the helo
Under the shortcut method, the lessee recognizes
rent expense over the lease term
The journal entry to record the lessee's payment on a short-term lease under the shortcut method will include a debit to
rent expense.
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
A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value.
90% or more
In an operating lease, who reports the leased asset on their balance sheet?
The lessor
Which of the following amounts represents the cost of goods sold in a sales-type lease?
The lessor's cost of the leased asset
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.
True or false: A lessee and a lessor will use similar amortization schedules for recording interest.
True
True or false: When a bargain purchase option exists, a renewal option is considered irrelevant because it is assumed that the purchase option will be exercised.
True
A lease structured as an installment purchase is called a(n) lease by the lessee.
finance
Which of the following are required disclosures for lessees and lessors?
future payments for total remaining years description of the leasing arrangements future payments in each of the next 5 years
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 an amount representing
interest and a reduction in the principal
Selling profit exists in a sales-type lease when the
present value of the lease payments is greater than the cost of the asset.
Lease payments are often than installment payments.
smaller
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.
The two basic lease classifications by a lessee are
operating and finance.
The journal entry to record the lessor's receipt of payment on a short-term lease would include which of the following entries?
Credit to lease revenue.
How is lease expense recorded by the lessee in an operating lease?
On a straight-line basis
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
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
The two basic lease classifications by a lessor are
operating and sales-type.
In a finance lease, the lessee reports the interest portion of the payment as a cash outflow from activities, and it reports the portion representing principal repayment as a cash outflow from activities.
operating, financing
In a short-term lease, periodic rental payments are
recorded as rent revenue by the lessor. recorded as rent expense by the lessee.
In a typical finance lease, the first lease payment at the beginning of the lease consists of
reduction in principal only
Which of the following are required disclosures related to leases?
residual values variable lease cost nonlease payments
The lessee records the right-of-use asset as
the present value of lease payments.
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
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:
equipment for $200,000 sales revenue for $320,000
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.
If a leased asset is specialized and has no alternative use to the lessor, then the lessee accounts for it as a(n) lease.
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
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
The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.
implicit
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 interest expense for $20,617
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
The incremental borrowing rate is
the rate the lessee would pay a bank to borrow funds.
Which of the following is true regarding how a lessor reports cash flows from a sales-type lease?
Cash receipts are reported as cash inflows from operating activities.
A lease in which the rights and responsibilities of ownership are retained by the lessor is called a(n) lease.
operating
For a sales-type lease, the lessor should report cash received on the lease as a(n) ______ activity.
operating
In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?
operating
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%
The _____ must disclose its net investment in the lease.
lessor
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
In which of the following ways can a lease be accounted for? (Select all that apply.)
As a rental agreement. As a purchase/sale agreement with debt financing.
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.
Which of the following occur in a lease?
Contractual agreement. Lessee pays the lessor periodic cash payments. Lessee has the right to use an asset for a specified period of time.
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?
Interest expense Amortization expense
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 lease payable. Kluge records a right-of-use 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 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 credit
Lease payable for $431,213
In which type of lease does the lessee report a single straight-line lease expense amount in its income statement?
Operating
In which type of lease does the lessor report a single lease revenue account with a straight-line amount?
Operating
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.
Which of the following amounts represents the selling price in a sales-type lease?
The present value of the lease payments
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
a lease receivable.
For an operating lease, the lessee will report
a single lease expense.
The primary motivation for the new accounting guidance on leases was to
deter the use of off-balance-sheet financing.
In an operating lease, the lessee reports lease and the lessor reports lease , both on a straight-line basis. (Enter only one word per blank.)
expense, revenue
Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply)
fear of obsolescence insufficient cash flow tax benefits lower periodic payments on the asset
The effective interest rate of return the lease payments provide the lessor is referred to as the
implicit rate.
The short-cut method may be applied only if the maximum possible lease term is
less than or equal to twelve months
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
In a lease, the is the owner of the property, whereas the is the user of the property.
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.
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
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(n) lease.
operating
In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.
operating
In which section of the statement of cash flows should a lessee report payments on an operating lease?
operating
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
Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the
remaining economic life.
In an operating lease, the lessor
rents the asset to the lessee for a period of time.
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.
An operating lease is defined as a lease
that does not meet any of the criteria of a finance or sales-type lease.
The should recognize amortization of the right-of-use asset.
lessee
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
At the inception of a finance lease for computer equipment, the lessee should
debit right-of-use asset credit lease payable
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
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, and the first payment is made at the inception of the lease. Mitchell should recognize the second lease payment by
debiting interest expense for $9,741.
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)
debiting lease payable for $100,000 crediting cash for $100,000
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 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
The amortization table for an operating lease allows the lessee to allocate each lease payment to __________ and ________.
interest expense; reduction of the lease liability
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
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, (Select all that apply.)
only the lessee receives the risks and rewards of ownership. it is accounted for as a finance lease.
Amortization of the right-of-use asset for an operating lease
is calculated as the lease payment minus interest expense.
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
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, and the first payment is made at the inception of the lease. Donelson should record which of the following in connection with the second payment?
Credit to lease receivable of $35,259.
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
How is lease revenue recorded by the lessor in an operating lease?
On a straight-line basis
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 method should normally be used to amortize the right-of-use asset?
Straight-line
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.
True or false: The incremental borrowing rate is the rate the lessee would expect to pay a bank if funds were borrowed to purchase the asset.
True
The lessor's receipt of payment on an operating lease is
all recorded as lease revenue.
Periods covered by renewal options
are not included in the lease term if a bargain purchase option is present.
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 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
crediting lease receivable 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.
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 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)
debiting cash for $100,000 crediting deferred lease revenue 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. Tucker should recognize the first lease payment by (Select all that apply)
debiting lease payable for $100,000 crediting 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. Mitchell should recognize the first lease payment on January 1, 20X1 by
debiting lease payable for $45,000.
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(n) . (Enter one word per blank)
lease
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
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, 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. Franz should recognize receipt of the second lease payment by crediting (Select all that apply)
lease receivable for $73,503 interest revenue for $26,497
The lessee amortizes the right-of-use asset over the asset's useful life, when (Select all that apply.)
ownership transfers at the end of the lease term. exercise of a purchase option is reasonably certain.
The right-of-use asset is amortized straight-line, unless the lessee's of using the asset is different.
pattern
When recording a finance lease, the amount initially recognized for the right-of-use asset is the
present value of the lease payments
The periodic lease payment in an operating lease reduces the outstanding lease balance so that at the end of the lease term the outstanding balance is equal to
zero
