Chapt 15 Acct 314
In a short-term lease, periodic rental payments are...
-Recorded as rent expense by the lessee -Recorded as rent revenue by the lessor
Lessee
-Records a lease payable -Records a right of use asset
Most common reasons for a Sale- leaseback transaction are to
-Refinance at a lower rate -Generate cash
Required disclosures related to leases
-Residual values -Variable lease cost -non lease payments
Lease classification as a finance lease under preexisting GAAP, new GAAP, or both Pre existing GAAP
-The agreement contains a bargain purchase option -The noncancelable lease term is equal to 75% or more of the expected economic life of the asset -the present value of the minimum lease payable is equal to or greater than 90% of the fair value of the asset
New GAAP
-The agreement contains a purchase option that the lessee is reasonably certain to exercise -The PV of the sum of lease payments is equal to or greater than substantially all of the FV of the underlying asset -The lease term is for the major part of the remaining economic life of the underlying asset -The underlying asset is so specialized that it is unlikely the lessor will have an alternative use for it at the end of the lease
The lease term includes
-The contractual term of the lease -Any periods covered by options to extend with significant incentive
Lease classification as a finance lease under preexisting GAAP, new GAAP, or BOTH Pre existing GAAP
-The lease specifies that ownership of the asset transfers to the lessee
Classify a capital lease under PREEXISTING GAAP
-The lease term is for 75% or more of the useful life of the leased asset -The present value of the minimum lease payments is 90% or more of the fair value of teh leased asset -Title to the property transfers at the end of the lease period -The lease contains a bargain purchase option.
Under IFRS No. 17, how are lessees required to account for leases?
Finance only!
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
A bargain purchase option is a provision in a lease contract that
Gives the lessee the right to purchase the leased asset at the price significantly less than the expected fair value of the property
On 1/1/19, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful like of 5 years. Franz acquired the asset for $431213 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 1,2018. At the commencement of the lease, Franz should debit
Lease Receivable for $431,213 $100,000 * 4.31213 (PV of lease payments 8% 5 years)
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
Who is allowed to reassess lease amounts for variable lease payments?
Lessee Only
under IFRS, a lessee will remeasure the variable lease payments that depend on an index or rate
When the right-of-use asset is remeasured and when there is a change in cash flows resulting from a change in index or rate
Periods covered by renewal options
are NOT included in the lease term if a bargain purchase option is present
How is amortization expense computed on the right-of-use asset by the lessee in an operating lease
as the payment less he interest expense
A lease structured as an installment purchase is called a(n) _______ lease by the lessee
finance
In an _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term
operating
Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the
remaining economic life
The journal entry to record the lessee's payment on a short-term lease will include a debit it
rent expense
The two additional criteria that applied only to the lessor in determining whether a lease was classified as a capital lease in preexisting GAAP are
-Any additional costs to be incurred by the lessor are reasonably predictable -The collectibllity of lease payments must be reasonably predictable
Initial direct costs include
-Costs that would not have been incurred if the lease agreement DID NOT exist -Costs necessary to acquire the lease -Costs associated with completing the lease agreement
On 1/1/18, 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 payments is $100,000; the first payment is due on January 1,2018. Tucker should recognize the first leave payment by:
-Debit Lease payable for $100,000 -credit Cash $100,000
North Company leased equipment from Lease Corp in a finance/sales-type lease. The annual payments equal $105,000. Payments include $5,000 which Lease Corp will use to pay the annual maintenance fee on the equipment. How should North Company record the first payment?
-Debit Maintenance Expense $5,000 -Debit Lease payable $100,000 -Credit Cash $105,000
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?
-Debit lease receivable $500,000 -Credit equipment $500,000
At the inception of a finance lease for computer equipment, the lessee should
-Debit right of use asset -Credit Lease payable
On 1/1/18 Tucker Company leases equipment from Inc. over 3 years of 5 years estimate useful life. Inc. acquired asset for $431,213 and normally utilizes 8% interest rate. The present value payments is $357,710. The annual lease payment is $100,000; the first payment is due 1/1/18. Inc should recognize the first lease payment by:
-Debit- Cash for $100,000 -Credit- Deferred lease revenue for $100,000
Required disclosures for lessees and lessors?
-Description of the leasing arrangement -Future payments in each of the next 5 years -Future payments for total remaining years
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:
-Equipment for $200,000 -Sales Revenue for $320,000
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?
-FIt Company records lease expense when the variable lease payment is paid -Lease corp records lease revenue when the variable lease payment is received
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 characteristics between Preexisting and new GAAP Preexisting GAAP
-Leases are classified as operating or capital -Intent is to determine whether the usual risks and rewards of ownership are transferred
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 -Fear of obsolescence -tax benefits
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,
-Only the lessee receives the risk and rewards of ownership -It is accounted for as a finance lease
Which of the following would be included in the lessor's gross investment in the lease?
-Periodic Lease payments -Residual Value
Residual Value treatment with NEW GAAP
-Present value of cash payment is added to the right-of-use asset -a cash payment over the expected residual value is included in the lease payments -Guaranteed residual value is not included in the lease payments
Residual Value treatment with Preexisting GAAP
-Present value of guaranteed residual value is included in the lease asset -Guaranteed residual value is included in the minimum lease payments
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
Under preexisting GAAP which of the following would require reassessment of the lease term?
-Provisions of the lease are modified -A lease option is exercised
The additional three years were NOT originally an option. How should Taylor address this lease modification?
-Reclassify for an operating lease to a finance lease -Update the right-of-use asset for the increase in present value
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
Occur in a sale-leaseback transaction
-The lessee receives cash from the sale of the asset -The lessee pays periodic rental payments
When a lease includes a termination penalty
-The penalty amount is considered an additional cash payment if the lessee is reasonably certain to terminate the lease -The lease term ends on the expected termination date
The lessee's payment in an operating lease is
Allocated between interest expense and amortization for the right of use asset
Executory costs were ________ under preexisting GAAP
Expensed by the lessee
The incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments?
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 The lessor subtracts the present value
In which type of lease does the lessee report interest expense and amortization expense separately in the income statement?
Finance
The accounting in which of the following parallels that of an installment purchase
Finance Lease
which of the following were executory costs in pre existing GAAP
-Hazard insurance -Maintenance costs -Property Taxes
Lease characteristics between Preexisting and new GAAP New GAAP:
-Intent is to determine if the lessee obtains substantially all of the remaining benefit of the asset -Leases are classified as operating or finance/sales type
Classifications as a finance lease?
-The present value of the total lease payments is greater than substantially all of the fair value of the asset. -The lease includes a purchase option the lessee is reasonably certain to exercise -Ownership of the asset transfers to the lessee
When is a lease considered a Direct Financing Lease?
-When control is not transferred to the lessee -It is probable that the lessor will collect the lease payments -When a third party guarantees the residual value
When are the right-of-use asset and lease liability remeasured and adjusted for changes in the amount of payments due to a change in index or rate?
-When the lease is modified giving the lessee an additional right-of-use -When the lease term is reassessed and changed
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
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
A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value
90% or more
When there is a change in lease term,
A lease initially classified as an operating lease may need to be reclassified as a finance lease
Cloud Corp sold its equipment and immediately lease it back. The leaseback portion of the transaction was classified as an operating lease. The original cost of the equipment was $300,000. At the time of sale, the equipment has a carrying value of $200,000. The sale price was $250,000. Cloud should
Credit Gain on sale leaseback for $50,000 at the time of sale
On 1/1 Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment form 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
Sarah Company leases a machine with a FV of $200,000 from Eden Inc. The PV of the future lease payments is $120,000. At the inception of the lease, Sarah should
Debit- Right of use asset for 120,000 Credit Lease payable for 120,000
An advanced payment on an operating lease should be classified by the lessor as
Deferred Rent revenue
Direct costs incurred by the LESSOR Sales type lease with no selling profit
Deferred and expensed over the lease term by increasing the lease receivable
Direct costs incurred by the LESSOR Operating lease
Deferred and expensed over the lease term typically on a straight line basis
Both the lessee and lessor use the same amortization schedule for a finance/sales-type lease. The lessee records interest _________ and the lessor records interest _________.
Expense; revenue
Direct costs incurred by the LESSOR Sales-type lease with selling profit
Expensed at the beginning of the lease
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
included in the lease payments used in present value calculations?
In-substance fixed lease payments
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
How does the bargain purchase option affect the calculation of the present value of the lease payments for the lessee?
Increases
The rate of interest incurred by the lessee if funds were borrowed to purchase the leased asset is known as the _______ rate.
Incremental borrowing
After the first lease payment, each lease payment in a finance lease consists of amount representing
Interest and a reduction in the principal
From the accounting standpoint, legal ownership of the lease asset is_______ to the accounting method used.
Irrelevant
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 ________
Lease
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
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 _______ subtracts the PV of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments
Lessor
Lessor on sales type lease with a residual value: Credit Inventory
Lessor's cost of equipment
Lessor on sales type lease with a residual value: Debit Cost of goods sold
Lessor's cost of the equipment less the PV of the residual value
In an operating lease, the _______ records no asset or liability at the inception of the lease and the ______ records both
Lessor; lessee
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
The lessee records an asset and liability for operating leases under
New GAAP only
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
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 _______ lease
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
Lessor on sales type lease with a residual value: Debit Lease Receivable
PV of lease payments plus the PV of the residual value
The lessor's gross investment in the lease is the total of periodic rental payments
Plus any residual value
The gain on a sale-leaseback classified as an operating lease is
Recognized at the time of the sale
In a typical finance lease, the first lease payment at the beginning of the lease consists of
Reduction in principal only
___________ is an estimate of a leased asset's commercial value at the end of the lease term.
Residual Value
A fundamental difference in lease classification between the lessee and lessor under preexisting GAAP related to
Revenue Recognition
Lessor on sales type lease with a residual value: Credit Sales Revenue
Sales less the PV of the residual value
Which of the following best describes the period over which the right of use asset is amortized when the ownership TRANSFERS at the END of the lease?
The asset's estimated useful life
IFRS allows the short cut method on leases if
The lease term is 12 months or less and DOES NOT include a purchase option
What interest rate is used to compute the present value of the remaining lease payments when a lease term is reassessed and changed?
The lessee's incremental borrowing rate AT THE TIME of the reassessment
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.
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
The lessee records the right-of-use asset as
The present value of lease payments
Which of the following amounts represents the selling price in a sales-type lease?
The present value of the lease payments
If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over
The useful life of the asset
The cost of a leasehold improvement is depreciated or amortized over its _______ to the lessee
Useful life
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
The primary motivation for the new accounting guidance on leases was to
deter the use of off balance sheet financing
On 1/1/18 Killian Inc. leases equipment with a fair value of $140,000 and the useful life of 4 years to marion company for 1 year. Under the lease term, marion makes four quarterly payments of $20,000 beginning on 1/1. 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 an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a....
sale- lease back
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
How does a residual value in a finance/sales type lease affect the lessee?
the lessee lease payments are lower
If a bargain purchase option is expected to be exercised, the lease term ends
when the option becomes exercisable
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?
-Amortization expense -Interest expense
A lease can be accounted for?
-As a purchase/sale agreement with debt financing -As a rental agreement
The following amortization table for a lease with periodic payments of $92,931 and a bargain purchase option of $60,000. The journal entry to exercise the bargain purchase at 12/3/16, which would include which of the following entries for the lessee?
-Debit lease payable $54,542 -Debit interest expense $5,458
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
Lessor
-Record a lease receivable -Removes the asset from its balance sheet
Depending on the nature of the leasing arrangement, a lease is accounted for
As a rental or a purchase/sale
How is a fixed payment for hazardous insurance or property taxes treated in a lease agreement?
As part of the lease payments
In an operating lease, the lessee report lease _____ and the lessor reports lease _______, both on a straight-line basis
Expense; revenue
Which of the following would justify reassessment of a lease term?
Leasehold improvements
the ________ should recognize amortization of the right-of-use asset
Lessee
The two basic lease classifications by a lessor are
operating and sales-type
