Ch 15 Quiz

Karla Salons leased equipment from Smith Co. on July 1, 2021, in a finance lease. The present value of the lease payments discounted at 12% was $50,600. Ten annual lease payments of $8,000 are due each year beginning July 1, 2021. Smith Co. had constructed the equipment recently for $43,000, and its retail fair value was $50,600.What amount did Smith Co. record in its income statement for the reporting year ending December 31, 2021, in connection with the lease? (ignore taxes.)

$10,156.

On January 1, 2021, Green Co. recorded a right-of-use asset of $270,360 in an operating lease. The lease calls for ten annual payments of $40,000 at the beginning of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2021, will be:

$253,396.

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

10%.

Omega leased a machine for a ten-year non-cancelable term. At the end of the ten-year term, Omega has five consecutive one-year renewal options. A replacement machine can be acquired at the end of the term for the leased machine, but due to an expensive installation process and Omega's lease term for its store, Omega expects to lease the machine for 12 years. What is the lease term?

12 years

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs are expensed at the beginning of the lease in:

A sales-type lease with selling profit.

From the perspective of the lessee, leases may be classified as either:

Finance or operating.

From the perspective of the lessor, two possible lease classifications are:

Operating or sales-type.

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the right-of-use asset should be recorded is the:

Present value of an annuity due table.

When a finance lease is first recorded at the beginning of the lease, the lessee typically debits:

Right-of-use asset.

The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do not include:

The collectibility of the lease payments must be reasonably predictable.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

Zero, unless a prepayment or accrual is involved.