Chpt 20 Practice - Adoptive

Only ____ lease will use the straight-line method for expense measurement.

operating The straight-line method for lease expense is used in an operating lease, whereas the effective-interest method is used in a financing lease.

Allan Company leased equipment to Harlan Company on May 1, 2019. The lease expires on May 1, 2022, and qualifies as an operating lease for both the lessee and the lessor. During 2019, Harlan paid $1,080,000 in rentals to Allan for the 8-month period. Allan incurred maintenance and other related costs under the terms of the lease of $96,000 in 2019 as well as $540,000 in depreciation. Ignoring income taxes, the amount of income reported by Allan from this lease for the year ended December 31, 2019, should be $540,000. $984,000. $444,000. $636,000.

$444,000. Allan's revenue will be $1,080,000 less depreciation expense of $540,000 less other expenses of $96,000 = $444,000.

Interest expense should be reported on the income statement by the lessee regardless of whether they have a finance lease or an operating lease. True False

False The only type of lease which reports interest expense on the income statement is a finance lease, whereas the operating lease's interest expense is added to the lease liability account therefore it appears on the balance sheet.

The FASB indicates that reporting ______________ on the income statement more appropriately reflects the economics of a(n) ______________ lease than separate recognition of interest and amortization expense. only amortization expense; finance a single operating cost; operating only interest expense; operating a single operating cost; finance

a single operating cost; operating An operating lease reports a single operating cost, typically shown as Lease Expense on the income statement rather than recognizing interest and amortization expense which can be found on the income statement for financing leases.

When a lessee properly accounts for an operating lease, it ________ the amount of interest on the liability to/from the ____________ to arrive at the amount of ___________. deducts; amortization on the right-of-use asset; straight-line lease expense deducts; right-of-use asset; carrying value of the right-of-use asset each period deducts; straight-line lease expense; amortization on the right-of-use asset adds; straight-line lease expense; amortization on the right-of-use asset

deducts; straight-line lease expense; amortization on the right-of-use asset The effective-interest method for amortizing the lease liability continues to be used however, instead of reporting interest expense, a lessee reports interest on the lease liability as part of Lease Expense. Because the lessee no longer reports amortization expense related to the right-of-use asset, it "plugs" in an amount that increases the lease expense account which forces the lease expense to be the same amount with the plugged amount reducing the amount of amortization on the right-of-use asset.

All of the following are lease classification tests to determine if it is a finance or operating lease except is the lease term equal to or more than 75% of the estimated economic life of the leased property? does the lease transfer ownership of the property to the lessor? do the lease payments equal or exceed 90% of the fair value of the leased property? does the lease contain a purchase option, and is it reasonably certain the lessee will exercise?

does the lease transfer ownership of the property to the lessor? The four lease classification tests are: transfer of ownership test, purchase option test, lease term test, and present value test. The lease term test is met if the lease term is 75 percent or greater than the economic life of the leased asset. If any of these tests are met, the lease is classified as a finance lease, otherwise, the lease is classified as an operating lease.

Variable payments are included as part of the lease payments when they are based on an index. when they are reasonably certain of being exercised. when there is a compelling economic reason to pay them. in all circumstances since they are specified in the lease agreement.

when they are based on an index. The criteria for a variable lease payment to be included as a lease liability is if the payments are based on an index. This is the only criteria that is considered.

Lessees record a right-of-use asset for operating leases. True False

True In an operating lease, the lessee will record a right-of-use asset on the lease initiation date with the offsetting entry to Lease Liability.

Allan Company leased equipment to Harlan Company on May 1, 2019. The lease expires on May 1, 2022 and qualifies as an operating lease for both the lessee and the lessor. During 2019, Harlan paid $1,080,000 in rentals to Allan for the 8-month period. Allan incurred maintenance and other related costs under the terms of the lease of $96,000 in 2019 as well as $540,000 in depreciation. Ignoring income taxes, the amount of expense incurred by Harlan from this lease for the year ended December 31, 2019, should be

$1,080,000. The annual lease payment of $1,080,000 is the lease expense whereas the other related costs of $96,000 and depreciation of $540,000 will not be recorded as lease expense. Instead, the $96,000 of other related costs will be accounted for in the expense account that best fits the other related costs, and the $540,000 depreciation will be recorded as depreciation expense.

Jane (lessor) and Sally (lessee) are entering into a lease agreement that does not meet any of the lease classification tests and will therefore be accounted for as an operating lease. Sally will be making 3 beginning-of-the-year payments of $88,100.40. The asset has an unguaranteed residual value of $60,000. The term of the lease is 3 years and Jane used a 6% rate to calculate the payments. Sally's incremental borrowing rate is 8% but Sally is aware of Jane's rate. What is the fair value of Jane's asset?

$300,000.00 The payments are calculated as follows: Take the FV leased equipment minus PV of residual to get the amount to be recovered from payments, then divide by PV of the annuity due, 3 periods, 6%, to get the annual payment. 300,000-50,377.20=249,622.80249,622.80/2.83339= 88,100. 488,100.40 is the annual payment.

Byers Enterprises leased machinery to Carver Manufacturing on July 1, 2019, for a ten-year period expiring June 30, 2029. The terms of the lease agreement require equal annual payments of $120,000 on July 1 of each year, starting in 2019. The effective interest rate for the lease is 9% and the present value of an annuity due of 1 for 10 periods at 9% is 6.99525 whereas the present value of an ordinary annuity of 1 for 10 periods at 9% is 6.41776. The cost of the machinery on Byers' accounting records was $820,000. If Byers properly records the lease as a sales-type lease for accounting purposes, what amount of interest revenue would ByersByers's record for the year ended December 31, 2019?

$32,374.35 The lease receivable on July 1, 2019, will be ($120,000 x 6.99525) - $120,000 = $719,430. For the six months between July 1 and December 31, the accrued interest would be $719,430 x 9% x 6/12 = $32,374.35.

On January 1, 2020, Hammons Company signed a five-year noncancelable lease for equipment. Hammons was required to make annual payments of $150,000 at the beginning of each year with the title passing to Hammons at the end of the lease. Hammons appropriately accounts for this lease transaction as a finance lease. Hammons uses the straight-line method of amortization for all of its leased assets, and the leased equipment has an estimated useful life of 7 years with no salvage value. If the lease payments were determined to have a present value of $625,479 at an effective interest rate of 10%, what should Hammons record as interest expense in 2021? Select answer from the options below

$37,303 Hammons will pay $150,000 at the beginning of 2020 and accumulate interest on the remaining balance of the lease during 2020. Therefore, the interest expense will be ($625,479 - $150,000) x 10% = $47,548 in 2020. In 2021, this interest expense will be deducted from the amount applied to the principal. Therefore, the new principal that will accrue interest in 2021 is $625,479 - $150,000 - ($150,000 - $47,548) = $373,027. Thus, the interest expense for 2021 will be $373,027 x 10% = $37,303.

Rosas Manufacturing manufactures equipment that is sold or leased. On December 31, 2019, Rosas leased equipment to Kinney for a five-year period ending December 31, 2024, at which date ownership of the leased asset will be transferred to Kinney. Equal payments under the lease are $550,000 and are due on December 31 of each year, starting in 2019. The normal sales price of the equipment is $1,925,000, and cost is $1,500,000. For the year ended December 31, 2019, what amount of gross profit should Rosas realize from the lease transaction? Select answer from the options below

$425,000. The gross profit is the difference between the sales price and the cost of goods sold, or $1,925,000 - $1,500,000 = $425,000.

On January 1, 2020, Hammons Company signed a five-year noncancelable lease for equipment. Hammons was required to make annual payments of $150,000 at the beginning of each year with the title passing to Hammons at the end of the lease. Hammons appropriately accounts for this lease transaction as a finance lease. Hammons uses the straight-line method of amortization for all of its leased assets, and the leased equipment has an estimated useful life of 7 years with no salvage value. If the lease payments were determined to have a present value of $625,479 at an effective interest rate of 10%, what should Hammons record as interest expense in 2020?

$47,548 Hammons will pay $150,000 at the beginning of 2020 and accumulate interest on the remaining balance of the lease during 2020. Therefore, the interest expense will be ($625,479 - $150,000) x 10% = $47,548.

Patsy Co. and Philip Inc. sign a lease agreement dated January 1, 2020. The lease agreement specifies that Patsy (lessor) will grant right-of-use to Philip (lessee) of one of its machines that is not of a specialized nature. The lease term is non-cancelable and has a 3-year term. On January 1, 2020, the machine has a cost and fair value of $240,000, an estimated economic life of five years, and a residual value at the end of the lease of $48,000 (unguaranteed). The machine reverts to Patsy at the end of the lease term and the lease contains no renewal options. Patsy used a 6 percent rate when calculating the lease payments, and Philip is aware of this rate. Philip's incremental rate is 8%. The payments are to be made at the beginning of the year with the first payment on January 1, 2020. Use the following PV factors:

70,480.32 The payments are calculated as follows: Take the FV leased equipment minus PV of residual to get the amount to be recovered from payments, then divide by PV of the annuity due, 3 periods, 6%, to get the annual payment. 240,000-40,301.76=199,698.24Then, take 199,698.24/2.83339= 70,480.32. 70,480.32 is the annual payment.

A company has two different leases. Lease 1 has a lease term that is equal to 90% of the estimated life of the leased property, but it does not contain a bargain purchase option. In contrast, Lease 2 has a lease term that is equal to 75% of the estimated economic life of the leased property, but the ownership of the property is never transferred to the lessee. How should the company account for these leases? Both should be classified as finance leases. Lease 1 should be classified as a finance lease, and Lease 2 should be classified as an operating lease. Both should be classified as operating leases. Lease 1 should be classified as an operating lease, and Lease 2 should be classified as a finance lease.

Both should be classified as finance leases. The terms of both leases meet the criterion to be classified as finance leases. Lease 1 meets the criterion as the lease term is equal to 90% of the estimated e life of the leased property. Lease 2 meets the criterion as the lease term is equal to 75% of the estimated economic life of the leased property.

How is lease expense recorded for an operating lease? By computing interest on the lease liability using the straight-line method and amortizing the right-of-use asset using the straight-line method so that equal amounts of lease expense are reported each period. By computing amortization on the right-of-use asset using the straight-line method and then amortizing the lease liability in a manner that results in equal amounts of lease expense each period. By computing interest on the lease liability using the effective-interest method and then amortizing the right-of-use asset in a manner that results in equal amounts of lease expense each period. By computing amortization on the right-of-use asset using the company's usual method and then amortizing the lease liability using the effective-interest method but only reporting the amount of interest that results in equal amounts of lease expense each period.

By computing interest on the lease liability using the effective-interest method and then amortizing the right-of-use asset in a manner that results in equal amounts of lease expense each period. A straight-line approach is used for the lease expense, which is computed by determining the interest on the lease liability and then amortizing the right-of-use asset in a manner that results in equal amounts of lease expense in each period. The lease expense amount is then used to calculate the amortization of the right-of-use asset using an effective-interest method with the remaining amount between the lease expense and amortization of ROU asset as the interest on the liability.

Which of the following incorrectly depicts how lessees report information for a finance or an operating lease? Finance lease - Lease expense shown on the income statement Finance lease - Right-of-use asset shown on the balance sheet Operating lease - Lease liability shown on the balance sheet Operating lease - Right-of-use asset shown on the balance sheet

Finance lease - Lease expense shown on the income statement Lessees with operating leases will report right-of-use assets and lease liability on their balance sheet whereas lessees with finance leases will also report right-of-use assets on their balance sheet.

When is the straight-line method for expense measurement used? For an operating lease. For a sales-type lease. For both finance and operating leases. For a finance lease.

For an operating lease. An operating lease amortizes the lease liability and right-of-use asset using the straight-line expense method, whereas finance and sales-type leases use the effective-interest method to amortize the lease liability and right-of-use assets.

Clary Instruments enters into an agreement with Fabian Industries on January 1, 2019, to lease a machine that it will use in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432 are due on January 1 of each year beginning on January 1, 2019. (b) The fair value of the machine on January 1, 2019, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Clary depreciates all machinery it owns on a straight-line basis. (d) Clary's incremental borrowing rate is 10% per year. Clary does not have knowledge of the 8% implicit rate used by Fabian.

If the PV of the future lease payments is $800,000 at January 1, 2019, what is the amount of the reduction in the lease liability for Clary Instruments in the second full year of the lease if Clary accounts for the lease as a finance lease? $236,175 The remaining balance of the lease liability will be $800,000 - $287,432 = $512,568 at the beginning of the second year. With an assumed interest rate of 10% (lessee has no knowledge of implicit rate), the second year's payment will have an interest component of $512,568 x 10% = $51,257. Therefore, the lease liability will be reduced by $287,432 - $51,257 = $236,175 in 2020.

Which of the following correctly depicts the calculation of the right-of-use asset? Initial Measurement of Lease Liability - Prepaid Lease Payments - Lease Incentives Received + Initial Direct Costs Initial Measurement of Lease Liability + Prepaid Lease Payments + Lease Incentives Received + Initial Direct Costs Initial Measurement of Lease Liability - Prepaid Lease Payments - Lease Incentives Received - Initial Direct Costs Initial Measurement of Lease Liability + Prepaid Lease Payments - Lease Incentives Received + Initial Direct Costs

Initial Measurement of Lease Liability + Prepaid Lease Payments - Lease Incentives Received + Initial Direct Costs The following formula is used to identify the adjustments made to the lease liability balance to determine the right-of-use asset's amount: Initial Measurement of Lease Liability + Prepaid Lease Payments - Lease Incentives Received + Initial Direct Costs.

What should the lessor generally do when a lease does not qualify as a sales-type lease? It should classify and account for the lease as a sale-leaseback. It should classify and account for the lease as direct-financing lease. It should classify and account for the lease as a short-term lease. It should classify and account for the lease as an operating lease.

It should classify and account for the lease as an operating lease. A sales-type lease occurs when the lessor transfers control of the leased asset which satisfies a performance obligation. However, if the lease does not transfer control (and ownership) over the lease term, the lessor will classify the lease as an operating lease.

What should the lessor do when a depreciable asset is leased under an operating lease? It should record depreciation in the normal manner. It should require the lessee to recognize depreciation. It should defer depreciation until the lease expires. It should use activity-based depreciation.

It should record depreciation in the normal manner. An operating lease is recognized by the lessor on its balance sheet and will depreciate the leased equipment over the life of the asset. The lessor will use the normal depreciation method for that asset type.

Patsy Co. and Philip Inc. sign a lease agreement dated January 1, 2020. The lease agreement specifies that Patsy (lessor) will grant right-of-use to Philip (lessee) of one of its machines that is not of a specialized nature. The lease term is non-cancelable and has a 3-year term. On January 1, 2020, the machine has a cost and fair value of $240,000, an estimated economic life of five years, and a residual value at the end of the lease of $48,000 (unguaranteed). The machine reverts to Patsy at the end of the lease term and the lease contains no renewal options. Patsy used a 6 percent rate when calculating the lease payments, and Philip is aware of this rate. Philip's incremental rate is 8%. The payments are to be made at the beginning of the year with the first payment on January 1, 2020. Use the following PV factors: On January 1, 2021, which of the following journal entries will Philip make?

Lease Liability. 70,480.32 Cash. 70,480.32 On January 1, 2021, Philip debits the Lease Liability and Cash for $70,480.32.

On July 1, 2020, Limon leased a piece of equipment to Wolford Industries for a three-year period expiring June 30, 2023, for $75,000 a month. Limon purchased the equipment on July 1, 2020, for $4,800,000. The equipment is being depreciated on a straight-line basis over an eight-year period with no salvage value. Assuming that the lessor, Limon, and the lessee, Wolford, properly record the lease as an operating lease for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2020?

Limon would report $150,000 in income and Wolford would report expenses of $450,000. Because this is an operating lease, the cost of the lease would be reported as lease expense for Wolford. Wolford would have expenses of $75,000 x 6 = $450,000. Limon would report $450,000 as income, but they also have to report depreciation expense on the equipment ($4,800,000/8 = $600,000 x 6/12). Therefore, Limon has net income of $450,000 - $300,000 = $150,000.

Which of the following best describes the Lease Receivable? PV of rental payments plus PV of only unguaranteed residual values (guaranteed residual values are separately accounted for in a different receivable since their receipt is probable). PV of only rental payments (PV of guaranteed residual values and unguaranteed residual values are separately accounted for in a different receivable, depending on the probability of their collection). PV of rental payments plus PV of guaranteed and unguaranteed residual values. PV of rental payments plus PV of only guaranteed residual values (unguaranteed residual values are separately accounted for in a different receivable).

PV of rental payments plus PV of guaranteed and unguaranteed residual values. The lessor will record a lease receivable for a sales-type lease for the total of the following amount: present value of rental payments plus present value of guaranteed and unguaranteed residual values. No other amounts would be included in the Lease Receivable account in the lessor's books.

The _______ account should be debited by the lessee if a lease for equipment is a finance lease. a journal entry is only partially posted. Lease Liability Right-of-Use Asset Cash

Right-of-Use Asset When a lease for equipment is a finance lease on the lessee's books, the Right-of-Use Asset should be debited.

Which of the following is correct regarding operating leases? The lessee "plugs" the amount of the Interest Expense each period so that the lease liability is reduced to zero at the end of the lease. The lessee "plugs" the amount of the Right-to-Use Asset to amortize each period so that the asset is reduced to zero at the end of the lease. The lessee recognizes Interest Expense using the effective-interest method and Amortization Expense using the straight-line method so that both the asset and the liability are reduced to zero at the end of the lease. The lessee recognizes Interest Expense and Amortization Expense using the straight-line method so that both the asset and the liability are reduced to zero at the end of the lease.

The lessee "plugs" the amount of the Right-to-Use Asset to amortize each period so that the asset is reduced to zero at the end of the lease. In an operating lease, the annual lease payment is first applied to the interest with the remaining amount applied to the Right-to-Use Asset therefore at the end of the lease the Right-to-Use Asset has a zero balance at the end of the lease. The effective-interest method is used to determine the Interest Expense and Amortization Expense which results in a zero balance in the asset and liability accounts at the end of the lease.

Which of the following criteria is required of a lease agreement to pass the purchase option test? The lessee must be allowed to purchase the leased property for the fair value of the property at the end of the lease. The lessee must be given the option to purchase the leased property at the end of the lease. The lessee must be allowed to purchase the leased property for significantly less than the fair value at the date the option becomes exercisable. The lessee must be given ownership of the leased property at no extra cost at the end of the lease.

The lessee must be allowed to purchase the leased property for significantly less than the fair value at the date the option becomes exercisable. To pass the purchase option test, the lessee must be able to purchase the leased property at a bargain. A bargain is considered a price that is substantially lower than the leased asset's anticipated fair value on the purchase option date. The purchase option test is not satisfied if at the end of the lease the lessee is given the option to purchase the leased property, given ownership at no cost, or allowed to purchase the leased property for the fair value of the property. These options do not offer the lessee a bargain purchase.

How is the present value of the lease payments computed by the lessee impacted by a bargain-purchase option? The lease payments would be decreased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price. The lessee must decrease the present value of the lease payments by the present value of the option price. The lessee must increase the present value of the lease payments by the present value of the option price. It has no impact, as the option does not enter into the transaction until the end of the lease term.

The lessee must increase the present value of the lease payments by the present value of the option price. When evaluating if the present value test is met the present value of the lease payments are computed and added to the present value of the bargain-purchase option. Therefore, the present value of the bargain-purchase amount is always added on to the present value of the lease payments rather than ignoring them, subtracting them, or only adding them if it is certain that the lessee will exercise the option at the end of the lease and purchase the asset at the option price.

Which of the following is correct regarding an operating lease? The lessee uses the effective-interest method to amortize the lease liability and compute the amount of interest expense reported on the income statement. The lessee will amortize the right-to-use asset in accordance with its standard policy. The lessee records a right-of-use asset and lease liability at the commencement of the lease. The lessee "plugs" the amount of interest expense so that the same amount of Lease Expense is reported from period to period.

The lessee records a right-of-use asset and lease liability at the commencement of the lease. When a lessee enters into an operating lease, the transaction is entered as a debit to right-of-use asset and a credit to lease liability. The lessee "plugs" the lease expense so that it is the same amount each period. While companies do use the effective-interest method for amortizing the lease liability the interest expense is the difference between the lease expense and the amortization of ROU asset. The lessee amortizes the right-to-use asset by deducting the interest on the liability from the straight-line lease expense rather than in accordance with its standard policy.

Which of the following guidelines should the lessee follow when computing the present value of the lease payments? The lessee should use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. The lessee should use either the implicit interest rate or the incremental borrowing rate, whichever enables the lessee to classify the lease as an operating lease. The lessee should use the incremental borrowing rate, assuming the incremental borrowing rate is known to the lessee. The lessee should use either the implicit interest rate or the incremental borrowing rate, whichever enables the lessee to classify the lease as a finance lease.

The lessee should use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. When computing the present value of the lease payments, the implicit interest rate of the lessor is used to determine if the present value equals or exceeds 90% of the fair value of the leased assets. The incremental borrowing rate is used only if it is impracticable to determine the implicit rate.

Which of the following is an essential element of a lease agreement? The lessor allows the lessee to use the leased property. The term of the lease is substantially equal to the economic life of the leased property. The lessee provides a sinking fund equal to one year's lease payments. The property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.

The lessor allows the lessee to use the leased property. A lease is a contract that conveys the right to control the use of the leased property therefore, an essential element is that the lessor allows the lessee to use the leased asset. Elements a lease contract does not include are the requirement for a sinking fund, that the leased property was for sale immediately prior to the lease or that the term of the lease is relatively equal to the economic life of the property.

Which of the following statements related to the lessor's accounting for residual values related to leased assets is true? The lessor includes the unguaranteed residual value in sales revenue. All of these answer choices are correct. The lessor recognizes more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value. The lessor includes both a guaranteed and an unguaranteed residual value in the Lease Receivable.

The lessor includes both a guaranteed and an unguaranteed residual value in the Lease Receivable. The unguaranteed and guaranteed residual values for a sales-type lease is taken into account when the lessor calculates the lease receivable. However, due to the uncertainty of realizing the unguaranteed residual value the sales revenue, cost of goods sold and gross profit does not consider the unguaranteed residual value.

A firm has just agreed to lease a piece of equipment to another company for a period of five years. When the lease term is over, ownership of the equipment transfers to the lessee. In order for the lessor to classify the lease as a sales-type lease, which of the following must be true? Select answer from the options below The lease term must be equal to 75% or more of the estimated economic life of the leased equipment. The lease must effectively transfer control of the underlying asset to a third party. The present value of the minimum lease payments must equal or exceed 90% of the fair value of the leased equipment. The lessor is reasonably confident that it will be able to collect all lease payments from the lessee at the time they are due.

The lessor is reasonably confident that it will be able to collect all lease payments from the lessee at the time they are due. A sales-type lease must have ownership of the equipment transferring to the lessee and the lessor must be reasonably assured that collectability of payments from the lessee is probable. The control of the leased asset must be transferred to the lessee, not to a third party. A sales-type lease does not require the lease term to be equal to 75% or more of the estimated economic life of the leased equipment or the present value of lease payments to be equal to or exceed 90% of the fair value of the leased equipment.

Which of the following is correct regarding operating leases for lessors? The lessor recognizes the asset on its balance sheet, depreciates the asset using its preferred method, and recognizes lease revenue. The lessor removes the asset from its balance sheet, depreciates the asset using its preferred method, and recognizes lease revenue. The lessor recognizes the asset on its balance sheet and recognizes interest revenue and lease revenue. The lessor removes the asset from its balance sheet and recognizes interest revenue and lease revenue.

The lessor recognizes the asset on its balance sheet, depreciates the asset using its preferred method, and recognizes lease revenue. An operating lease's assets will remain on the lessor's books with the depreciation expense recognized over the life of the asset and lease revenue recognized as received. A lessor does not recognize any interest revenue in operating leases.

Which of the following is correct regarding operating leases for lessors? The lessor removes the asset from its balance sheet, depreciates the asset using its preferred method, and recognizes lease revenue. The lessor recognizes the asset on its balance sheet and recognizes interest revenue and lease revenue. The lessor removes the asset from its balance sheet and recognizes interest revenue and lease revenue. The lessor recognizes the asset on its balance sheet, depreciates the asset using its preferred method, and recognizes lease revenue.

The lessor recognizes the asset on its balance sheet, depreciates the asset using its preferred method, and recognizes lease revenue. An operating lease's assets will remain on the lessor's books with the depreciation expense recognized over the life of the asset and lease revenue recognized as received. A lessor does not recognize any interest revenue in operating leases.

How is the lease receivable defined in a sales-type lease? The present value of the rental payments + present value of guaranteed and unguaranteed residual values. The present value of the rental payments + present value of guaranteed residual value - present value of unguaranteed residual values. The present value of the rental payments - present value of guaranteed residual value + present value of unguaranteed residual values. The present value of the rental payments - present value of guaranteed and unguaranteed residual values.

The present value of the rental payments + present value of guaranteed and unguaranteed residual values. For a sales-type lease, the lease receivable is the present value of the amounts to be received over the term of the lease. The amounts to be received include the rental payment and any guaranteed or unguaranteed residual value.

What process is required when a company records a finance lease? They do not record the capitalization of the lease on their financial statements. They record an expense and a revenue on the income statement that is generally equal to the present value of the lease payments. They record a gain and a loss on the income statement that is generally equal to the present value of the lease payments. They record a right-of-use asset and a liability on the balance sheet that is generally equal to the present value of the lease payments.

They record a right-of-use asset and a liability on the balance sheet that is generally equal to the present value of the lease payments. A finance lease requires the right-of-use asset and a liability to be recorded on the balance sheet for an amount that is generally equal to the present value of the lease payments. The company is capitalizing the lease on their financial statements by recording it as an asset on the balance sheet. They will not record an expense and revenue nor will they record a gain and a loss on the income statement that is generally equal to the present value of the lease payments because this asset is recorded on the balance sheet.

A lessor is not required to disclose which one of the following items? Income from variable lease payments not included in the lease receivable. A maturity analysis for the lease receivable. A maturity analysis for operating lease payments. Weighted-average remaining lease term and weighted-average discount rate.

Weighted-average remaining lease term and weighted-average discount rate. Lessees and lessors are required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of future cash flows; however, the types of quantitative information that should be disclosed by the lessee differs from the information that should be disclosed by the lessor. Only the lessee is required to disclose the weighted-average lease term and the weighted-average discount rate.

On January 1, 2020, Parker Company signed a 10-year noncancelable lease agreement to lease a storage building from Chili Equipment Company. The following information pertains to this lease agreement. a. Parker will pay equal rental payments at the beginning of each year. b. The fair value of the building on January 1, 2020 is $5,000,000; however, the book value to Chili is $4,125,000. c. The building has an estimated economic life of 10 years, with no residual value. Parker depreciates similar buildings on the straight-line method. d. At the termination of the lease, the title to the building will be transferred to the lessee. e. Parker's incremental borrowing rate is 11% per year. Chili Equipment Co. set the annual rental to ensure a 10% rate of return. The implicit rate of the lessor is known by Parker Company. annual lease payment PVF-AD of 10 periods at 11% is 6.53705. PVF-ADof 10 periods at 10% is 6.75902

What is the amount of the total annual lease payment? Assume that the PV factor for an annuity due of 10 periods at 10% is 6.75902 and the PV factor for an annuity due of 10 periods at 11% is 6.53705. $739,752 The capitalized amount is equal to the product of the annual lease payment and the present value of an annuity due of 1 for 10 periods at 10%. The 10 periods represent the term of the lease, and the 10% equals Chili's rate of return, which is known to Parker. Chili uses the fair value of the warehouse to compute the lease payment. Therefore, $5,000,000 = annual lease payment x 6.75902, or $5,000,000/6.75902 = annual lease payment. Therefore, the annual lease payment is $739,752.

After signing a lease agreement, a company records a right-of-use asset and a liability on the balance sheet that is equal to the present value of the lease payments. What type of lease has the company signed? a sales-type lease a finance lease a short-term lease an operating lease

a finance lease If a company records a right-of-use asset and a corresponding asset on the balance sheet in an amount equal to the present value of the lease payments, the lease is a financing lease. If this is not the case, then it would be an operating lease, and the company would be able to take a lease expense for the lease payment. A sales-type lease or short-term lease would be operating leases for which the company can deduct their lease payments as lease expenses.

The lease agreement that would most likely be classified as an operating lease is a lease agreement in which the lessee may renew the two-year lease for an additional two years at the same rental. a lease agreement that runs for 15 years when the economic life of the leased property is 20 years. a lease agreement in which the present value of the lease payments is $55,600 and the fair value of the leased property is $60,000. a lease agreement that allows the lessee the right to purchase the leased asset for $1.00 when half of the asset's economic useful life has expired.

a lease agreement in which the lessee may renew the two-year lease for an additional two years at the same rental. An operating lease is a lease which has not met any of the financing lease classification tests. The five tests of a financing lease are: transfer of ownership test, purchase option test, lease term test, present value test, and alternative test. The lease agreement in which the lessee may renew the two-year lease for an additional two years at the same rental does not satisfy any financing lease classification tests therefore this lease would be classified as an operating lease.

Which of the following companies would be MOST likely to lease equipment rather than buy it due to a lack of benefit from depreciation tax deductions on a purchase? a very old company with a reasonable level of taxable income a middle-aged company with a moderate level of taxable income a start-up with a very low level of taxable income a relatively new company with a very high level of taxable income

a start-up with a very low level of taxable income Some companies lease because leasing provides is cheaper financing than other forms of financing. Start-up companies tend to lease because the depreciation deductions do not offer a benefit to the company due to their low taxable income. On the other hand, companies with reasonable or moderate to high taxable income would rather buy an asset than lease it because the depreciation deductions are beneficial to their companies.

Pinnacle Corporation has agreed to lease a piece of manufacturing equipment to Peak Industries for the next six years. The lease is determined to be a sales-type lease for Pinnacle. For the lessor, this means that the lease met one of the lease classification tests. both that the lease met one of the lease classification tests and that the lessor is unable to derecognize the asset. the collectability of payments from the lessee is probable. both that the lease met one of the lease classification tests, and that the collectability of payments from the lessee is probable.

both that the lease met one of the lease classification tests, and that the collectability of payments from the lessee is probable. For the lessor to classify a lease as a sales-type lease it must have met one of the lease classification tests and collectability of payments from the lessee is probable.

A finance lease will always be recorded for a(n) build-to-suit arrangement. lease that includes a guaranteed residual value. sale-leaseback. short-term lease.

build-to-suit arrangement. If a leased asset was built to meet specifications set by the lessee, "build-to-suit", the lease is always recorded as a finance lease. The alternative use test is met if an asset has this classification, therefore, a finance lease is present.Sale-leaseback, guaranteed residual value incorporated in the lease, or short-term lease do not always require that they are recorded as a finance lease.

On January 1, 2020, Breeden Company signed a 10-year noncancelable lease agreement to lease a storage building from Paxton Warehouse Company. The following information pertains to this lease agreement. (a) Breeden will pay equal rental payments at the beginning of each year. (b) The fair value of the building on January 1, 2020, is $4,000,000; however, the book value to Paxton is $3,300,000. (c) The building has an estimated economic life of 10 years, with no residual value. Breeden depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Breeden's incremental borrowing rate is 11% per year. Paxton Warehouse Co. set the annual rental to ensure a 10% rate of return. The implicit rate of the lessor is known by Breeden Company. From the lessee's viewpoint, what type of lease exists in this case?

finance lease If any of the lease classification tests are satisfied then the lease is classified as a finance lease, otherwise, it is an operating lease. Term (a) states that equal rental payments will be made at the beginning of the year. There is no test for this criteriathis criterion, therefore we will look at term (b) of the lease; fair value of the building is $4,000,000 with a book value of $3,300,000. This does not provide us with information needed for any of the four lease classification tests. Lease agreement term (c) indicates the building has an estimated economic life of 10 years which matches up exactly with the lease term of 10-years. The lease term test is satisfied because the lease term is a major part of the remaining economic life of the asset therefore this lease is classified as a finance lease. A sales-leaseback or sales-type lease are not a classification of a lease but are types of leases.

When comparing a finance lease and an operating lease, the _____________ lease has higher charges in the earlier years and lower charges in later years whereas the ______________ lease reports the same amount of expense each period. finance, operating finance, sales-type lease operating, finance operating, sales-type lease

finance, operating A finance lease sets the annual lease payments, however, the amount charged to lease expenses will be higher in the earlier years with lower charges in later years because the lease expenses are determined by applying the effective-interest method. This method computes the expenses based on the remaining lease liability balance therefore as the balance is reduced there is a comparable reduction in lease expenses. When lease payments are set for an operating lease, the lessee will have the same payment each period with lease expenses remaining the same.

When a ________ properly accounts for an operating lease, it ________ the amount of interest on the liability to/from the straight-line lease expense to arrive at the amount of ___________. lessor; deducts; carrying value of the right-of-use asset each period lessee; deducts; straight-line lease expense lessor; adds; amortization on the right-of-use asset lessee; deducts; amortization on the right-of-use asset

lessee; deducts; amortization on the right-of-use asset A lessee accounts for an operating lease by reporting interest on the lease liability as part of Lease Expense. Instead of reporting amortization expense on the right-of-use asset, it deducts the amount of interest on the liability from the Lease Expense (straight-line is used for expense measurement) with the remainder used to determine the amount of amortization on the right-of-use asset.

If a lease agreement does not qualify as a finance lease, the lessee must account for the lease as a(n) ________ lease. sales-type operating rental bargain

operating The two classifications of leases are operating and financing. When the lease terms are agreed upon, the lessee must classify the lease by determining if it meets at least one of the five tests. If it does not, the lease is classified as an operating lease. If it does meet one of the five tests, it will be classified as a financing lease. Bargain, rental, and sales-type leases are not classifications of leases but are types of leases.

When a lease conveys use of one floor of an office building for five years it is considered a(n) leveraged lease. sales lease. operating lease. finance lease.

operating lease. Giving a lessee the right to use one floor of an office building for five years is an operating lease because none of the five criteria for tests for classifying a lease as a financing lease would be met due to the short length of the lease in relationship to the useful life of a building. A leveraged lease and sales-type lease are types of leases rather than a classification of a lease.

On January 1, 2021, Hickory Corporation signs a noncancelable contract in which it agrees to lease a piece of non-specialized manufacturing equipment to Penzey Products. Specific details related to the lease are as follows: • The lease has a 3-year term with no renewal option. • Penzey is required to make a payment of $287,432 to Hickory on January 1 of each year in the lease term, beginning January 1, 2021. • As of January 1, 2021, the machine's fair value is $950,000. The machine has an estimated economic life of 10 years and no expected salvage value. • Upon termination of the lease, the machine reverts to Hickory Corporation. • Penzey depreciates all of its machinery on a straight-line basis. • Penzey's incremental borrowing rate is 10% per year. The firm is not aware of the 8% implicit rate used by Hickory. From Hickory's point of view, this agreement would be classified as a(n)

operating lease. The lease does not meet the transfer of ownership test, the purchase option test, the lease term test, nor the alternative use test. The PV of 3 payments of $287,432 at 10% = $287,432 x 2.73554 = $786,282 which is less than 90% of the asset's fair value ($950,000 x 0.90 = $855,000). Therefore, the lease is an operating lease.

When a lessee records an operating lease it adds the amount of interest on the liability to the straight-line lease expense to arrive at the amount of amortization on the right-of-use asset. part of its annual lease expense is based on interest related to amortizing its lease liability. it determines the carrying value of the right-of-use asset by deducting the amount of interest on the liability each period. it reports both interest expense and amortization expense on its income statement.

part of its annual lease expense is based on interest related to amortizing its lease liability. A lessee records an operating lease with a debit to right-of-use assets and a credit to lease liability; the right-of-use asset and lease liability are reduced each year by recording part of its annual lease expense based on interest related to amortizing the lease liability. The interest amount is deducted from the liability on the straight-line lease expense to determine the amortization on the right-of-use asset, therefore the carrying value of the right-of-use asset is computed by deducting amortization from the asset. The lessee reports interest and right-of-use asset amortization as an operating expense on the income statement.

On January 1, 2020, Hall Inc. signs a noncancelable contract in which it agrees to lease a warehouse facility to Krauss Corporation for the next 10 years. The collectability of Krauss' lease payments is probable. Specific provisions of the lease are as follows: • Krauss is required to make equal rental payments on the first day of each year. • As of January 1, 2020, the fair value of the building is $5 million, but the book value to Hall is $4.2 million. • The building has a predicted economic life of 10 years and no expected residual value. Krauss depreciates similar facilities using the straight-line method. • Upon termination of the lease, Krauss will receive title to the building.• Krauss' incremental borrowing rate is 10% per year. Hall set the annual rent amount to insure a 9% rate of return. Krauss is aware of Hall's implicit rate. From Hall's point of view, this agreement would be classifie

sales-type lease. To be classified as a financing lease one of the five tests must be satisfied. The transfer of ownership test is met because at the end of the lease the lessee, Krauss Corporation receives title to the building therefore the lease is a financing lease which means it is not an operating lease. Next, we need to determine if the lease is a direct-financing or a sales-type lease. Hall sets the annual rent amount at an implicit rate of return at 9% rather than Krauss's incremental borrowing rate of 10%, therefore this is a sales-type lease whereas a direct financing lease would use the incremental borrowing rate of return.

In an operating lease, the lessor will depreciate the property over ________. the lease term the shorter of the lease term or the asset's life the longer of the lease term or the asset's life the asset's life

the asset's life An operating lease is recognized by the lessor on its balance sheet and will depreciate the leased equipment over the life of the asset.

For leases accounted for as operating leases, at the end of each period, the lessee reports the net amount of the lease liability and the right-to-use asset (either as an asset or a liability) on its balance sheet. the lessee is required to use the straight-line method for amortizing the right-to-use asset. the lessee continues to use the effective-interest method for amortizing the lease liability. the lessee continues to use its preferred method for amortizing the right-to-use asset.

the lessee continues to use the effective-interest method for amortizing the lease liability. In an operating lease, the lessee records the same amount for lease expense each period over the lease term which is known as the straight-line method, however, the lease liability is amortized using the effective-interest method. The lessee uses the effective-interest method to amortize the right-to-use assets and the lease liability. At the end of the period, the lessee reports the interest and right-of-use asset amortization related to the lease as an operating expense on the income statement each year.

For leases accounted for as operating leases, the lessee is required to use the straight-line method for amortizing the right-to-use asset. the lessee continues to use the effective-interest method for amortizing the lease liability. the lessee continues to use its preferred method for amortizing the right-to-use asset. at the end of each period, the lessee reports the net amount of the lease liability and the right-to-use asset (either as an asset or a liability) on its balance sheet.

the lessee continues to use the effective-interest method for amortizing the lease liability. In an operating lease, the lessee records the same amount for lease expense each period over the lease term which is known as the straight-line method, however, the lease liability is amortized using the effective-interest method. The lessee uses the effective-interest method to amortize the right-to-use assets and the lease liability. At the end of the period, the lessee reports the interest and right-of-use asset amortization related to the lease as an operating expense on the income statement each year.

When a lease includes variable payments based on an index the lessee includes the variable payments in the lease liability using only reasonably certain increases in the index available at the commencement date of the lease. the lessee includes the variable payments in the lease liability using reasonably certain increases and decreases in the index available at the commencement date of the lease. the lessee includes the variable payments in the lease liability at the level of the index at the commencement date of the lease. any changes in the index subsequent to the commencement date of the lease are treated as a change in estimate and the lease liability is revalued.

the lessee includes the variable payments in the lease liability at the level of the index at the commencement date of the lease. A lease with variable payments based on an index requires the lessee to include variable lease payments in the value of the lease liability at the level of the index at the lease's commencement date. Increases or decreases to future lease payments are not considered when valuing the lease liability but rather are expensed in the period incurred. If the variable payment amounts are unknown at the lease commencement date, this payment is not included in determining the present value of the lease liability however, it will be expensed in the period incurred.

If the fair value of the leased asset is less than the expected residual value, and if the lessee guaranteed the residual value, the lessor will record a loss. the lessor will need to adjust the amount previously reported as COGS. the lessee has no further obligations. the lessee will record a loss.

the lessee will record a loss. A lease with a guaranteed residual value has two guidelines it must follow to ensure proper accounting for the residual value. One guideline is if it is probable that the expected residual value is less than the guaranteed residual value, the difference between the expected and guaranteed residual values should be included in computation of the lease liability. Therefore, the lessee will record a loss and will need to satisfy the residual value amount by making an additional payment which will clear out the liability account. The lessor does not need to adjust the cost of goods sold amount previously reported nor will they record a loss because the expected residual value is less than the guaranteed residual value.

If a sales-type lease results in the lessor reporting a loss, the lessor will derecognize the asset but will defer recognition of the loss until the lease payments equal to the fair value of the asset have been received. the lessor recognizes sales revenue and cost of goods sold. the lessor will derecognize the asset but will defer recognition of the loss until the lease payments equal to the historical cost of the asset have been received. the lessor will not derecognize the asset and will record lease revenue for payments received from the lessee until the loss is absorbed.

the lessor recognizes sales revenue and cost of goods sold. In the situation where a sales-type lease results in reporting a loss, record the sale with a debit to Cost of Goods Sold and a credit to Inventory to remove the asset from the lessor's books. Then debit Lease Receivable and credit Sales Revenue. Therefore, the answer of the lessor recognizes sales revenue and cost of goods sold is correct. The loss is recognized immediately when the Lease Receivable is recorded. The lessor will derecognize the asset on their books despite the sales-type lease resulting in a loss.