Chapter 15 Intermediate accounting

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 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.

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.

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

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.)

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

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

Increases.

Which of the following would justify reassessment of a lease term?

Leasehold improvements

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

Operating

? 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

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.

How does a residual value in a finance/sales-type lease affect the lessee?

The lessee lease payments are lower.

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.

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.

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.

For an operating lease, the lessee will report:

a single lease expense.

Initial direct costs incurred by the lessee are:

added to the right-of-use asset.

Periods covered by renewal options:

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

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.)

credit lease payable for $120,000 debit right-of-use asset for $120,000

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 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, 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)

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

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

deferred rent revenue.

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

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

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

does not include

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

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.

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

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 ? 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

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 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

The rate of interest incurred by the lessee if funds were borrowed to purchase the leased asset is known as the ______ rate.

incremental borrowing

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

initial direct costs.

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

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

Lease payments are often ? than installment payments.

less

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

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

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.

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

operating

A lease that is more true to the nature of a rental agreement is called a(n) ? lease.

operating

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

operating

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

operating

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

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

periodic lease payments residual value

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

plus any residual value.

Selling profit exists in a sales-type lease when the:

present value of the lease payments is greater than the cost of the asset.

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 from the lessee.

reduces

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

reduces

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 ______ of leased property is an estimate of what its commercial value will be at the end of the lease term.

residual value

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

residual value.

Residual value is an estimate of:

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

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

the straight-line lease payment.

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

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

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

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

90% or more

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

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

How does the bargain purchase option affect the calculation of the amount to be recovered through periodic rental payments for the lessor?

Decreases

True or false: The residual value of a leased asset impacts the lessee's calculation of effective interest.

False

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 remaining lease payments

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

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

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

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?

credit equipment $500,000 debit lease receivable $500,000

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 North Company record the first payment? (Select all that apply)

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

An additional cash payment is _____ when a bargain purchase option is included in the lease agreement.

expected

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.

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

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

The _____ must disclose its net investment in the lease.

lessor

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

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

nonlease component

Which of the following are required disclosures related to leases?

nonlease payments variable lease cost residual values

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

operating

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 lessor are:

operating and sales-type.

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, finance

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:

operating, lease

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

present value of the lease payments

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

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

rent revenue

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.

An operating lease is defined as a lease:

that does not meet any of the criteria of a finance or sales-type lease.

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

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 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.

An operating lease:

is similar to a typical rental agreement.

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

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

are in-substance fixed payments

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:

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

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 journal entry to record the lessee's payment on a short-term lease under the shortcut method will include a debit to:

rent expense.

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

when the option becomes exercisable.

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

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

As a purchase/sale agreement with debt financing. As a 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, (Select all that apply)

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

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

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.

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.

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

If a leased asset is specialized and has no alternative use to the lessor, then the lessee accounts for it as a(n) ? lease.

financing

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 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

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

lessee

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

operating

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

In an operating lease, the lessor:

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

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:

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

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

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

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.

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

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, 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

In which type of lease does the lessee report interest expense and amortization expense separately in the income statement?

Finance

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

Finance lease

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

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.

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

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

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)

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

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.

True

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

all recorded as lease revenue.

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.

The lease term includes:

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

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

as a rental or a purchase/sale.

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

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.

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

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, 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 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

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

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 lessee are:

operating and finance.

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, finance/sales-type

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

pattern

The lessee records the right-of-use asset as:

the present value of lease payments.