Chapter 15 Leases

If a finance lease contains a bargain purchase option, the lessee should amortize the leased asset:

Over the economic life of the asset

The two basic lease classifications by a lessee are

operating and finance

The five criteria for finance lease

(1) Ownership transfers to the lessee at the end of the lease (2) the lease contains a bargain purchase option (3) The lease term is more than 75% of the economic life of the asset (4) the present value of the lease payments are substantially all of the fair value of the asset 90% (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

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 an operating lease in which the asset's economic life and lease term are different:

The lessee amortizes the leased asset at an amount that increases each period

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

When the rights and responsibilities of ownership are retained by the lessor, the lease is classified as a(n) ______ lease.

operating

When recording a finance lease, the amount initially recognized for the right-of-use asset is the

present value of the lease payments

Advantages of leasing include (5)

- reduces the upfront cash needed to use an asset. - lease payments often are lower than installment payments. - offers flexibility and a lower cost when disposing of the asset. - protection against the risk of declining asset values. - tax advantages.

A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value.

90% or more

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.) A. it is accounted for as a finance lease. B. it is accounted for as an operating lease. C. only the lessee receives the risks and rewards of ownership. D. only the lessor receives the risks and rewards of ownership.

A, C

When calculating the amount to capitalize as a right-of-use asset at the beginning of the lease term, the payment called for by the bargain purchase option should be:

added at its present value