Intermediate Accounting Chapter 15

What would be the outstanding balance after payment 10?

$0.

What is the interest revenue that Technoid would report on this lease in its 2013 income statement?

$1,673,820.

At what amount would Reagan record the leased asset at inception of the agreement?

$519,115.

When a lease qualifies as a capital lease, what is the cost basis of the asset acquired?

The present value of the minimum lease payments, exclusive of executory costs

Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be:

The shorter of the physical life of the asset or the lease term

For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option, the depreciation period used by the lessee must be:

The useful life to the lessee

For a capital lease, an amount equal to the present value of the minimum lease payments should be recorded by the lessee as a(n):

Asset and a liability

On January 1, 2013, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight years. The first payment of $450,000 was made on January 1, 2013. Remaining payments are made on December 31 each year, beginning with December 31, 2013. The equipment cost Packard Corporation $2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2014, balance sheet?

$1,704,900

What is the outstanding balance after payment 5?

$1,818.

ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $120,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $2,000 at the end of 10 years. Using the straight-line method, what would Best record as annual depreciation?

$11,800

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $600,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation?

$120,000

What is the net carrying value of the lease liability in Lone Star's June 30, 2013, balance sheet? Round your answer to the nearest dollar.

$15,943,154.

On January 1, 2013, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $20,000 for 2013, $18,000 for 2014, $16,000 for 2015, and $14,000 for 2016. What is the correct amount of lease expense for 2014?

$17,000

What is the carrying value of the lease liability on Reagan's December 31, 2014, balance sheet (after the third lease payment is made)?

$280,531.

On January 1, 2013, Princess Corporation leased equipment to King Company. The lease term is eight years. The first payment of $675,000 was made on January 1, 2013. The equipment cost Princess Corporation $3,600,000. The present value of the minimum lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2014 on this lease?

$293,850.

What is the total effective interest paid over the term of the lease?

$36,718

What would the lessee record as annual depreciation on the asset using the straight-line method, assuming no residual value?

$4,325

On February 1, 2013, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

$540,000.

What would the lessee record as annual depreciation on the asset using the straight-line method?

$6,328.

What is the total interest paid over the term of the lease?

$7,400.

On September 1, 2013, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much rent expense will Custom Shirts recognize for 2013?

$8,000.

What is the outstanding balance after payment 9?

$8,929.

Francisco leased equipment from Julio on December 31, 2013. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2013. The present value of the lease is $1,020,000. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2014?

$807,000

What would be the amount of interest expense recorded with payment 5?

$893.

Refer to the following lease amortization schedule. The five payments are made annually starting with the inception of the lease. A $2,000 bargain purchase option is exercisable at the end of the five-year lease. The asset has an expected economic life of eight years. What is the effective annual interest rate?

10%.

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is non cancelable. What is the effective annual interest rate?

12%

What is the effective annual interest rate charged to Reagan on this lease?

4%.

One of the four criteria for a capital lease specifies that the lease term be equal to or greater than:

75% of the expected economic life of the leased property

One of the four criteria for a capital lease specifies that the present value of the minimum lease payments be equal to or greater than:

90% of the fair value of the asset

Lone Star Company would account for this as

A capital lease

Prepayments made on an operating lease are considered to be:

A prepayment of rent

Recording a sales-type lease is similar to recording

A sale of merchandise on account.

Technoid would account for this as:

A sales-type lease.

A direct financing lease is classified in the lessor's balance sheet as

An asset.

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

Any one of the four criteria specified by GAAP regarding accounting for leases.

If the lessor records unearned rent at the beginning of a lease term, the lease must

Be an operating lease

From the perspective of the lessee, leases may be classified as either:

Capital or operating

On January 1, 2013, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2013, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2013?

Cash 36,000 Unearned rent revenue 36,000

GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type:

Conveys most of the risks and benefits of property ownership

At the inception of a lease agreement, the company's debt to equity ratio and rate of return on assets are both affected whether the lease is classified as a capital lease or as an operating lease.

FALSE

On January 1, 2013, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing lease. Calloway paid $240,000 for the machine and is leasing it to Zone for $34,000 per year, an amount that will return 10% to Calloway. The present value of the minimum lease payments is $240,000. The lease payments are due each January 1, beginning in 2013. What is the appropriate interest entry on December 31, 2013?

Interest receivable 20,600 interest value 20,600

In this situation, Reagan:

Is the lessee in a capital lease.

When a capital lease is first recorded at the inception of the lease, the lessee typically debits:

Leased asset

Crystal Corporation recorded a lease payment as follows:

Operating lease.

From the perspective of the lessor, leases may be classified as either:

Operating, direct financing, or sales-type

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the leased asset should be recorded is the:

Present value of an annuity due table.

The lessee normally measures the lease liability to be recorded as the:

Present value of the minimum lease payments

Leasehold improvements usually are classified in a balance sheet as:

Property, plant, and equipment

Additional lessor conditions for classification as a capital lease are consistent with the criteria of the:

Realization principle.

Distinguishing between operating and capital leases is due in large part to the accounting concept of:

Substance over form.

Capital leases are agreements that are formulated outwardly as leases, but are installment purchases in substance.

TRUE

In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset.

TRUE

In addition to the criteria that must be met by the lessee, the lessor must meet additional conditions for classification as a capital lease to satisfy the realization principle.

TRUE

The criterion of 75% of economic life for classifying a lease as a capital lease is consistent with the basic premise that most of the risks and rewards of ownership occur during the first 75% of an asset's life

TRUE

When accounting for a capital lease, the lessee records the leased asset at the present value of the minimum lease payments or the asset's fair value, whichever is lower

TRUE

Of the four criteria for a capital lease, the one that most often is the decisive criteria is:

The 90% of fair value test

Of the four criteria for a capital lease, which two are not applied if the lease begins during the final quarter of the asset's useful life?

The 90% test and the 75% test.

The four criteria provided in GAAP for distinguishing a capital lease from an operating lease do not include:

The collectibility of the lease payments must be reasonably predictable

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that

The expenses of the capital lease and operating lease are equal

A sales-type lease differs from a direct financing lease in one respect:

The lessor receives a manufacturer's or dealer's profit

Which of the following statements characterizes an operating lease?

The lessor records depreciation and lease revenue

Which of the following is not among the criteria for classifying a lease as a capital lease?

The noncancelable lease term is equal to 90% or more of the expected economic life of the asset.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

Zero, unless a prepayment or accrual is involved.