IA Ch. 15 SB

Initial direct costs include (Select all that apply)

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

At the inception of a finance lease for computer equipment, the lessee should

-credit lease payable -debit right-of-use asset

When a lease includes a termination penalty,

-the penalty amount is considered an additional cash payment if the lessee is reasonably certain to terminate the lease. -the lease term ends on the expected termination date.

Which of the following are required disclosures related to leases?

-variable lease cost -residual values -nonlease payments

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

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

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.

Which of the following amounts represents the selling price in a sales-type lease?

The present value of the lease payments

Cloud Corp. sold its equipment and immediately leased it back. The leaseback portion of the transaction was classified as an operating lease. The original cost of the equipment was $300,000. At the time of sale, the equipment had a carrying value of $200,000. The sale price was $250,000. Cloud should

credit gain on sale-leaseback for $50,000 at the time of sale.

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

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

In a direct financing lease, the lessor's primary involvement in the lease is providing financing in exchange for --- ---

interest revenue

From an accounting standpoint, legal ownership of a leased asset is _____ to the accounting method used.

irrelevant

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

In an operating lease, who reports the leased asset on their balance sheet?

lessor

The _____ must disclose their lease transactions and regular transactions separately.

lessor

In which of the following ways can a lease be accounted for? (Select all that apply.)

-As a purchase/sale agreement with debt financing. -As a rental agreement.

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

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.

Which of the following occur in a sale-leaseback transaction?

-The lessee receives cash from the sale of the asset. -The lessee pays periodic rental payments.

When is a lease considered a direct financing lease? (Select all that apply.)

-When a third party guarantees the residual value. -When control is not transferred to the lessee. -It is probable that the lessor will collect the lease payments.

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

The lease term includes

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

The most common reasons for a sale-leaseback transaction are to

-cash -refinance at a lower rate.

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

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

A purchase option (Select all that apply)

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

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.

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 present value of a residual asset in a lease

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

In a short-term lease, periodic rental payments are

-recorded as rent expense by the lessee. -recorded as rent revenue by the lessor.

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.

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

90% or more

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%?

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

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.`

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

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. Reason: Second payment of $45,000 is comprised of the interest portion of $9,741 [($239,826-45,000) x 0.05], with the remainder reducing the lease receivable

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

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 Reason: $100,000x4.31213 (PV of lease payments, 8%, 5 yrs)

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 Reason: $100,000 x 4.31213 (PV of lease payments, 8%, 5 years)

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.

Who is the initial owner of the asset in a sale-leaseback transaction?

The lessee.

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.

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

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 Reason: $431,213/5 yrs

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, 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.

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

decreases

Sales revenue for the lessor ________ the expected residual value to be recovered.

does not include

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

Sometimes a lease agreement includes a commitment by the lessee that the lessor will recover a specified amount when the asset is returned. This is known as

guaranteed residual value.

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 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

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

A lease is classified as a finance lease by the lessee and a sales-type lease by the lessor if the present value of _____ constitutes "substantially all" of the fair value of the asset.

lease payments including any lessee-guaranteed residual value

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

leasehold improvements

The lessee records an asset and liability for operating leases under

new GAAP

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

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

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 Reason: The present value of the minimum lease payments (3.67301 x 10,000 = $36,730) is less than substantially all of the fair value of the leased asset Also, there is no transfer of title, and no purchase option. Therefore, it is an operating lease.

The two basic lease classifications by a lessee are

operating and finance.

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments.

reduces

When the lessor calculates the periodic lease payments, the present value of the bargain purchase option should be

subtracted from the amount to be recovered through periodic rental payments.

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.

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

-debiting cash for $100,000 -crediting lease receivable for $100,000

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

-residual value -periodic lease payments

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

A lessee makes improvements to leased property. At the end of the lease the property reverts back to the lessor. How should the costs of the improvements be classified?

Capitalize and amortize over asset useful life to the lessee.

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 Reason: $239,826/6 years

IFRS requires lessees to apply a --- ---approach to lease accounting, whereby lessees account for all leases as finance leases.

one model

Roots, Inc. needed to improve its cash position. Thus, on December 31, it decided to sell one of its warehouses for its fair value of $250,000, and lease it back from the purchaser. Prior to sale, the warehouse had a carrying value of $220,000 (original cost $260,000). Under the 7 year lease agreement, Roots will make annual payments of $33,799, beginning the date of the lease signing. The annual lease payments provide the lessor with a 6% rate of return. On December 31, the date of the lease signing, Roots should

record a gain on sale of $30,000 record a cash outflow of $33,799

If a bargain purchase option is expected to be exercised, the lease term ends

when the option becomes exercisable.

The amortization table for an operating lease allows the lessee to allocate each lease payment to __________ and ________.

-interest expense; reduction of the lease liability

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply)

-lower periodic payments on the asset -fear of obsolescence -tax benefits -insufficient cash flow

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

Under IFRS, a lessee will remeasure the variable lease payments that depend on an index or rate

when the right-of-use asset is remeasured and when there is a change in cash flows resulting from a change in index or rate.

Which of the following are criteria for classification as a finance lease? (Select all that apply.)

-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.

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?

-debit lease receivable $500,000 -credit equipment $500,000

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 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

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

increase

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

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)

-Record a lease receivable for the present value of remaining lease payments -Reclassify from an operating lease to a sales-type lease

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, 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)

-interest revenue for $26,497 Reason: 0.08($431,213-$100,000) -lease receivable for $73,503 Reason: $100,000-$26,497

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)

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

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

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%?

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

IFRS allows the short-cut method on leases if

-the lease term is 12 months or less and does not include a purchase option. -the lease has a value of $5,000 or less.

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:

-debit lease receivable $245,673 PV of payments: $50,000 x 4.46511 = $223,255 plus the PV of residual: $30,000 x 0.74726 = $22,418 = $245,673 -credit sales revenue $223,255 - credit equipment $150,000

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 Taylor account for this lease modification? (Select all that apply)

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

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 Reason: 0.08($431,213-$100,000) -lease payable for $73,503 Reason: $100,000-$26,497

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)

-nterest expense for $20,617 Reason: ($357,710-$100,000)x.08 -lease payable for $79,383 Reason: $100,000-$20,617

Under _________, a lessee remeasures the variable lease payments that depend on an index or rate whenever there is a change in the cash flows resulting from a change in that index or rate; however, under ________ a lessee only remeasures the variable lease payments that depend on an index or rate when the lessee remeasures the ROU asset and lease liability for other reasons.

IFRS; US GAAP

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