Smartbook Ch 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
Samuel Company leased equipment from Lease Corp. The cost of the equipment to Lease Corp was $300,000. Lease Corp will require Samuel to make the first payment on the day of the lease signing (January 1 of Year 1), with the next four payments due on January 1 of Years 2 - 5. At the end of Year 5, the equipment is expected to have a residual value, present value being $50,000. The estimated useful life of the equipment is seven years. If the five lease payments are of an equal amount, what payment amount provides Lease Corp with a return of 6%?
$55,990 Reason: $300,000 - 50,000 = $250,000/4.46511 = $55,990
Smith Company leased equipment from FirstLease Corp. The cost of the equipment to FirstLease was $500,000. The present value of the expected residual value is $40,000. The lease includes six annual payments beginning on the first day of the lease. If the six lease payments are of an equal amount, what payment amount would provide FirstLease Corp with a return of 10%?
$96,018 Reason: $500,000-40,000 = $460,000/4.79079 = $96,018
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
In which of the following ways can a lease be accounted for?
As a rental agreement. As a purchase/sale agreement with debt financing.
Lease Corp leases equipment to Samuel Company in a sales-type lease. The present value of the lease payments is $250,000. The lease includes an unguaranteed residual value with a present value of $50,000. The rate implicit in the contract is 6% and the lease term is five years. Which of the following are included in the journal entry for Lease Corp to record this lease?
Credit equipment $300,000
True or false: The residual value of a leased asset always impacts the lessee's accounting.
False
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: Reason: The implicit rate is the desired rate of return of the lessor.
Which of the following type of leases follows the same accounting method as that of an installment purchase?
Finance lease
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.
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
Who makes cash payments for use of the asset during a lease?
Lessee
Which of the following are possible reasons for leasing an asset rather than purchasing an asset?
Lower periodic payments on the asset Higher debt to asset ratios Tax benefits Avoiding the risk of decreasing selling prices No additional fees
The two basic lease classifications by a lessee are
Operating and Finance
Lessor
Owner of the property
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? (Select all that apply)
Reclassify from an operating lease to a sales-type lease Record a lease receivable for the present value of remaining lease payments
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
Which one of the following will determine classification of a lease transaction as a finance lease?
The asset is of a very specialized nature and will have no alternative use to the lessor.
How does a residual value in a finance/sales-type lease affect the lessee?
The lessee lease payments are lower.
Which of the following are criteria for classification as a finance lease? (Select all that apply.)
The present value of the total lease payments is greater than substantially all of the fair value of the asset. Ownership of the asset transfers to the lessee. The lease includes a purchase option the lessee is reasonably certain to exercise.
Lessee
User of the property
How does the bargain purchase option affect the calculation of the amount to be recovered through periodic rental payments for the lessor?
decreases
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
An additional cash payment is _____ when a bargain purchase option is included in the lease agreement.
expected
In an operating lease, the lessee reports lease ___________ and the lessor reports lease __________ , both on a straight-line basis.
expense; revenue
A lease structured as an installment purchase is called a(n) __________ lease by the lessee.
finance
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.
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
The ______ is a commitment by the lessee that the lessor will recover a specified residual value when the asset is returned to the lessor.
guaranteed residual value
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.
After the first lease payment, each lease payment in a finance lease consists of an amount representing
interest and a reduction in the principal
From an accounting standpoint, legal ownership of a leased asset is _____ to the accounting method used.
irrelevant
An operating lease
is similar to a typical rental agreement.
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, Ludwig Corporation should record
lease receivable
The short-cut method may be applied only if the maximum possible lease term is
less than or equal to twelve months
The _____ subtracts the present value of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments.
lessor
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
The two basic lease classifications by a lessor are
operating and sales-type.
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 records the right-of-use asset as
present value of the lease payments
When recording a finance lease, the amount initially recognized for the right-of-use asset is the
present value of the lease payments
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
Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the
remaining economic life
How is lease expense recorded by the lessee in an operating lease?
straight line basis
How is lease revenue recorded by the lessor in an operating lease?
straight line basis
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.
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.
The accounting for finance leases is similar to the purchase of an asset using an ________ note.
installment
Lease payments are often _________ than installment payments.
lower
An operating lease is defined as a lease:
that does not meet any of the criteria of a finance or sales-type lease.
Smith Company leased equipment from FirstLease Corp. The cost of the equipment to FirstLease was $500,000. The present value of the expected residual value is $40,000. The lease includes six annual payments beginning on the first day of the lease. If the six lease payments are of an equal amount, what payment amount would provide FirstLease Corp with a return of 10%?
$96,018
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
Which of the following are criteria for classification as a finance lease?
Ownership of the asset transfers to the lessee. The lease includes a purchase option the lessee is reasonably certain to exercise. The present value of the total lease payments is greater than substantially all of the fair value of the asset.
The rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.
are not
Depending on the nature of the leasing arrangement, a lease is accounted for
as a rental or a purchase/sale.
Sarah Company leases a machine with a fair value of $200,000 from Eden Inc. The present value of the future lease payments is $120,000. At the inception of the lease, Sarah should (Select all that apply.)
credit lease payable for $120,000 debit right-of-use asset for $120,000
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 first lease payment by (Select all that apply)
debiting lease payable for $100,000 crediting cash for $100,000
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.
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
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 (round to the nearest whole dollar and select all that apply)
lease payable for $79,383 Reason: $100,000-$20,617 interest expense for $20,617 Reason: ($357,710-$100,000)x.08
The _____ adds the present value of the bargain purchase option to the present value of periodic rental payments when computing the amount to be recorded as a right-of-use asset and a lease liability.
lessee
The ________ should recognize amortization of the right-of-use asset.
lessee
Lease payments are often ___________ than installment payments.
lower
The right-of-use asset is amortized straight-line, unless the lessee's ___________ of using the asset is different.
pattern
Selling profit exists in a sales-type lease when the
present value of the lease payments is greater than the cost of the asset.
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
When the lessee is given the option of purchasing the leased property at a price significantly lower than its fair value, a _____ is present.
bargain purchase option
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
The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.
implicit
The lease term includes
the contractual term of the lease. any periods covered by options to extend with significant incentive.
In an operating lease, interest expense plus amortization expense is equal to
the straight-line lease payment.
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.