Chapter 21

Major reasons why a company may become involved in leasing to other companies is (are) tax incentives. all of these. interest revenue. high residual values.

all of these.

Lease payments receivable includes all of the following except: a bargain purchase option. a penalty for failure to renew. unguaranteed residual value. All of the options are included.

All of the options are included.

All of the following are disclosures required of the lessor except The amount of lease revenues reported each period. The payments to be received for each of the five succeeding years. Amounts receivable and unearned revenues under lease agreements. All of the options are required disclosures.

All of the options are required disclosures.

All of the following are disclosures required of the lessor except: total contingent rentals included in income for each period for which an income statement is presented. All of the options are required disclosures. future minimum lease payments to be received for each of the five succeeding years. the components of the net investment in sales-type and direct financing leases as of each balance sheet date.

All of the options are required disclosures.

Which of the following statements is correct? In a sales-type lease, initial direct costs are expensed in the year of incurrence. For operating leases, initial direct costs are deferred and allocated over the lease term. All of these. In a direct-financing lease, initial direct costs are added to the net investment in the lease.

All of these.

Which of the following would not be included in the Lease Receivable account? Penalty for failure to renew (if any). A bargain purchase option (if any). All would be included Guaranteed residual value (if any).

All would be included

Which of the following best describes current practice in accounting for leases? All leases are capitalized. Leases similar to installment purchases are capitalized. Leases are not capitalized. All long-term leases are capitalized.

Leases similar to installment purchases are capitalized.

Which of the following best describes current practice in accounting for leases? Leases similar to installment purchases are capitalized. All long-term leases are capitalized. All leases are capitalized. Leases are not capitalized.

Leases similar to installment purchases are capitalized.

On January 1, 2012, Cyrul Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Cyrul to make annual payments of $150,000 at the end of each year for ten years with title to pass to Cyrul at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Cyrul uses the straight-line method of depreciation for all of its fixed assets. The lease payments were determined to have a present value of $1,006,512, discounted at Cyrul's incremental borrowing rate of 8%. With respect to this lease, Cyrul's 2012 income statement will report interest expense of $68,522 and depreciation expense of $100,652. interest expense of $67,101 and depreciation expense of $57,102. interest expense of $80,521 and depreciation expense of $67,101. rent expense of $150,000.

interest expense of $80,521 and depreciation expense of $67,101. Interest expense = $1,006,512 X 8% = $80,521; Depreciation expense = $1,006,512/ 15 = $67,101

All of the following are advantages of leasing except: leasing permits the write-off of the full cost of the assets leasing may have favorable tax advantages. leasing may permit more rapid changes in equipment. interest rates for leasing always lower.

interest rates for leasing always lower.

If the residual value of a leased asset is guaranteed by a third party it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term. the third party is also liable for any lease payments not paid by the lessee. it is treated by the lessee as no residual value. the net investment to be recovered by the lessor is reduced.

it is treated by the lessee as no residual value. If the residual value of a leased asset is guaranteed by a third party it is treated by the lessee as no residual value.

The methods of accounting for a lease by the lessee are none of these. operating and capital lease methods. operating, sales, and capital lease methods. operating and financing lease methods.

operating and capital lease methods.

When a depreciable asset is leased under an operating lease, the lessor: records depreciation in the normal manner. defers depreciation until the lease expires. must use activity-based depreciation. never recognizes depreciation.

records depreciation in the normal manner.

A lease that involves a manufacturer's or dealer's profit is a (an): sales-type lease. capital lease. direct financing lease. operating lease.

sales-type lease.

A lease that involves a manufacturer's or dealer's profit is a (an): capital lease. operating lease. direct financing lease. sales-type lease.

sales-type lease.

The lessor expenses initial direct costs in the year of incurrence in a(n): direct financing lease and sales-type lease. operating lease. direct financing lease. sales-type lease.

sales-type lease.

The lessor expenses initial direct costs in the year of incurrence in a(n) operating lease. sales-type lease. direct financing lease and a sales-type lease. direct financing lease.

sales-type lease. In a sales-type lease, initial direct costs are expensed in the year incurred.

Cambre Co. leased equipment to West Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Cambre gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and obligation accounts have the following balances: Leased equipment under capital lease $700,000 Less accumulated depreciation--capital lease 672,000 =$28,000 Interest payable $2,660 Obligations under capital leases 25,340 =$28,000 If, at the end of the lease, the fair market value of the residual value is $15,400, what gain or loss should Cambre record? $15,400 gain $11,340 gain $12,460 loss $12,600 loss

$12,600 loss Correct!$15,400 - $28,000 = ($12,600).

Jernigan Company leased machinery to Sully Company on July 1, 2012, for a ten-year period. Equal annual payments under the lease are $75,000 and are due on July 1 of each year. The first payment was made on July 1, 2012. The rate of interest used by Jernigan and Sully is 9%. The cash selling price of the machinery is $525,000 and the cost of the machinery on Jernigan's accounting records was $465,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Jernigan, what amount of interest revenue would Jernigan record for the year ended December 31, 2012? $40,500 $0 $20,250 $47,250

$20,250 ($525,000 - $75,000) × .09 × 6/12 = $20,250

Emporia Corporation is a lessee with a capital lease. The asset is recorded at $450,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a market value of $150,000 at the end of 5 years, and a market value of $50,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of depreciation expense would the lessee record for the first year of the lease? $80,000 $60,000 $50,000 $90,000

$50,000

Emporia Corporation is a lessee with a capital lease. The asset is recorded at $450,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a market value of $150,000 at the end of 5 years, and a market value of $50,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of depreciation expense would the lessee record for the first year of the lease? $60,000 $80,000 $90,000 $50,000

$50,000 ($450,000 - $50,000) ÷ 8 = $50,000.

Macon Company has a machine with a cost of $380,000 which also is its fair market value on the date the machine is leased to Nabors Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $38,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be $63,334. $87,743. $78,342. $74,271.

$78,342. [$380,000 - ($38,000 × .50663)] ÷ 4.60478 = $78,342

Omega Company leased machinery to Suleiman Company on January 1, 2012, for a ten-year period expiring December 31, 2021. Equal annual payments under the lease are $150,000 and are due on January 1 of each year. The first payment was made on January 1, 2012. The rate of interest used by Omega and Suleiman is 9%. The cash selling price of the machinery is $1,050,000 and the cost of the machinery on Omega's accounting records was $930,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Omega, what amount of interest revenue would Omega record for the year ended December 31, 2012? $40,500 $81,000 $0 $94,500

$81,000

Groban Co. leased real estate to Crippen Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Groban gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and obligation accounts have the following balances: *SEE PHOTO* If, at the end of the lease, the fair market value of the residual value is $30,800, what gain or loss should Groban record? $30,800 gain $24,920 loss $22,680 gain $25,200 loss

Answer is D

Which of the following is included in the minimum lease payment? Bargain purchase option. Unguaranteed residual value. Maintenance costs. Executory costs.

Bargain purchase option.

Lease 1 does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease 2 does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases? Lease 1 Lease 2 Capital Lease Operating Lease Operating Lease Capital Lease Capital Lease Capital Lease Operating Lease Operating Lease

Capital Lease Capital Lease

Which of the following statements is true when comparing the accounting for leasing transactions under GAAP with IFRS? IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks, and leveraged leases. The IFRS leasing standard is the subject of over 30 interpretations since its issuance in 1982. IFRS for leases is more "rules-based" than GAAP and includes many bright-line criteria to determine ownership. IFRS requires that companies provide a year-by-year breakout of future noncancelable lease payments due in years 1 through 5.

IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks, and leveraged leases.

All of the following statements about lease accounting under IFRS and GAAP are true except: IFRS is more general in its lease accounting provisions than is GAAP. Finance leases under IFRS are referred to as capital leases under GAAP. IFRS requires a year-by-year breakout of payments related to leasing arrangements. the IFRS leasing standard, IAS 17, is the subject of only three interpretations.

IFRS requires a year-by-year breakout of payments related to leasing arrangements.

All of the following statements about lease accounting under IFRS and U.S. GAAP are true except: IFRS is more general in its lease accounting provisions than is U.S. GAAP. IFRS requires a year-by-year breakout of payments related to leasing arrangements. the IFRS leasing standard, IAS 17, is the subject of only three interpretations. the IFRS leasing standard is IAS 17, first issued in 1982.

IFRS requires a year-by-year breakout of payments related to leasing arrangements.

Which of the following is not true regarding a sale-leaseback arrangement? If the lease meets one of the four capital lease criteria, the seller-lessee amortizes the profit from the sale over the lease term unless the lease contains a bargain purchase option or an automatic transfer of the asset at the end of the lease term, in which case the profit from the sale will be amortized over the economic life of the asset. If the fair value of the asset is less than its book value, the seller-less must recognize the loss immediately. The potential advantages to the seller-lessee from a sale-leaseback are better financing rates and alternative minimum tax considerations. If the seller-lessee continues to use the asset after the sale, the transaction is in substance a sale and not a financing arrangement so profit or loss on the sale should be recognized immediately.

If the seller-lessee continues to use the asset after the sale, the transaction is in substance a sale and not a financing arrangement so profit or loss on the sale should be recognized immediately. Correct! If the seller-lessee gives up the right to use the asset, the transaction is in substance a sale and not a financing arrangement so profit or loss on the sale should be recognized immediately.

Which of the following is not a benefit to the lessor? Interest revenue. Tax incentives. High residual value. Off-balance sheet financing.

Off-balance sheet financing.

Which of the following is not one of the classifications for leases from the lessor's viewpoint? Sales-type. Operating. Direct financing. Off-balance sheet.

Off-balance sheet.

Which one of the following amounts would differ in a sales-type lease with an unguaranteed residual value instead of a guaranteed residual value? Lease receivable. Gross profit. Sales price of the asset. None of the above.

Sales price of the asset.

Which of the following is not a criterion for a lease to be recorded as a capital lease? The lease is cancelable. The lease term is for the major part of the economic life of the asset. There is a bargain-purchase option. There is transfer of ownership.

The lease is cancelable.

Which of the following is not a criterion for a lease to be recorded as a capital lease? There is a bargain purchase option. The lease is noncancelable. There is transfer of ownership. The lease term is substantially all of the asset's useful life.

The lease term is substantially all of the asset's useful life.

All of the following are differences that occur if a lease is classified as a capital lease instead of an operating lease except: a lower income early in the life of the lease. a decrease in the amount of total expenses. an increase in the amount of total assets. an increase in the amount of reported debt.

a decrease in the amount of total expenses.

The Lease Liability account should be disclosed as all noncurrent liabilities. all current liabilities. current portions in current liabilities and the remainder in noncurrent liabilities. deferred credits.

current portions in current liabilities and the remainder in noncurrent liabilities. The Lease Liability account should be disclosed as current portions in current liabilities and the remainder in noncurrent liabilities.

All of the following are advantages, to the lessee, of leasing except off-balance sheet financing. 100% financing at fixed rates. less costly financing. elimination of the risk of obsolescence.

elimination of the risk of obsolescence.

In computing lease payments, the amount to be recovered by the lessor is the: fair market value of the leased asset less the asset's residual value. fair market value of the leased asset less the present value of the asset's residual value. cost of the leased asset less the asset's residual value. cost of the leased asset less the present value of the asset's residual value.

fair market value of the leased asset less the present value of the asset's residual value.

In computing lease payments, the amount to be recovered by the lessor is the fair market value of the leased asset less the asset's residual value. fair market value of the leased asset less the present value of the asset's residual value. cost of the leased asset less the asset's residual value. cost of the leased asset less the present value of the asset's residual value.

fair market value of the leased asset less the present value of the asset's residual value. The amount to be recovered by the lessor through lease payments is the fair market value of the leased asset less the present value of the asset's residual value.

The lessee may not capitalize property for more than its: fair value. book value. historical cost. liquidation value.

fair value.

The lessee records a capital lease as an asset and a liability at the: total amount of the minimum lease payments. fair market value of the leased asset at the lease inception. lower of the present value of the minimum lease payments or the fair market value of the leased asset. present value of the minimum lease payments.

lower of the present value of the minimum lease payments or the fair market value of the leased asset.

The distinction for the lessor between a direct financing lease or a sales-type lease is the presence or absence of: minimum lease payments. manufacturer or dealer's profit. guaranteed residual value. executory costs.

manufacturer or dealer's profit.

The distinction, for the lessor, between a direct financing lease and a sales-type lease is the presence or absence of manufacturer's or dealer's profit. a bargain purchase option. an unguaranteed residual value. minimum lease payments.

manufacturer's or dealer's profit.

Any lease that does not qualify as a direct financing lease or a sales-type lease is classified and accounted for by the lessor as a(n): capital lease. operating lease. temporary lease. residual lease.

operating lease.

Any lease that does not qualify as a direct financing lease or a sales-type lease is classified and accounted for by the lessor as a (n) temporary lease. capital lease. operating lease. residual lease.

operating lease. Leases that do not qualify as direct financing or sales-type leases are classified and accounted for as operating leases by the lessor.

The computation of the lessee's capitalized amount is the sum of the: annual rental payments and the guaranteed residual value. present value of the annual rental payments and the present value of the guaranteed residual value. present value of the annual rental payments and the undiscounted guaranteed residual value. annual rental payments and the present value of the guaranteed residual value.

present value of the annual rental payments and the present value of the guaranteed residual value.

The total charges to operations over the lease term are greater for a capital lease than an operating lease. not comparable between a capital lease and an operating lease. less for a capital lease than an operating lease. the same for a capital lease as an operating lease.

the same for a capital lease as an operating lease.

In computing the present value of the minimum lease payments, the lessee should use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee. none of these. use its incremental borrowing rate in all cases. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.

use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.

In computing the present value of the minimum lease payments, the lessee should use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee. use its incremental borrowing rate in all cases. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee. none of these.

use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee. Correct! In computing the present value of the minimum lease payments, the lessee should use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.

Under IFRS, in computing the present value of the minimum lease payments, the lessee should: use its incremental borrowing rate in all cases. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee. use the implicit rate of the lessor, unless it is impracticable to determine the implicit rate.

use the implicit rate of the lessor, unless it is impracticable to determine the implicit rate.