Intermediate Accounting Chapter 15

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.

The amortization table for an operating lease allows the lessee to allocate each lease payment to __________ and ________.

interest expense; reduction of the lease liability

In a direct financing lease, the lessor's primary involvement in the lease is providing financing in exchange for _______________ _______________.

interest revenue

A guaranteed residual value ___________ the calculation of the present value of the lease payments when comparing that amount to the fair value of the asset in determining lease classification.

is included in

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

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

The lessee records an asset and liability for operating leases under

new GAAP only.

On January 1, Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment from Electronics Plus at a cost of $500,000. The lease agreement specifies three annual payments of $100,000 beginning at the inception of the lease. The useful life of the asset is estimated to be five years, but Warren will lease the asset for a total of three years. The present value of the three lease payments is $273,554. At the inception of the lease Best Lease Co. should

no entry to remove the asset from the balance sheet

A _____ 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 _______ the amount the lessor needs to recover through periodic lease payments.

reduces

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

remaining economic life.

Under the shortcut method, the lessee recognizes

rent expense over the lease term

Which of the following are required disclosures related to leases?

residual values variable lease cost nonlease payments

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

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

Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should credit:

sales revenue for $320,000 equipment for $200,000

The periodic lease payment in an operating lease reduces the outstanding lease balance so that at the end of the lease term the outstanding balance is equal to

zero

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

implicit

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

residual value periodic lease payments

In which of the following ways can a lease be accounted for?

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.

True or false: The residual value of a leased asset impacts the lessee's calculation of effective interest.

False

Who makes cash payments for use of the asset during a lease?

Lessee

How is lease revenue recorded by the lessor in an operating lease?

On a straight-line basis

True or false: The incremental borrowing rate is the rate the lessee would expect to pay a bank if funds were borrowed to purchase the asset.

True

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

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.

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

as a rental or a purchase/sale

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

credit lease payable debit right-of-use asset

The _______________ residual value is a commitment by the lessee that the lessor will recover a specified residual value at the end of the lease term.

guaranteed

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 lease payment is $100,000; the first payment is due on January 1, 20X1. Tucker should recognize the second lease payment by debiting

interest expense for $26,497 Reason: 0.08($431,213-$100,000) lease payable for $73,503 Reason: $100,000-$26,497

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

irrelevant

A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)

lease

The _____ adds the present value of the bargain purchase option to the present value of periodic rental payments when computing the amount to be recorded as a right-of-use asset and a lease liability.

lessee

The _______________ should recognize amortization of the right-of-use asset.

lessee

When the lessor's implicit rate is unknown, which rate should be used to calculate the present value of the lease payments for the lessee?

lessee's incremental borrowing rate

The _____ must disclose its net investment in the lease.

lessor

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) ______ activity.

operating

In which section of the statement of cash flows should a lessee report payments on an operating lease?

operating

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

operating; financing

The lessee records the right-of-use asset as

the present value of lease payments.

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%?

$55,990 Reason: $300,000 - 50,000 = $250,000/4.46511 = $55,990

First Lease Corp. leases equipment to Taylor. The interest rate implicit in the loan is 8% and is known to both parties. Taylor's incremental borrowing rate is 10%. Market rate on similar leases is averaging 9%. What interest rate should Taylor use to compute the present value of lease payments?

8% Reason: The lessee uses the interest rate implicit in the lease when known.

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

Periods covered by renewal options

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

On January 1, Year 1, Samuel Company leases equipment from Lease Corp. The lease agreement specifies five annual payments of $50,000, with the first payment due at lease signing (January 1, Year 1), and at each January 1 from Year 2 to Year 5. At the end of the lease term, the equipment will be returned to the lessor and is expected to have a residual value of $30,000. The estimated useful life of the equipment is six years. The interest rate in the financing arrangement is 6%. The cost to Lease Corp of manufacturing the equipment is $150,000. The journal entry for the Lessor on January 1, Year 1 will include the following in its entry:

credit sales revenue $223,255 credit equipment $150,000 debit lease receivable $245,673

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 lease payment is $100,000. Franz should recognize receipt of the first lease payment on January 1, 20X1 by

debiting cash for $100,000 crediting lease receivable for $100,000

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

does not include

A lease is classified as a finance lease by the lessee and a sales-type lease by the lessor if the present value of _____ constitutes "substantially all" of the fair value of the asset.

lease payments including any lessee-guaranteed residual value

Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should debit:

lease receivable for $320,000

The short-cut method may be applied only if the maximum possible lease term is

less than or equal to twelve months

Lease payments are often __________ than installment payments

lower

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

The incremental borrowing rate is

the rate the lessee would pay a bank to borrow funds.

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.

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

75% or more

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.

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

Residual/Salvage value

When is a lease considered a direct financing lease?

When control is not transferred to the lessee. When a third party guarantees the residual value. It is probable that the lessor will collect the lease payments.

If the lease term includes a bargain purchase option that is reasonably expected to be exercised, when does the lease term end for accounting purposes?

When the option becomes exercisable.

On January 1, 20X1, 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, 20X1. Tucker should recognize the first lease payment by

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

In an operating lease, the lessee reports lease _______________ and the lessor reports lease _______________, both on a straight-line basis.

expense revenue

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

interest and a reduction in the principal

On January 1, 20X1, 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, 20X1. Tucker should recognize the second lease payment by debiting (round to the nearest whole dollar and select all that apply)

interest expense for $20,617 Reason: ($357,710-$100,000)x.08 lease payable for $79,383 Reason: $100,000-$20,617

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 lease payment is $100,000; the first payment is due on January 1, 20X1. Franz should recognize receipt of the second lease payment by crediting

lease receivable for $73,503 Reason: $100,000-$26,497 interest revenue for $26,497 Reason: 0.08($431,213-$100,000)

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

lessor

In a lease, the __________ is the owner of the property, whereas the __________ is the user of the property.

lessor lessee

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

Selling profit exists in a sales-type lease when the

present value of the lease payments is greater than the cost 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

In a short-term lease, periodic rental payments are

recorded as rent revenue by the lessor. recorded as rent expense by the lessee.

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.

For an operating lease, the lessee will report

a single lease expense.

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 ____________.

equivalent to a sale.

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

finance

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.

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.

The accounting for finance leases is similar to the purchase of an asset using an _______________ note.

installment

On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Both companies choose the short-cut option. Marion recognizes the first lease payment by debiting

lease expense

Residual value is an estimate of

the commercial value of an asset at the end of the lease term

A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value.

90% or more

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

Decreases

What type of lease involves a "front loading" of lease expense and revenue due to higher interest in the earlier stages of the lease?

Finance/Sales-type

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

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

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

are not

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

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments 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. On January 1, 20X1, Donelson should recognize the receipt of the first lease payment by

crediting lease receivable for $45,000.

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 lease payment is $100,000. Tucker should recognize the first lease payment on January 1, 20X1 by

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

A purchase option

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.

Lease payments are often _______________ than installment payments.

lower

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.

On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Assuming that Marion chooses the short-cut method, at the commencement of the lease before the first lease payment is made, Marion should

not make any journal entry

When the rights and responsibilities of ownership are retained by the lessor, the lease is classified as a(n) ______ lease.

operating

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

The two basic lease classifications by a lessee are

operating and finance.

The lessee amortizes the right-of-use asset over the asset's useful life, when

ownership transfers at the end of the lease term. exercise of a purchase option is reasonably certain.

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

plus any residual value.

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

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

If a bargain purchase option is expected to be exercised, the lease term ends

when the option becomes exercisable.

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

On January 1, Smith Co leased equipment from Bentley Corp. The lease agreement includes four annual payments beginning at the inception of the lease. The estimated useful life of the equipment is 7 years. The lease does not contain a purchase option. The present value of the minimum lease payments is $400,000. The fair value of the asset is $500,000. What type of lease is this for Smith Co?

Operating lease

On January 1, 20X1, 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, 20X1. Franz should recognize the first lease payment by

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

If a lease does not meet any of the criteria to be classified as a finance or sales-type lease, it is classified as a(n) _______________ lease.

operating

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 debit

Right-of-use asset for $431,213 Reason: $100,000 x 4.31213 (PV of lease payments, 8%, 5 years)

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

included; excluded

The rate of interest incurred by the lessee if funds were borrowed to purchase the leased asset is known as the ______ rate.

incremental borrowing

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

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

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.

On January 1, Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment from Electronics Plus at a cost of $500,000. The lease agreement specifies three annual payments of $100,000 beginning at the inception of the lease. The useful life of the asset is estimated to be five years, but Warren will lease the asset for a total of three years. The present value of the three lease payments is $273,554. At the inception of the lease Warren should

debit right-of-use asset $273,554

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, _____ for the difference between estimate and actual.

the lessor records a loss

When the lessee is given the option of purchasing the leased property at a price significantly lower than its fair value, a _____ is present.

bargain purchase option

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

The lessee lease payments are lower.

Which of the following are criteria for classification as a finance lease?

- 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. - Ownership of the asset transfers to the lessee.

On January 1, 20X1, 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, and the first payment is made at the inception of the lease. Donelson should record which of the following in connection with the second payment?

Credit to lease receivable of $35,259. Reason: Second payment of $45,000 is comprised of the interest portion of $9,741 [($239,826-45,000) x 0.05], with the remainder reducing the lease receivable

Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

Debit lease receivable - PV of lease payments plus the PV of the residual value Debit cost of goods sold - Lessor's cost of the equipment less the PV of the residual value Credit sales revenue - Sales less the PV of the residual value Credit Inventory - Lessor's cost of equipment

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

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)

In which type of lease does the lessee report a single straight-line lease expense amount in its income statement?

Operating

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

Operating

Which method should normally be used to amortize the right-of-use asset?

Straight-line

The lessee's payment in an operating lease is

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

If a lease contract includes a penalty payment for termination and it is reasonably certain the lessee will terminate the lease, then the lessee should consider the penalty to be an additional _______________ _______________.

cash payment

Lessees prefer the ______ lease classification because it defers expense recognition, as compared to the ______ lease classification, which "front loads" lease expense due to higher interest expense in early years and straight-line amortization expense.

operating; finance

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments from the lessee.

reduces

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

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

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?

Interest expense Amortization expense

Which of the following best describes the period over which the right-of-use asset is amortized when ownership transfers at the end of the lease?

The asset's estimated useful life

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 four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Lease Corp account for this lease modification?

credit sales revenue for $300,000 debit accumulated depreciation for $142,857 debit cost of goods sold for $357,143 credit asset $500,000 debit lease receivable for $300,000

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 four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Taylor account for this lease modification?

debit right-of-use asset for $200,000 credit lease payable for $200,000

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments 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, and the first payment is made at the inception of the lease. Mitchell should recognize the second lease payment by

debiting interest expense for $9,741.

On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments 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, 20X1 by

debiting lease payable for $45,000.

If a leased asset is specialized and has no alternative use to the lessor, then the lessee accounts for it as a(n) _______________ lease.

finance

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 Reason: Since title transfers at the end of the lease term, the lease is a finance lease.

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

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

The effective interest rate of return the lease payments provide the lessor is referred to as the

implicit rate.

In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?

operating

When the lessor calculates the periodic lease payments, the present value of the bargain purchase option should be

subtracted from the amount to be recovered through periodic rental payments.

When a lease includes a termination penalty,

the lease term ends on the expected termination date. the penalty amount is considered an additional cash payment if the lessee is reasonably certain to terminate the lease.