Chapter 12
When the rights and responsibilities of ownership are retained by the lessor, the lease is classified as a(n) ______ lease.
operating
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
The lessee's payment in an operating lease is
- reported as a single lease expense. - allocated between interest expense and amortization for the right-of-use asset.
In which of the following ways can a lease be accounted for
As a rental agreement. As a purchase/sale agreement with debt financing.
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
In which type of lease does the lessor record a lease receivable at the inception of the lease
Sales-type
In an operating lease, who reports the leased asset on their balance sheet?
The lessor
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 (Select all that apply)
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 (Select all that apply)
crediting deferred lease revenue for $100,000 debiting cash for $100,000
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.
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, 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. Tucker should allocate the cost of the right-of-use asset annually by (round to a whole dollar)
debiting amortization expense for $86,243
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
The lessee amortizes the right-of-use asset over the asset's useful life, when (Select all that apply.)
exercise of a purchase option is reasonably certain. ownership transfers at the end of the lease term.
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 (Select all that apply.)
interest expense for $26,497 lease payable for $73,503
Amortization of the right-of-use asset for an operating lease
is calculated as the lease payment minus interest expense.
An operating lease
is similar to a typical rental agreement.
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
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
A lease in which the rights and responsibilities of ownership are retained by the lessor is called a(n) _____ lease.
operating
A lease that is more true to the nature of a rental agreement is called a(n)
operating
The two basic lease classifications by a lessee are
operating and finance.
The two basic lease classifications by a lessor are
operating and sales-type.
An operating lease is defined as a lease
that does not meet any of the criteria of a finance or sales-type lease.
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%
How is amortization expense computed on the right-of-use asset by the lessee in an operating lease
As the payment less the interest expense.
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
In which type of lease does the lessor record a lease receivable at the inception of the lease?
Sales-type
Which method should normally be used to amortize the right-of-use asset?
Straight-line
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
Which of the following is true regarding accounting for an operating lease?
The lessee records both an asset and a liability even when the risks and rewards of ownership do not transfer.
True or false: A lessee and a lessor will use similar amortization schedules for recording interest.
True
The lessor's receipt of payment on an operating lease is
all recorded as lease revenue.
Depending on the nature of the leasing arrangement, a lease is accounted for
as a rental or a purchase/sale.
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
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. For the year ended 20X1, Mitchell should allocate the cost of the right-of-use asset by
debiting amortization expense of $39,971
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.
If a leased asset is specialized and has no alternative use to the lessor, then the lessee accounts for it as a
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
In a _____, the is the owner of the property, whereas the ______ is the user of the property.
lease , lessee
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
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
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
Off-balance-sheet financing refers to the practice of
structuring transactions to keep assets and liabilities off the balance sheet by leasing rather than buying them.
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.
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.
A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value.
90% or more
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
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? (Select all that apply)
debit lease receivable for $300,000 debit cost of goods sold for $357,143 credit asset $500,000 debit accumulated depreciation for $142,857 credit sales revenue for $300,000
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. Tucker should recognize the second lease payment by debiting
interest expense for $20,617 lease payable for $79,383
For an operating lease, the lessee will report
a single lease expense.
depending on the nature of
as a rental or a purchase/sale.
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
In an operating lease, the lessor
rents the asset to the lessee for a period of time.
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, (Select all that apply)
Kluge records a right-of-use asset. Kluge records a lease payable.