ACC 3120 - SB CH 15

When the lessee is given the option of purchasing the leased property at a price significantly lower than its fair value, a _____ is present.

bargain purchase option

The _____ must disclose its net investment in the lease.

lessor

A _____ is a lease provision giving the lessee the option to buy the leased property at the end of the lease term at a specified exercise price.

purchase order

Which of the following are required disclosures related to leases?

variable lease cost residual values nonlease payments

The right-of-use asset is amortized straight-line, unless the lessee's _ of using the asset is different.

Blank 1: pattern or manner

Which of the following is true regarding how a lessor reports cash flows from a sales-type lease?

Cash receipts are reported as cash inflows from operating activities.

True or false: The incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments.

False

How is lease revenue recorded by the lessor in an operating lease?

On a straight-line basis

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)

Update the right-of-use asset for the increase in present value Reclassify from an operating lease to a finance lease

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

all recorded as lease revenue.

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

as a rental or a purchase/sale.

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.

An operating lease

is similar to a typical rental agreement.

For a sales-type lease, the lessor should report cash received on the lease as a(n) ______ activity.

operating

In which section of the statement of cash flows should a lessee report payments on an operating lease?

operating

In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?

operating

In a typical finance lease, the first lease payment at the beginning of the lease consists of

reduction in principal only

The ______ of leased property is an estimate of what its commercial value will be at the end of the lease term.

residual value

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

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? (Select all that apply.)

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

the _ residual value is a commitment by the lessee that the lessor will recover a specified residual value at the end of the lease term. (Enter one word per blank)

Blank 1: guaranteed

The accounting for finance leases is similar to the purchase of an asset using an _ note.

Blank 1: installment

THE _ should recognize amortization of the right-of-use asset.

Blank 1: lessee

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

Blank 1: lessor or owner Blank 2: lessee or user

Lease payments are often _ than installment payments.

Blank 1: lower, less, or smaller

A lease in which the rights and responsibilities of ownership are retained by the lessor is called a(n) _ lease

Blank 1: operating

A lease that is more true to the nature of a rental agreement is called a(n) _ lease.

Blank 1: operating

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 occur in a lease?

Lessee has the right to use an asset for a specified period of time. Contractual agreement. Lessee pays the lessor periodic cash payments.

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

Straight-line

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

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)

crediting cash for $100,000 debiting lease payable for $100,000

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.

Which of the following are required disclosures for lessees and lessors?

description of the leasing arrangements future payments in each of the next 5 years future payments for total remaining years

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

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

nonlease component

In a finance lease, the lessee records the interest portion of payments as a cash outflow from _____ activities, and the principal portion as a cash outflow from _____ activities on the Statement of Cash Flows.

operating; financing

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

periodic lease payments residual value

The lessor's gross investment in the lease is the total of periodic rental payments

plus any residual value.

The lessee records the right-of-use asset as

present value of the lease payments

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

present value of the lease payments

Selling profit exists in a sales-type lease when the

present value of the lease payments is greater than the cost 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

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

A lease structured as an installment purchase is called a(n) _ lease by the leesee.

Blank 1: finance or financing

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.

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

operating

Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the

remaining economic life.

In a finance lease, the lessee reports the interest portion of the payment as a cash outflow from _ activities, and it reports the portion representing principal repayment as a cash outflow from _ activites.

Blank 1: operating Blank 2: financing or finance

If a lease modification substantially lengthens the amount of time the lessee has the right to use an asset, it is possible that the lessee might need to switch its lease classification from _ TO _ .

Blank 1: operating or operating lease Blank 2: finance, sales-type, finance/sales-type, finance lease, or finance/sales type lease

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.

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.)

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

On January 1, Smith Co leased equipment from Bentley Corp. The lease agreement includes four annual payments beginning at the inception of the lease. The estimated useful life of the equipment is 7 years. The lease does not contain a purchase option. The present value of the minimum lease payments is $400,000. The fair value of the asset is $500,000. What type of lease is this for Smith Co?

Operating lease

How does a residual value in a finance/sales-type lease affect the lessee?

The lessee lease payments are lower.

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.

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

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

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

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.

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

does not include

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.

The ______ is a commitment by the lessee that the lessor will recover a specified residual value when the asset is returned to the lessor.

guaranteed residual value

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

Legal fees for executing lease documents, and the preparation and processing cost of lease documents are referred to as

initial direct costs.

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

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

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

interest and a reduction in the principal

The short-cut method may be applied only if the maximum possible lease term is

less than or equal to twelve months

The _____ subtracts the present value of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments.

lessor

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

reduces

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

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.

Residual value is an estimate of

the commercial value of an asset at the end of the lease term

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 lease term includes

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

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

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

//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

//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

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

//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

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

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

The accounting in which of the following parallels that of an installment purchase?

Finance lease

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

Increases.

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

Which one of the following will determine classification of a lease transaction as a finance lease?

The asset is of a very specialized nature and will have no alternative use to the lessor.

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

reduces

True or false: The exercise of a bargain purchase option is reasonably certain.

True

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.

Initial direct costs incurred by the lessee are

added to the right-of-use asset

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

are not

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)

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

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

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. 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 North Company record the first payment? (Select all that apply)

debit maintenance expense $5,000 credit cash $105,000 debit lease payable $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 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 first lease payment by (Select all that apply)

debiting lease payable for $100,000 crediting cash for $100,000

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)

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

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

irrelevant

A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)

lease.

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

The two basic lease classifications by a lessee are

operating and finance. operating and sales-type.

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

the straight-line lease payment.