FR2 Ch. 17

On January 1, 2020, Apple leased non-specialized machinery under a 6 year lease. The machinery has a 9 year economic life. The PV of the monthly payments is determined to be 80% of the machinery's fair value. The lease contract includes neither a transfer of title to Apple nor a bargain purchase option. What type of lease is this? What amount should Apple report in its 2020 income statement? a. Amortization expense equal to 1/9 of the equipment fair value b. Amortization expense equal to 1/6 of the machinery's fair value c. Lease expense equal to the 2020 lease payments d. Lease expense equal to the 2020 lease payments minus interest

Operating Lease C

Lessee Finance Lease Inception JE

ROU Asset (pmt + probable RV) -----Lease Liability

From the question above, how much assets/liabilities from the lease should Apple report in its December 31, 2018 balance sheet?

ROU Asset: $38.475 million Lease Liability: $36.225 million

Apple leased machinery from Red Inc on July 1, 2018. The lease was recorded as a finance lease. The PV of the lease payments discounted at 10% was $40.5 million. Ten annual lease payments of $6 million are due each July 1 beginning July 1, 2018. No guaranteed RV is required. What amount of interest expense from the lease should Apple report in its December 31, 2018 income statement? Amortization expense?

$1,725,000 interest $2,025,000 amortization

On January 1, 2020, Super Sports Supply recorded a ROU asset of $135, 180 in an operating lease. The lease calls for 10 annual payments of $20,000 at the beginning of each year. The implicit rate is 10%. The balance in the ROU Asset at 12/31 2020 will be?

$126, 698

From the above question, how much assets from the lease should LeaseCo report on its Dec 31, 2018 balance sheet?

$724,500

LeaseCo leased equipment to UserCorp on July 1, 2018. LeaseCo recorded the lease as a sales type lease at $810,000, the PV of the lease payments discounted at 10%. The lease called for 10 annual payments of $120,000 due each July 1. No guaranteed RV is required. The first payment was received on July 1, 2018. LeaseCo had manufactured the equipment at a cost of $750,000. The total increase in earnings (pretax) on LeaseCo's December 31, 2018 income statement would be?

$94,500

4. A finance/sales type lease if...

The PV of the lease payments > or equal to 90% of the fair value of asset. PV includes lease pmt and Guaranteed RV

Which of the following meets the criteria for classification as a finance lease? a. At the end of the lease term, the asset has an alternative use b. The lessee has the option of acquiring the asset during or at the end of the lease term at a price of FV plus 10% c. Lease term is 8 years and the assets economic life is 9 years d. The PV of the lease payments (including RV) is approximately 70% of the fair value of the leased asset

C. Lease term is longer than 75% of useful life

3. A finance/sales type lease if...

The lease term > or equal to 75% of the remaining useful life of the asset

On January 1, 2020, Apple leased printing equipment from Lease Corp. Lease Corps carrying value of the equipment is $300,000. The lease agreement specifies 3 annual payments of $100,000 beginning January 1 2020 and at each Jan 1 thereafter through 2022. The 3 year lease term ends Dec 31, 2022. The agreement requires the lessee to guarantee the RV of the equipment at the end of the lease for $50,000. The lessee's expected RV at the end is $30,000. The fair value of the asset at the commencement of the lease is $330,000 and the estimated remaining useful life is 3 years. The lessors implicit rate is 10%. How should this lease be classified?

Criteria 1 (ownership transfer)? No Criteria 2 (bargain purchase option)? No Criteria 3 (lease term > 75% economic life)? Yes Criteria 4 (PV of pmt > 90% FV)? Yes Criteria 5 (alternative use)? No It is a finance/sales lease!!!

Mills Tread Industries leased exercise equipment to Jim Gyms on July 1, 2020. The lease does not meet the criteria for a finance lease. The lease agreement specifies 4 annual payments of $80,000 beginning on July 1, 2020. The PV of those payments at a discount rate of 10% is $278,948. Which of the following is true regarding the entries made on July 1, 2020? a. Jim gyms records a debit to lease expense for $278,948 b. Mills records a credit to exercise equipment for $278,948 c. Jims records a credit to lease liability for $80,000 d. Mills records a debit to cash for $80,000

D

Finance/Sales type lease

Generally long term; Meets at least 1 of the criteria

What RV is included in the classification tests FOR A LESSEE?

Guaranteed RV

2. A finance/sales type lease if...

If there is a purchase option. "Bargain" purchase option. Ex: buying the car for $1 after the term ends

What RV is included in the calculation of lease liability and ROU asset FOR A LESSEE?

Include only PROBABLE amount owed (Guaranteed - Expected)

Amortization for an Operating Lease

Interest expense using effective interest method Amortization expense = straight line lease expense - interest expense Total lease expense stays the same over time

Amortization for a Finance Lease

Interest expense using effective interest method Amortization expense using straight line Total expense from the lease decreases over time

1. A finance/sales type lease if...

Transfer of legal ownership from the lessor to the lessee at the end of the lease term

T/F... In an operating lease, the lessor does not take the asset off its books. It remains on the balance sheet and gets depreciated over its useful life

True

5. A finance/sales type lease if...

Underlying asset is such of a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term Contractual restrictions and Practical Restrictions