Chapter 15 Smartbook

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

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%?

$58,819.91 Reason: =PMT(6%,5,-300000,50000,1) = $58,819.91

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

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 Reason: $500,000-40,000 = $460,000/4.79079 = $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? (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

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

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.

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

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

What two criteria must be met at the inception of a contract for an arrangement to constitute a lease?

-The lessee must have the right to control the use of the asset. -There must be an identified asset.

The lease term includes

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

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

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

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

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

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.)

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

The lessee's payment in an operating lease is

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

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

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

Implicit

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 Reason: $100,000 x 4.31213 (PV of lease payments, 8%, 5 yrs)

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 Reason: $100,000x4.31213 (PV of lease payments, 8%, 5 yrs)

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

Leasehold improvements

Lease payments are often _____ than installment payments.

Lower, less, or smaller

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

On a straight-line basis

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 assets are eligible for lease accounting under ASC 842?

Property Buildings

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

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

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

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.

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

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

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

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

debit right-of-use asset credit lease payable

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)

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

On January 1, 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. Mitchell should recognize the first lease payment on January 1, by

debiting lease payable for $45,000.

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

decreases

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

does not include

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

expected

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

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.

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.

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

irrelevant

In a sales-type lease with selling profit, accounting by the lessee

is the same as a sales-type lease without selling profit.

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 Blank______ must disclose its net investment in the lease.

lessor

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

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

nonlease component

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

operating

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

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

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

operating

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

The two basic lease classifications by a lessee are

operating and finance

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; financing

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

present value of the lease payments

A Blank______ 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

The residual value of a leased asset Blank______ 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

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

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.

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

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

In-substance fixed lease payments

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

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.

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

are in-substance fixed payments.

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

finance

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

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

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.

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 lessor are

operating and sales-type.

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

pattern

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

remaining economic life.

In an operating lease, the lessor

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

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

residual value

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.

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%?

$58,819.91 Reason: =PMT(6%,5,-300000,50000,1) = $58,819.91

On January 1, 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, by (Select all that apply)

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

A reasonable conclusion is that the "major part" of the leased asset's life is included in the lease, if Blank______ of the remaining economic life of the asset is covered by the lease term.

75% or MORE

A reasonable conclusion is that Blank______ 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

Select all that apply 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 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, 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 Reason: book 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

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.

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 Reason: The lessor subtracts the present value.

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

Finance lease

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 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.

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.

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.

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

all recorded as lease revenue

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

are not

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

installment

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

lessor

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

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

plus any residual value

The lessee records the right-of-use asset as

present value of the lease payments

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

reduction in principal only

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

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

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

Increases Reason: The present value of the exercise price is added to the present value of lease payments

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

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

Periods covered by renewal options

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

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

as a rental or a purchase/sale

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 Blank______.

equivalent to a sale.

The present value of the residual value is Blank______ in/from the lease receivable, and it is Blank______ in/from sales and cost of goods sold for the lessor.

included; excluded

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

initial direct costs

After the first lease payment, each lease payment in a finance lease consists of an amount representing

interest and a reduction in the principal

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

periodic lease payments residual value

_____ _____is an estimate of a leased asset's commercial value at the end of the lease term.

residual value

When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a

sale-leaseback.

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

the lessee lease payments are lower

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

the lessor

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, Blank______ for the difference between estimate and actual.

the lessor records a loss