FAR CHP 13 Leases and Contingencies

On June 1, Oren Co. entered into a 5 year nonrenewable operating lease commencing on that date, for office space and made the following payments to Rose Properties Bonus to obtain lease 30,000 First months rent 10,000 Last months rent 10,000 The lease term required monthly rent payments of 10,000. In its income statement for the year ended June 30, what amount should Oren report as lease expense?

$10,500 Monthly rent + initial direct cost amortized = Lease expense 10,000 + ( 30,000 ÷ 5) ÷ 12 = 10,500

Wall Co. leased office premises to Fox Inc, for a 5 year term beginning January 2, Year 4. Under the terms of the operating lease, rent for the first year is $8,000 and rent for years 2 through 5 is 12,500 per annum However, as an inducement to enter the lease, Wall granted Fox the first 6 l9 ths of the lease rent free. I its December 31, year 4 income statement, what amount should Wall report as rental income?

$10,800 Year 1 rent 8,000 Free rent (8,000×.5) (4,000) Year 2 - 5 Rent (12,500 × 4) 50,000 Divided by total period ÷ 5 years

Quick Company's lease payments are made at the end of each period. Quick's liability for a capital lease will be reduced periodically by the

Lease payment less the portion of the lease payment allocable to interest

A lessee had a 10 year finance lease requiring equal annual payments. The reduction of the lease liability in Year 2 should equal

The current liability shown for the lease at the end of Year 1

Riley, LLC , ( lessee) entered into a 5 year operating lease on January 1, year 1. Annual lease payments of $40,000 are due on December 31 each year. Initial direct costs related to the lease incurred by Tilet are $20,000. The rate implicit in the lease is 8%. The present value of an ordinary annuity at 8% for 5byears is 3.9927 What is the annual lease expense for Riley, LLC?

$ 44,000 Undiscounted lease payment + initial direct costs ÷ Lease term= annual lease expense ($40,000 × 5 + 20,000) ÷ 5 years = 44,000 ​

On January 1, year 1 Alla Co. sold a property to Mish Co. for $400,000 and simultaneously leased it back for 3 years. The carrying amount of the property was $280,000 and it's fair value was $310,000. The leaseback was properly classified as an operating lease. What amount of gain on sale of the property was recognized by Alla on January 1, year 1?

$30,000 Fair Value 310,000 - Carrying Amount 280,000 = 30,000

On June 1 of the current year, a company entered into a real estate agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, the company must pay 28,900 per month for 56 months beginning October 1 of the current year. The lease term spans 5 years. The compa y has a calendar year end. What amount is the company's lease expense for the current calendar year?

$188,813 Operating lease a single equal lease expense is recognized by the lessee in each period. Monthly Fee x number of months= Cost of lease 28,900 x 56 months = 1,618,400 Cost of leases ÷ lease term= Monthly expense 1,618,400 ÷ 60 months (5 years)= 26,973.33 Monthly expense x number of months used = current lease expense for year 26,973.33 x 7 months ( June 1 - December 31) = 188,813

On December 29, Year 1, Action Corp. signed a 7 year lease for an airplane to transport its professional sports team around the country. The airplane fair value was $841,500. Action made the first annual lease payment of $153,000 on December 31 year 1. Actions incremental borrowing rate was 12% and the interest rate implicit in the lease, which was k kwn by Actio was 9%. The following are the rounded present value factors for an annuity due: 9% for 7 years 5.5 12% for 7 years 5.1 What amount should Action report as a lease liability in its December 31, year 1 balance sheet?

$688,500 lease payment x present value 153,000 x 5.5 = 841,500 Present value - payment = Lease liability 841,500 - 153,000 = 688,500

On December 30, Rafferty Corp. leases equipment under an operating lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment's useful life is 10 years and the inte8rate implicit in the lease of 10% is known to Rafferty. The operating lease obligation was recorded on December 30 at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this lease in its December 31 balance sheet?

$8,500 Opening balance- initial payment = lease liability 135,000 - 20,000 = 115,000 Lease liability x effective rate = interest expense 115,000 × 10% = 11,500 Cash payment- interest expense = current liabilities 20,000 - 11,500 = 8,500

Rent should be reported by the lessor as revenue over the lease term as it becomes receivable according to the provision of the lease for a(n)

Direct Financing Lease- No Operating Lease- Yes Sales Type Lease- No

An entity is currently being sued by a customer A reliable estimate can be made of the costs that would result from a ruling unfavorable to the entity and the amount involved is material. The entity's managers lawyers and auditors agree that the likelihood of an unfavorable ruling is remote. The contingent liability

Need not be disclosed

Which of the following is a condition for a lessee to elect an accounting policy not to recognize the right of use asset and lease liability?

The lease had a tern of 12 months or less at the commencement date.

A seller- lessee and buyer- lessor entered into a sale and leaseback transaction. The leaseback is classified ad an operating lease, and the initial transfer meets the requirements for recognition of revenue from customers. When the transaction is not a fair value or based on market terms

The seller lessee recog9a financial liability if the selling price exceeds the fair value of the asset.

Cott, Inc. prepared an interest amortization table for a 5 year lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error? ​

Tje beginning present value of the lease did not include the present value of the payment called for by the purchase option .

On January 1, year 1, JCK Co. signed a contract for an 8 year lease of its equipment with a 10 year life. The present value of the 16 equal semiannual payments in advance equal 85% of the equipment's fair value. The contract had no provision for JCK, the lessor to gove up legal ownership of the equipment. Should JCK recognize rent or interest in Year 3, and should the revenue recognized in year 3 be the same or smaller than the revenue in year 2?

Year 3 Revenues Recognized- Interest Year 3 amount recognized Compared with year 2- Smaller