Accounting Chapter 15

Norma Manufacturing Company leases an asset to Maren Inc in a sales-type lease. The present value of the lease payments is $200,000 and the cost of the leased asset is $160,000. At the beginning of the four-year lease term, Norma should recognize a profit of:

$40,000

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

Blank 1: Residual or Salvage Blank 2: Value

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

Blank 1: finance or financing

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

Blank 1: lessee

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

Blank 1: lessor Blank 2: lessee

Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by three years, and to change the amount of lease payments. The additional three years were not originally an option. How should Lease Corp address this lease modification?

Record a lease receivable for the present value of remaining lease payments Reclassify from an operating lease to a sales-type lease

Which of the following was one of the four criteria used to determine if a lease was a capital lease under preexisting GAAP?

The lease term is 75% or more of the economic life of the asset.

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

Blank 1: operating Blank 2: financing or finance

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 incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments.

False

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

Finance lease

Who owns the asset in an operating lease?

Lessor

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

On a straight-line basis

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

Straight-line

Which of the following was not a criteria used to determine if a lease was a capital lease for the lessee under preexisting GAAP?

The lease term is for the major part of the remaining economic life of the leased asset.

Which of the following were the criteria used to classify a capital lease under preexisting GAAP?

The present value of the minimum lease payments is 90% or more of the fair value of the leased asset. The lease term is for 75% or more of the useful life of the leased asset. The lease contains a bargain purchase option. Title to the property transfers at the end of the lease period.

When is a nonlease component of a lease agreement recorded separately from the lease payments?

When the amount represents transfer of a good or service to the lessee.

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

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

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

If a lease is modified and is reclassified from an operating to a sales-type lease, the lessor will record interest revenue at the ____________ rate, instead of the ___________ rate.

effective; straight-line

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

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

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.

Agatha Corp. leases store space from Christie Company. Agatha agrees to pay $10,000 per month. In addition, if Agatha exceeds specified sales targets, it will pay additional monthly rent based on a percentage of those excess sales. The additional rent payments

have no effect on the lessee's lease liability and lessor's lease receivable.

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

implicit

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

implicit rate.

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

installment

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

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

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

lease payable for $79,383 interest expense for $20,617

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

less than or equal to twelve months

The _____ must disclose its net investment in the lease.

lessor

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.

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

nonlease component

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

operating

In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.

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

Selling profit exists in a sales-type lease when the

present value of the lease payments is greater than the cost of the asset.

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

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

reduction in principal only

The estimated commercial value of leased property at the end of the lease term is known as

residual value.

An operating lease is defined as a lease

that does not meet any of the criteria of a finance or sales-type lease.

The lease term is typically considered to be

the contractual term of the lease plus any periods covered by options to extend if extension is reasonably certain to occur.

In an operating lease, interest expense plus amortization expense is equal to

the straight-line lease payment.

Which of the following are required disclosures related to leases?

variable lease cost residual values nonlease payments

Fit Company leases building space from Lease Corp. Fit Company agrees to pay Lease Corp an additional amount if Lease Corp attracts a higher amount of traffic through the doors resulting in more profit for Fit Company. How are these variable lease payments treated?

Lease Corp records lease revenue when the variable lease payment is received Fit Company records lease expense when the variable lease payment is paid

The lease term includes

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

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

operating

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

operating

Lease payments are often _______ than installment payments.

Blank 1: lower, less, or smaller

A lease in which the rights and responsibilities of ownership are retained by the lessor is called a(n) _______ lease

Blank 1: operating

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.

Blank 1: operating