Chapter 15 Leases

On January 1, 2013, Evergreen Company leases an asset from Rocky, Inc. The asset leased is a special computer server with an estimated useful life of 6 years. The lease agreement specifies six annual payments of $320,000 beginning January 1, 2013, the inception of the lease, and at each December 31 thereafter through 2017. The present value of these payments at the appropriate interest rate is $1,078,158. Prior to signing the lease agreement, Evergreen Company considered purchasing the server for its cash price of $1,078,158. If Evergreen Company were to borrow the money to purchase the server the bank would charge a 10% interest rate. Which of the following entries will Evergreen Company record at the lease inception date, January 1, 2013? $320,000 debit to cash. $1,920,000 credit to lease payable. $1,078,158 credit to leased asset. $1,078,158 debit to leased asset.

$1,078,158 debit to leased asset. The company will record the following entries to record the capital lease on January 1, 2013: Leased Asset 1,078,158 Lease Payable 1,078,158 Lease Payable 320,000 Cash 320,000

On January 1, 2013, Evergreen Company leases an asset from Rocky, Inc. The asset leased is a special computer server with an estimated useful life of 6 years. The lease agreement specifies six annual payments of $211,000 beginning January 1, 2013, the inception of the lease, and at each December 31 thereafter through 2017. The present value of these payments at the appropriate interest rate is $963,658. Prior to signing the lease agreement, Evergreen Company considered purchasing the server for its cash price of $963,658. If Evergreen Company were to borrow the money to purchase the server the bank would charge a 10% interest rate. Which of the following entries will Evergreen Company record at December 31, 2013 when it makes its second lease payment? $211,000 debit to cash. $96,366 debit to interest expense. $135,734 debit to lease payable. $75,266 credit to interest expense.

$135,734 debit to lease payable The company will record the following entry to record the 2nd lease payment on December 31, 2013: Interest expense ($963,658 - 211,000 = $752,658 × 10%) 75,266 Lease Payable 135,734 Cash 211,000

On January 1, 2013, Evergreen Company leases an asset from Rocky, Inc. The asset leased is a special computer server with an estimated useful life of 6 years. The lease agreement specifies four annual payments of $206,000 beginning January 1, 2013, the inception of the lease, and at each January 1 thereafter through 2016. The present value of these payments at the appropriate interest rate is $697,970. Prior to signing the lease agreement, Evergreen Company considered purchasing the server for its cash price of $961,158. If Evergreen Company were to borrow the money to purchase the server the bank would charge a 10% interest rate. Which of the following entries will Evergreen Company make at the lease inception date, January 1, 2013? $697,970 credit to cash. $206,000 debit to prepaid rent. $697,970 debit to leased asset. $961,158 debit to leased asset.

$206,000 debit to prepaid rent. Because the lease fails to meet any of the capital lease criteria, the company will record the following entry when it makes the initial payment on January 1, 2013: Prepaid rent 206,000 Cash 206,000

Evergreen Company leases an asset from Rocky, Inc. The terms of the lease include monthly payments of $1,260 for a period of 4 years. Additionally, the lease includes a bargain purchase option for $7,960 at the end of the lease term. Separately, Evergreen Company leases another asset from Mountain Corporation. This lease calls for monthly payments of $1,040 for a period of 7 years on an asset with an 8 year useful life. Additionally, the lease provides for an unguaranteed residual value of $920 at the termination of the lease term. Evergreen Company's periodic lease payments for these two leases include all of the following except a.$2,300 monthly payments. b.$920 unguaranteed residual value. c.$7,960 bargain purchase option. d.All of the choices are included in the minimum lease payments.

$920 unguaranteed residual value.

what would be included in the lessors gross investment in the lease

1. guaranteed residual value 2. bargain purchase option

On January 1, 2013, Rosalie's Ice Cream Company acquired a package-labeling machine from Labels, Inc. under a three-year lease that required six semiannual rental payments of $74,179 each. Labels, Inc. ordinarily sells this machine for $350,317; therefore the interest rate implicit in this transaction is 14.60%. If Rosalie's Ice Cream Company records the lease as a capital lease, which of the following will be made to record the first payment on June 30, 2013?

A debit to Interest Expense for $25,573 The first payment is recorded by using the following journal entry: Interest expense ($350,317 × 7.3% = $25,573) 25,573 Lease Payable 48,606 Cash 74,179

On January 1, 2013, Rosalie's Ice Cream Company acquired a package-labeling machine from Labels, Inc. under a three-year lease that required six semiannual rental payments of $71,429 each. Labels, Inc. ordinarily sells this machine for $340,817; therefore the interest rate implicit in this transaction is 13.93%. If Rosalie's Ice Cream Company records the lease as a capital lease, which of the following will be made to record the transaction?

A debit to Leased Machine for $340,817. The lease is recorded as a capital lease by using the following journal entry: Leased Machine 340,817 Lease payable 340,817

The minimum lease payments include all of the following except? The total of periodic rental payments. Any guaranteed residual value. Any bargain purchase option price. All of the choices are included in the minimum lease payments.

All of the choices are included in the minimum lease payments.

Leasehold improvements

Are improvements made by a lessee to leased property that reverts to the lessor.

Which of the following statements is correct regarding accounting for leases?

The essential question in determining if a lease is a capital or an operating lease is whether the usual risks and rewards of ownership have been transferred to the lessee. Leasing follows the accounting concept of substance over form. The essential question in determining if a lease is a capital or an operating lease is whether the usual risks and rewards of ownership have been transferred to the lessee.

Which of the following statements is not one of the criteria for classification as a capital lease a. The agreement contains a bargain purchase option. b. The agreement specifies that ownership of the asset remains with the lessor. c. The non cancelable lease term is equal to 75% or more of the life of the asset. d. All of the choices are correct regarding the classification criteria for leases.

b. The agreement specifies that ownership of the asset remains with the lessor. One of the criteria for classification as a capital lease is that the agreement specifies that ownership of the asset transfers to the lessee.

Payson corp leased equipment to Marsh for 3 years for $5,000. the lease was classified as an operating lease. At the inception of the lease Payson received $5,000 Paysons journal entry at the inception of the lease will include which entries

credit unearned revenue for $5,000 (if you credit rent revenue there would be no adjusting entry at year end) debit cash for $5,000

On January 1, 2013, Evergreen Company leases an asset from Rocky, Inc. The asset leased is a special computer server with an estimated useful life of 6 years. The lease agreement specifies four annual payments of $206,000 beginning January 1, 2013, the inception of the lease, and at each January 1 thereafter through 2016. The present value of these payments at the appropriate interest rate is $697,970. Prior to signing the lease agreement, Evergreen Company considered purchasing the server for its cash price of $961,158. If Evergreen Company were to borrow the money to purchase the server the bank would charge a 10% interest rate. At December 31, 2013, how much depreciation expense will Evergreen Company record on its books? a. $116,328 b. $160,193 c. $174,493 d. $0

d. $0 Because the lease fails to meet any of the capital lease criteria, the company will not record the asset on its books, nor will it depreciate the asset. The asset remains on the books of the lessor company and will be depreciated by the lessor company.

a basic concept of classifying a lease is substance over

form

a bargain option is a provision in a lease contract that

gives the lessee the right to purchase the leased asset at a significantly reduced price, less than the fair value.

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

incremental borrowing rate

a lease that is accounted for as a rental agreement is classified as a ___________ lease whereas a lease that is accounted for as a purchase accompanied by financial debt is classified as a _________ lease

operating / capital

when the rights and risks of ownership are retained by the lessor the lease is classified as a .....

operating lease

lessor

owner of the rental property

lessee

user of the rental property