Chapter 15: Leases

Which of the following occur in a sale-leaseback transaction?

The lessee receives cash from the sale of the asset. The lessee pays periodic rental payments.

Which of the following are possible reasons for leasing an asset rather than purchasing an asset?

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

Record the beginning of the lease for ComputerWorld Leasing. (lessor)

no entry required

short option leases

no entry required at start each payment debit: lease expense credit: cash

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

nonlease component

The present value of a residual asset in a lease

provides a source of recovery of the lessor's investment regardless of guarantee reduces the lessee's lease payments regardless of guarantee

Lessee with profit (lessor)

record lease: debit: lease receivable/COGS credit: equipment/sales revenue

An operating lease is defined as a lease

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

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.

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.

Interest payments=

1st: principal only 2nd: effective/market rate times outstanding balance

How to find accrued interest

December 31, 2024 770000=sold$ 102771=payment 11%=implicit rate Interest expense (11% × [$770,000 − $102,771]) = $73,395 Depreciation expense ($600,000 ÷ 15 years*) = $40,000 * The airplane is depreciated over its remaining useful life rather than the lease (loan) term because there is no sale or lease. The title remains with the lessee.

Lease payments=

Fair value of asset / (PVAD or PVA of rate of return&years)

Under Blank______, 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 Blank______ 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 criteria for classification as a finance lease? (Select all that apply.)

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

Annuity due

beginning of period

Record Lease Payment

debit: lease payable, interest expense credit: cash

ordinary annuity

end of period

Lease payments are often _______ than installment payments.

less

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 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

Record the payment of $16,000 on March 1, 2024, for the first year's accommodations. Record the journal entry needed at commencement of the lease.

debit: prepaid expense credit: cash debit: Right use of asset (PVAD of lease) credit: lease payable (PVAD of lease)

Federated Fabrications leased a tooling machine on January 1, 2024, for a three-year period ending December 31, 2026. The lease agreement specified annual payments of $36,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2025. The company had the option to purchase the machine on December 30, 2026, for $45,000 when its fair value was expected to be $60,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 12%.

Right of use and lease liability: PV of payments and PV of exercise price Amortization schedule Journal Entries: Record the lease debit right of use credit lease payable record amortization debit amortization expense credit right of use asset

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

crediting deferred lease revenue for $100,000 debiting cash for $100,000

Record the cash received on sale by Signal Aviation.(sale-leaseback) Record accrued interest.

debit cash credit notes payable debit interest expense credit interest payable amount is next interest value

effective rate times balance title transfer to lessee rev recognition issues initial direct costs purchase option Cash expected to satisfy residual value guarantee leasehold improvements payments expensed by lessee

interest expense amortization longer than lease term control passed to lessee sales-type lease selling expense might shorten lease term component of lease payment depreciable assets nonlease payments

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

Lease situations (Lessor)

lease payments= (annual lease payment x N) +guaranteed by lessee Gross investment= lease payments +est fair value Net investment= PV of annuities+ PV of est FV+ PV guaranteed by lessee

Lease situations (lessee)

lease payments= (annual lease payment x N) +guaranteed by lessee Right of use asset= PV of annuities+ PV of guarantees (only if guarantees are more than FV, which in that case you take the difference)

In a finance lease, the lessee records the interest portion of payments as a cash outflow from Blank______ activities, and the principal portion as a cash outflow from Blank______ activities on the Statement of Cash Flows.

operating; financing

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.

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 lease (for profit)

Right-of-Use-Asset/Lease Payable equals

fair value of asset

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

The desired rate of return for the lessor when determining the lease payments is referred to as the ______ interest rate. Multiple choice question.

implicit

When the lessor's implicit rate is unknown, the lessee should use its own

incremental borrowing rate

The accounting for finance leases is similar to the purchase of an asset using a(n) _____ note.

installment

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

pattern