Chp. 15 Smartbook

Lease

A contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time is called a(n)?

Financing lease

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

finance lease Reason: Since title transfers at the end of the lease term, the lease is a finance lease.

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?

Lower

Lease payments are often....than installment payments.

debiting lease payable for $45,000.

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

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 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

Finance lease

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

the present value of lease payments.

The lessee records the right-of-use asset as?

Leasehold improvements

Which of the following would justify reassessment of a lease term? Residual value Leasehold improvements Purchase option Change in incremental borrowing rate

debit right-of-use asset for $120,000 credit lease payable for $120,000

Sarah Company leases a machine with a fair value of $200,000 from Eden Inc. The present value of the future lease payments is $120,000. At the inception of the lease, Sarah should (Select all that apply.)

operating and finance.

The two basic lease classifications by a lessee are?

operating and sales-type.

The two basic lease classifications by a lessor are?

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.

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

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

Which one of the following will determine classification of a lease transaction as a finance lease? Multiple choice question. The asset is of a very specialized nature and will have no alternative use to the lessor. Ownership of the asset remains with the lessor at the end of the lease. The present value of the lease payments is 50% of the fair value of the leased asset. The lease term is for 50% of the remaining economic life of the leased asset.

Lessee

Who makes cash payments for use of the asset during a lease?

equivalent to a sale.

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 ____________. Multiple choice question. equivalent to a sale. a bargain purchase option. non-cancelable. an operating lease.

reduction in principal only Annuity due no interest accrued in first payment

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

lessor, lesse

In an operating lease, the............. , records no asset or liability at the inception of the lease and the..............records both.

The lessor

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

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

In which of the following ways can a lease be accounted for? (Select all that apply.) Multiple select question. As a purchase/sale agreement with debt financing. As a purchase/sale agreement with equity financing. As an estate gift. As a rental agreement.

debiting amortization expense of $39,971 Reason: $239,826/6 years

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

Operating lease

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?

implicit interest rate

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

Finance/Sales-type

What type of lease involves a "front loading" of lease expense and revenue due to higher interest in the earlier stages of the lease?

Straight-line

Which method should normally be used to amortize the right-of-use asset? Multiple choice question. Straight-line Sum of the years' digits Productive output method Double-declining balance method

75% or more

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.

Deferred rent revenue. Reason: The lessor does not record a lease receivable for an operating lease

An advanced payment on an operating lease should be classified by the lessor as? rent expense for the period. a lease receivable. deferred rent revenue. a contra-asset.

8% Reason: The lessee uses the interest rate implicit in the lease when known.

First Lease Corp. leases equipment to Taylor. The interest rate implicit in the loan is 8% and is known to both parties. Taylor's incremental borrowing rate is 10%. Market rate on similar leases is averaging 9%. What interest rate should Taylor use to compute the present value of lease payments?

A single lease expense.

For an operating lease, the lessee will report? separate interest expense and amortization expense on the right-of-use asset. separate interest expense and depreciation expense on the right-of-use asset. a single lease expense.

Purchase option

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.

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

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?

Structuring transactions to keep assets and liabilities off the balance sheet by leasing rather than buying them.

Off-balance-sheet financing refers to the practice of? Intentionally misreporting the assets and liabilities involved in a transaction involving the purchase of long-lived assets. Recording assets and liabilities in a separate accounting journal. Structuring transactions to keep assets and liabilities off the balance sheet by leasing rather than buying them.

no entry to remove the asset from the balance sheet

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

rent expense.

The journal entry to record the lessee's payment on a short-term lease under the shortcut method will include a debit to Multiple choice question. depreciation expense. lease obligation. interest expense. rent expense.

10

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?

Credit to lease revenue.

The journal entry to record the lessor's receipt of payment on a short-term lease would include which of the following entries? Credit to lease receivable. Credit to depreciation expense. Credit to interest income. Credit to lease revenue.

90% or more

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

not make any journal entry Reason: No entry to record a right-of-use asset and liability because the lease has a term (including any options to renew or extend) of twelve months or less.

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?

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

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 cash for $45,000. Credit to lease receivable of $35,259. Debit to lease receivable of $45,000. Credit to interest revenue of 11,991.

lessee's balance sheet as an asset.

A lessee makes leasehold improvements to leased property that will revert back to the lessor at the end of the lease. During the term of the lease, the leasehold improvements are reported on the?

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, and the first payment is made at the inception of the lease. Mitchell should recognize the second lease payment by