ACCT 3230 - Chapter 15 - LearnSmart

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 of $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%?

$300,000 - $50,000=$250,000/4.46511 = $55,990

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

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 accumulated depreciation for $142,857 -debit cost of goods sold for $357,143 -credit asset $500,000 -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 (round to the nearest whole dollar and select all that apply)

-lease payable for $79,383 -interest expense for $20,617

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

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 an estate gift. As a rental agreement. As a purchase/sale agreement with debt financing. As a purchase/sale agreement with equity financing.

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

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?

Credit equipment $500,000. Debit lease receivable $500,000.

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 does the bargain purchase option affect the calculation of the amount to be recovered through periodic rental payments for the lessor?

Decreases

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

True or false: The residual value of a leased asset impacts the lessee's calculation of effective interest.

False

In which type of lease does the lessee report interest expense and amortization expense separately in the income statement?

Finance

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

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? (Select all that apply.)

Fit Company records lease expense when the variable lease payment is paid. Lease Corp records lease revenue when the variable lease payment is received.

How does the bargain purchase option affect the calculation of the present value of the lease payments for the lessee?

Increases

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 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

Which of the following would justify reassessment of a lease term?

Leasehold improvements

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

Match the treatment of initial direct costs incurred by the lessor with the correct lease classification.

Sales-type lease with selling profit matches Choice, Expensed at the beginning of the lease Expensed at the beginning of the lease Sales-type lease with no selling profit matches Choice, Deferred and expensed over the lease term by increasing the lease receivable Deferred and expensed over the lease term by increasing the lease receivable Operating lease matches Choice, Deferred and expensed over the lease term typically on a straight-line basis Deferred and expensed over the lease term typically on a straight-line basis

Which method should normally be used to amortize the right-of-use asset?

Straight-line

Which of the following are criteria for classification as a finance lease?

The lease includes a purchase option the lessee is reasonably certain to exercise. Ownership of the asset transfers to the lessee. The present value of the total lease payments is greater than substantially all of the fair value of the asset.

How should the lessee account for an expected cash payment when the value of the leased asset at the end of the lease is expected to be less than the guaranteed residual value?

The lessee should increase the right-of-use asset and lease liability by the present value of the expected cash payment.

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.

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

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

If the lease term includes a bargain purchase option that is reasonably expected to be exercised, when does the lease term end for accounting purposes?

When the option becomes exercisable

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.

Initial direct costs incurred by the lessee are

added to the right-of-use asset

The lessor's receipt of payment on an operating lease is

all recorded as lease revenue.

The rights granted to a lessee under a finance lease ____________ the same as those granted to a company that purchases an asset.

are not

Periods covered by renewal options _______________

are not included in the lease term if a bargain purchase option is present

If a lease payment depends on an index or rate, any change in the lease payments due to changes in that index or rate (select all that apply)

are used to calculate the right-of-use asset and lease liability only if they are remeasured for another reason. is reported as additional lease expense for the lessee and lease revenue for the lessor.

Depending on the nature of the leasing agreement, a lease is accounted for

as a rental or a purchase/sale.

Initial direct costs include (Select all that apply)

costs that would not have been incurred if the lease agreement did not exist costs associated with completing the lease agreement costs necessary to acquire the lease

On January 1, Year 1, Samuel Company leases equipment from Lease Corp. The lease agreement specifies five annual payments of $50,000, with the first payment due at lease signing (January 1, Year 1), and at each January 1 from Year 2 to Year 5. At the end of the lease term, the equipment will be returned to the lessor and is expected to have a residual value of $30,000. The estimated useful life of the equipment is six years. The interest rate in the financing arrangement is 6%. The cost to Lease Corp of manufacturing the equipment is $150,000. The journal entry for the Lessor on January 1, Year 1 will include the following in its entry:

credit equipment $150,000 credit sales revenue $223,255 debit lease receivable $245,673

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

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 Lease Corp record the first payment? (Select all that apply)

debit cash $105,000 credit maintenance fee payable $5,000 credit lease receivable $100,000

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, 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

An advanced payment on an operating lease should be classified by the lessor as

deferred rent revenue

Sales revenue for the lessor _________ the expected residual value to be recovered

does not include

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

A lease structured as an installment purchase is called a ___________ lease by the lessee.

finance

A bargain purchase option is a provision in a lease contract that

gives the lessee the right to purchase the leased asset at a price significantly less than the expected fair value of the property.

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.

The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.

implicit

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

After the first lease payment, each lease payment in a finance lease consists of an amount representing

interest and a reduction in the principal

A guaranteed residual value ___________ the calculation of the present value of the lease payments when comparing that amount to the fair value of the asset in determining lease classification.

is included in

The _________ should recognize amortization of the right-of-use asset.

lessee

A lease is a contractual agreement by which a ______________ provides a ______________ the right to use an asset for a specified period of time.

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.

When a portion of the lease payment represents the transfer of a good or service to the lessee, it is considered a

noblesse component

In a(n) _______________ lease, recording lease expense should reflect straight line rental of the asset during the lease term.

operating

Which of the following would be included in the lessor's gross investment in the lease?

periodic lease payments residual value

Selling profit exists in a sales-type lease when the

present value of the lease payments is greater than the cost of the asset.

The present value of a residual asset in a lease

reduces the lessee's lease payments regardless of guarantee. -provides a source of recovery of the lessor's investment regardless of guarantee.

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

Under the shortcut method, the lessee recognizes

rent expense over the lease term

An advanced payment on an operating lease is allocated to _____ over the lease term by the lessor.

rent revenue

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.

The lease term includes

the contractual term of the lease any periods covered by options to extend with significant incentive.

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 incremental borrowing rate is

the rate the lessee would pay a bank to borrow funds.

In an operating lease, interest expense plus amortization expense is equal to

the straight-line lease payment.

If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over

the useful life of the asset

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%?

$500,000 - $40,000 = $460,000/4.79079 = $96,018

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.

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? (Select all that apply)

debit maintenance expense $5,000 debit lease payable $100,000 credit cash $105,000

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

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 Taylor address this lease modification? (Select all that apply)

Reclassify from an operating lease to a finance lease. Update the right-of-use asset for the increase in present 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? (Select all that apply)

When the lease is modified giving the lessee an additional right-of-use. When the lease term is reassessed and changed.

On January 1, Year 1, Samuel Company leases equipment from Lease Corp. The lease agreement specifies five annual payments of $50,000, with the first payment due at lease signing (January 1, Year 1), and at each January 1 from Year 2 to Year 5. At the end of the lease term, the equipment will be returned to the lessor and is expected to have a residual value of $30,000. The estimated useful life of the equipment is six years. The interest rate in the financing arrangement is 6%. The cost to Lease Corp of manufacturing the equipment is $150,000. The journal entry for the Lessor on January 1, Year 1 will include the following in its entry:

credit equipment $150,000 debit lease receivable $245,673 credit sales revenue $223,255

The rate of interest incurred by the lessee if funds were borrowed to purchase the leased asset is known as the ______ rate.

incremental borrowing

When there is a change in the lease term, the _____ is required to reassess the classification of the lease. A _____ is not permitted to reassess its initial determination of the lease term

lessee; lessor

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.

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

A purchase option (Select all that apply)

includes a specified exercise price. gives the lessee the option to purchase the asset during the lease term or at the end of the lease.

Lessees prefer the ______ lease classification because it defers expense recognition, as compared to the ______ lease classification, which "front loads" lease expense due to higher interest expense in early years and straight-line amortization expense.

operating; finance

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

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

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? (Select all that apply)

-debit right-of-use asset for $200,000 -credit lease payable for $200,000

Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

Debit lease receivable matches Choice PV of lease payments plus the PV of the residual value PV of lease payments plus the PV of the residual value Debit cost of goods sold matches Choice, Lessor's cost of the equipment less the PV of the residual value Lessor's cost of the equipment less the PV of the residual value Credit sales revenue matches Choice, Sales less the PV of the residual value Sales less the PV of the residual value Credit Inventory matches Choice, Lessor's cost of equipment Lessor's cost of equipment

Smith leases a piece of equipment from Marvin Company. The lease has a bargain purchase option which is expected to be exercised at the end of the lease. The useful life of the equipment is 10 years and the lease term is 8 years. Which number of years should be used to compute amortization?

10

If future lease payments are uncertain, they are considered as part of present value calculations only if they

are in-substance fixed payments.