

Operating

Match each lease with its description

Operating = Rights and responsibilities of ownership are retained by the lessor; Finance or Sales-type = Rights and responsibilities of ownership are transferred to the lessee

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;

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

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.

Which of the following were the criteria used to classify a capital lease under preexisting GAAP?

The present value of the minimum lease payments is 90% or more of the fair value of the leased asset.; Title to the property transfers at the end of the lease period.; The lease term is for 75% or more of the useful life of the leased asset.; The lease contains a bargain purchase option.;

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.

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.

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

initial direct costs

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

nonlease component

On January 1, 2018, 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, 2018. At the commencement of the lease, Franz should debit

Lease receivable for $431,213

Match each term with its definition

Lessee = User of the property, Lessor = Owner of the property

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

Lessor; Lessee

For a sales-type lease, the lessor should report cash received on the lease as a(n) ______ activity.

Operating

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;

On January 1, 2018, 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, 2018. 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;

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

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; credit asset $500,000; debit cost of goods sold for $357,143; debit lease receivable for $300,000; credit sales revenue for $300,000;

A leasehold improvement should be depreciated or amortized over

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

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

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?

-FIt Company records lease expense when the variable lease payment is paid; -Lease corp records lease revenue when the variable lease payment is received

The most common reasons for a sale-leaseback transaction are to

-Refinance at a lower rate -Generate cash

The journal entry to record the lessor's receipt of payment on a short-term lease would include which of the following entries?

Credit to lease revenue

On January 1, 2018, 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, 2018. Franz should recognize the first lease payment by (Select all that apply)

Crediting deferred lease revenue for $100,000; Debiting cash for $100,000;

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

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

Analyze the following amortization table for a lease with periodic payments of $92,931 and a bargain purchase option of $60,000. The journal entry to exercise the bargain purchase option at December 31, 2016, would include which of the following entries for the lessee? (Select all that apply)

Debit lease payable $54,542; Debit interest expense $5,458;

Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

Debit lease receivable = PV of lease payments plus the PV of the residual value; Debit cost of goods sold = Lessor's cost of the equipment less the PV of the residual value; Credit sales revenue = Sales less the PV of the residual value; Credit Inventory = Lessor's cost of equipment;

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

Debit right-of-use asset; Credit lease payable;

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-to-use asset for $200,000; Credit lease payable for $200,000;

On January 1, 2018, 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, 2018 by

Debiting cash for $100,000; Crediting lease receivable for $100,000;

On January 1, 2018, 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, 2018. Tucker should recognize the first lease payment by (Select all that apply)

Debiting lease payable for $100,000; Crediting cash for $100,000;

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

Deferred rent revenue

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;

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

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

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

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

Categorize the items between the lessee and lessor in a finance/sales-type lease.

Lessee = Records a right-of-use asset, Records a lease payable; Lessor = Records a lease receivable, removes the asset from its balance sheet;

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.

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

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

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

On a straight-line basis

How is lease revenue recorded by the lessor in an operating lease?

On a straight-line basis

Match the lessee residual value accounting treatment with preexisting or new GAAP.

Pre-exisiting GAAP = Guaranteed residual value is included in the minimum lease payments, Present value of guaranteed residual value is included in the lease asset; New GAAP = Guaranteed residual value is not included in the lease payments, Present value of cash payment is added to the right-to-use asset, A cash payment over the expected residual value is included in the lease payments;

Categorize the criteria for lease classification as a finance lease under preexisting GAAP, new GAAP, or both.

Preexisting = -The agreement contains a bargain purchase option, -The noncancelable lease term is equal to 75% or more of the expected economic life of the asset, -The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset; New GAAP = -The agreement contains a purchase option that the lessee is reasonably certain to exercise, -The lease term is for the major part of the remaining economic life of the underlying asset, -The present value of the sum of lease payments is equal to or greater than substantially all of the fair value of the underlying asset, -The underlying asset is so specialized that it is unlikely the lessor will have an alternative use for it at the end of the lease; Both = The lease specifies that ownership of the asset transfers to the lessee.

Under preexisting GAAP which of the following would require reassessment of the lease term? (Select all that apply)

Provisions of the lease are modified; A lease option is exercised;

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

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

Straight-line

Who is the initial owner of the asset in a sale-leaseback transaction?

The Lessee

In an operating lease, who reports the leased asset on their balance sheet?

The Lessor

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.

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

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

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 maintenance fee payable $5,000; debit cash $105,000; credit lease receivable $100,000;

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

irrelevant

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

The two basic lease classifications by a lessor are

operating and sales-type

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

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

Categorize lease characteristics between preexisting GAAP and new GAAP

preexisting GAAP = Intent is to determine wheather the usual risks and rewards of ownership are transferred, Leases are classified as operating or capital; new GAAP = Intent is to determine if the lessee obtains substantially all of the remaining benefit of the asset, Leases are classified as operating or finance/sales-type

In a short-term lease, periodic rental payments are

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

IFRS allows the short-cut method on leases if

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

The incremental borrowing rate is

the rate the lessee would pay a bank to borrow funds

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

the useful life of the asset.

The cost of a leasehold improvement is depreciated or amortized over its ______ ______ to the lessee.

useful; life;