ch 15

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

insufficient cash flow fear of obsolescence tax benefits lower periodic payments on the asset No additional fees Avoiding the risk of decreasing selling prices

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

less than or equal to twelve months

How is lease expense recorded by the lessee in an operating lease?

on a straight-line basis

When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a

sale-leaseback

The lease term includes

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

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

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

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:

40000

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:

70000

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.

Which of the following type of leases follows the same accounting method as that of an installment purchase?

Finance lease

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

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

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

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

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

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

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.

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

interest and a reduction in the principal

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

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

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 option

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

reduction in principal only

___________ ___________ is an estimate of a leased asset's commercial value at the end of the lease term.

residual value

Lease payments are often ________ than installment payments.

smaller

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.

Which of the following occur in a lease?

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

The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.

implicit

The ___________ should recognize amortization of the right-of-use asset.

lessee

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

lessor

Lease payments are often ___________ than installment payments.

cheaper

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

operating

If a lease does not meet any of the criteria to be classified as a finance or sales-type lease, it is classified as a(n) ________ lease

operating

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

operating

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.

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)

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

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

Straight-line

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 PMT by (Select all that apply)

debiting cash for $100,000 crediting deferred lease revenue 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 FIRST LEASE PMT by (Select all that apply)

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

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

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.

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

installment

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

operating

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

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 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