ACCT 3120 Chapter 15/16 EOT

Over the entire term of a lease, the total expenses of an operating lease compared to the total expenses of a fianance lease will:

be equal

What is the Lessee's annual amortization of the Right-of-Use Asset using the straight-line method?

Outstanding balance/years

A short term lease is

12 months or less and companies have the option of using the short-cut method

Interest Expense recognized by the Lessee

PV of Lease Liability- Payment at Lease Commencement x interest rate

A "Lessee Guaranteed Residual Value" means that:

At the end of the lease term, the Lessee will need to pay the Lessor for any deficiency in the fair value of the lease item below the Guaranteed Residual Value.

Initial direct costs incurred by the Lessee, such as a commission paid to a real estate agency to locate a property meeting theLessee's requirements, and resulting in an executed lease for the property with a Lessor, are:

Debited to Right-of-Use Asset in the period incurred.

A valuation allowance relates to _____________ and is classified as a

Deferred Tax Assets; Contra-Asset Account

Under US GAAP, the method used to account for income taxes is termed the

asset-liability method

Income Tax Expense JE:

Dr. Income Tax Expense Cr. Income Tax Payble Dr. Def Tax Asset Cr. Income Tax Expense Dr. Deferred Tax Liability Cr. Income Tax Expense

Sales-Type with profit JE:

Dr. Lease Receivable Cr. Sales Dr. COGS Cr. Equipment

When recording a lease, the Lessee's Journal Entry:

Dr. Right-of-Use Asset; Cr. Lease Liability for the present value of the future lease obligations.

T/F A Lessor will classify its leases as either an "Operating Lease" or a "Finance Lease"

False Operating Lease and Sales-Type Lease

T/F A "permanent difference" originates in one accounting period and reverses, or turns around, in another accounting period.

False it never turns around

T/F A "temporary difference" originates in one accounting period and reverses, or turns around, in the same accounting period

False it turns around in future accounting periods

T/F Deferred tax assets and deferred tax liabilities are classified as current assets or liabilities in the Balance Sheet

False they are totatled netted together and then noncurrent asset or liabilty

A "Purchase Option" provided by the Lessor to the Lessee:

Is included in the lease payments used to determine the amount at which a lease should be recorded by the Lessee only if the purchase option price is sufficiently below the fair value of the item such that it is reasonably certain that the Lessee will purchase the leased asset at the end of the lease term.

Temporary differences are classified as _______________ in the Balance Sheet.

Long-Term Assets or Long-Term Liabilities.

Permanent differences are classified as ___________ in the Balance Sheet.

Neither Deferred Tax Assets or Deferred Tax Liabilities because Permanent Differences don't give rise to Deferred Tax Assets or Deferred Tax Liabilities. They have no J/E

What is the amount of Bugs Bunny's (Lessee) Lease Liability at December 31, 2022, after the 2nd annual lease payment has been made?

PV of Lease Liability- payment at Lease commencement- Principal

Profit for Lessor in Sales type lease

PV of Lease Payments - Cost of Equipment

Income received (lessor)

PV of lease - payment at lease commencement*borrowing rate

Principal

Payment at Lease commencement- Interest Expense

Which of the following creates a Deferred Tax Asset?

Rents received in advance.

Substantially all lease transactions are recorded in the accounting records as a Debit and Credit, respectively to the following accounts:

Right of Use Asset, Lease Obligation

What profit (loss) if any, will Road Runner Inc. recognize on the saleleaseback transaction?

Sales Price-Cost-Depreciation or Sales Price-Book Value

Which of the following creates a Deferred Tax Liability?

Straight-line depreciation for US GAAP financial statements and MACRS (accelerated depreciation) for income tax return purposes.

Income Tax Expense

Taxable Income* Income Tax Rate-(assets+liabilities)

Pretax Accounting Income

Taxable Income+MACRS Depreciation-GAAP Depreciation

The "lease term" includes:

The fixed term of the lease plus all optional renewal periods for which management believes that it is reasonably certain to exercise the renewal option(s).

When deferred tax assets or deferred tax liabilities recorded at the tax rate in existence at the time temporary differences arise are impacted by federal or state tax rate changes, US GAAP requires:

all defered tax asset and deferred tax liability accounts be adjusted to reflect the new tax rates.

For the lessee to account for a lease as a finance lease, the lease must meet:

any of the US GAAP criteria

T/F A Lessee will classify its leases as either an "Operating Lease" or a "Finance Lease".

True

T/F A Lessee's "bargain purchase option" means that at the end of the lease term, the Lessee may purchase the leased item at a price that is less than the fair market value of the item.

True

T/F Future taxable amounts result in "deferred tax liabilities".

True

T/F Valuation allowances reduce deferred tax assets to the amount that is more likely than not to be realized in the future.

True

T/F The Lessee's classification of a lease doesn't impact the Lessee's Journal Entry to initially record entering into a lease.

True Dr. ROU Cr. Lease Obligation

For classification purposes, a valuation allowance on a deferred tax asset is:

a contra account to the deferred tax asset and is classified as a non-current reduction of the deferred tax asset

In reconciling net income per the US GAAP financial statements to taxable income per the internal revenue code, fines and penalities incurred by a company are:

a permanent difference

Income tac refund receivable and income taxes payable are recorded in the balance sheet as

current asset and current liability

Using straight-line depreciation for financial reporting purposes and MACRS for tax purposes creates:

deferred tax liability

What is the effective annual interest rate on the lease?

effective interest/ outstanding balance

Deferred tax asset represents a:

future income tax benefit (reduction of future taxable income

The lease accounting standard does not apply to the leases of:

intangible assets

The difference in reporting interest received on municipal bonds in the financial statements prepared in accordance with US GAAP and tax is an example of:

permanent difference

The difference in reporting life insurance premiums and life insureance proceeds in the financial statements prepared in accordance with the US GAAP and tax is an example of:

permanent difference

Leases are recorded on the accounting records on:

the lease commencement date

The lease term includes

the non-cancellable period of the lease plus all optional lease periods for which the lessee is reasonably certain to exercise the option periods

Permanent differences between the handling of certain items in the financial statements prepared in accordance with US GAAP and their handling under tax are recorded as

they never turn around