IA 2 Ch. 15

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

irrelevant

If a modification grants the lessee an additional right of use, the original lease is...

terminated and a new lease is created based on the modified arrangement

Classification of a financing lease

1. Agreement specifies that ownership of the assets transfers to the lessee 2. The agreement contains a purchase option that the lessee is reasonable certain to exercise 3. The lease term is for the "major part" (75%) of the remaining economic life of the asset 4. The present value of the total of the lease payments equals or exceeds "substantially all" (90%) of the fair value of the underlying asset 5. The underlying asset is of such specialized nature that it is expected to have no alternative use to the lessor at the end of the leaser term

Why lease? 5 reasons

1. Leasing reduces the upfront cash needed to use an asset 2. Lease payments often are lower than installment payments 3. Leasing offers flexibility and a lower cost when disposing of the asset 4. Leasing might offer protection against the risk of declining asset values 5. Leasing might offer tax advantages

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

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

In its income statement, what two amounts does the lessee combine into a single lease expense amount reported as a straight-line amount each period when accounting for an operating lease?

Interest expense Amortization expense

Credit Inventory

Lessor's cost of equipment

Debit cost of goods sold

Lessor's cost of the equipment less the PV of the residual value

Credit sales revenue

Sales less the PV of the residual value

Short term lease

a lease for less than 1 year

Accounting for leases attempts to see through the legal form of the agreements to determine their....

economic substance

Under the IFRS, what lease can the lessee only classify

financing

Why do operating leases avoid front loading?

it defers expense recognition, making net income higher in the early years of the lease

In a sales-type lease with no selling profit, initial direct cost is expensed

over the lease term

residual asset

the present value of the residual value of a leased asset

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

Decreases

Cash Flow Statement: Finance Leases

Financing activities

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

Increases

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

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

Debit lease receivable

PV of lease payments plus the PV of the residual value

Which of the following were the criteria used to classify a capital lease under preexisting GAAP? (Select all that apply.)

The lease term is for 75% or more of the useful life of the leased asset. Title to the property transfers at the end of the lease period. The lease contains a bargain purchase option. The present value of the minimum lease payments is 90% or more of the fair value of the leased asset.

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.

purchase option

a price specified in a lease at which the lessee can buy the car at the end of the lease term

The terms of a finance lease: 1.) allow the ________ use of the asset where the lessee receives all of the benefits from the asset 2.) create ________ for the lessee that are similar to those that financing the purchase of an asset would impose

a. direct b. obligations

Periods covered by renewal options

are not included in the lease term if a bargain purchase option is present.

An apartment rental is a ___________ arrangement

contractual

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

initial direct costs.

4 reasons for leasing an asset rather than purchasing an asset?

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

In an operating lease, what does the Lessor record for the first journal entry?

nothing

When the rights and responsibilities of ownership are retained by the lessor, the lease is classified as a(n) ______ lease.

operating

Cash Flow Statement: Sales-Type Leases

operating activities

The two basic lease classifications by a lessor are

operating and sales-type.

In an operating lease, initial direct costs are expensed

over the lease term

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

plus any residual value.

Bargain Purchase Option (BPO)

provision in the lease contract that gives the lessee the option of purchasing the leased property at a bargain price.

In a short term lease, the lessee can elect not to record right-of-use asset and lease payable at the beginning of the lease term, but instead ........

record lease payments as expense as they occur

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

remaining economic life.

residual value

the estimated value of a fixed asset at the end of its useful life

When a leased asset is returned at the end of the lease term and the actual residual value is less than the initial estimated residual value, _____ for the difference between estimate and actual.

the lessor records a loss

Which of the following was one of the four criteria used to determine if a lease was a capital lease under preexisting GAAP?

The lease term is 75% or more of the economic life of the asset.

Cash Flow Statement: Operating leases

Operating activities

Purchase option

a price specified in a lease at which the lessee can buy the car at the end of the lease term

In a sales-type lease that includes selling profit, initial direct cost is expensed

at the beginning

Initial direct costs

costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire the lease.

substance over form

courts look to the intent of parties involved and adhere to a standard of good faith and fair play instead of applying the letter of the law in a way that would violate fundamental principles of fairness and consistency

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)

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

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.