int ii unit

A company wishes to avoid classifying a lease as a capital lease.Which criterion will prevent the company from reaching this goal? The lease fails to transfer the property to the lessee. There is a bargain price option. The present value of the minimum lease payments is 80% of the fair value of the leased property. The lease term is 50% of the estimated economic life of the leased property.

! If a lease contains a bargain price option, it is classified as a capital lease.

Company A leases computers from Company B with annual payments of $6,469. The leases are for two years, and the computers have an economic life of three years. At the end of the lease, the computers are expected to have a residual value of $5,000.Company A has an option to purchase the computers for $2,000 at the end of the lease agreement, which it expects to do. The fair value of the lease is $15,000, and the present value of the lease is $12,689. The present value of the option to purchase the computers is $1,849.How should Company A account for the amortization of the computers due to the bargain purchase option? It should amortize $15,000 using the lease term of the computers. It should amortize $14,538 using the lease term of the computers. It should amortize $15,000 using the economic life of the computers. It should amortize $14,538 using the economic life of the computers.

$14,538 = $12,689 + $1,849. Company A amortizes $14,538 using the economic life of the computers because of the bargain purchase option.

Company A leases a piece of machinery to Company B on January 1, Year 1. Information pertaining to the lease is as follows: •The lease is non-cancellable with a term of three years.•The machinery has a cost and fair value at the start of the lease of $40,000; an estimated economic life of five years; and a residual value at the end of the lease of $7,500 (unguaranteed).•The lease contains no renewal options, and the machinery reverts to Company A at the end of the lease.•The present value of the residual value has been calculated as $6,478. How much should Company A record as the right of use asset on January 1, Year 1? $46,478 $32,500 $40,000 $33,522

$33,522 = $40,000 - $6,478. Company A will record the asset at the amount it will recover over the lease payments. This amount is determined by using the fair value of the asset, less the present value of the residual value.

Company A leased a delivery truck from Company B. The initial measurement of Company A's lease liability is $100,000. Company A paid $2,000 to its attorney for legal assistance with the lease agreement. Company B paid $5,000 to Company A as an incentive to lease the vehicle.What is Company A's initial value of its right-of-use asset for the delivery truck? $102,000 $107,000 $97,000 $100,000

$97,000 = $100,000 - $5,000 + $2,000. Initial direct costs should be added to the lease liability, and incentives should be subtracted from the lease liability when measuring the value of the right-of-use asset. This calculation properly includes the initial direct cost and subtracts the lease incentive.

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021, it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $175,820 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co.What is Silver Point's book value of the leased asset at December 31, 2021? $780,000 $499,200 $624,000 $468,000

. Because the lease term is equal to the expected economic life of the asset, this is a finance lease. Silver Point record the asset at the sales price of $780,000 less depreciation in 2021. 100% divided by 5 years is 20% per year or 40% using a double-declining balance method. Therefore, Silver Point's book value is: [$780,000 - (780,000 x 40%)] = $468,000.

For a lessee with a finance lease containing a bargain purchase option, what is the lease asset depreciated over? The term of the lease The life of the asset or the term of the lease, whichever is shorter The asset's remaining economic life The life of the asset or the term of the lease, whichever is longer

A lessee with a finance lease containing a bargain purchase option should depreciate the leased asset over the asset's remaining economic life

For an asset lease with a four-year term, where should a Lease Liability be classified on the balance sheet? Current portions in current liabilities and the remainder in noncurrent liabilities Deferred credits A current liability A noncurrent liability

As with all liabilities, the portion that is payable within the operating cycle or one year, whichever is less, is reported as a current liability. The remaining lease liability is shown as a non-current liability on the balance sheet.

What describes current practice in accounting for leases? All long-term leases are capitalized. Leases similar to installment purchases are capitalized. All leases are capitalized. Leases are not capitalized.

Capitalize all long-term leases. This approach requires the long-term right to use the property in order to capitalize. This property-rights approach capitalizes all long-term leases.

A company is looking for additional guidance on which equipment to lease. The company is using a lessor that has knowledge about the parent's product that can be passed on to the company.Which lessor is being used by the lessee? Credit unions Independents Captive leasing companies Banks

Captive leasing companies have product knowledge that gives an advantage when financing the parent's product.

What is an advantage of captive leasing companies over the other players in the leasing market? They have access to low-cost funds allowing them to purchase assets at lower cost. They have the point-of-sale advantage in finding leasing customers. They provide leasing arrangements for a wider range of products than the parent company's product line. They are good at developing innovative contracts that help avoid accounting problems.

Captive leasing companies have the point-of-sale advantage in finding leasing customers.

Company A agrees to lease a robotic welding unit from Company B on January 1, Year 1. The following conditions apply to the lease: •The term of the lease is five years, is non-cancellable, and requires payments of $101,350 at the beginning of each year.•The robotic welding unit will have a fair value of $50,000 at the end of the lease; an estimated useful life of five years; and $45,000 guaranteed residual value.•There are no renewal options, so the unit will revert to Company B at the termination of the lease.•Company A can borrow at a 5% interest rate.•Company A uses straight-line depreciation on its assets.•Company B set its annual rate of return at 4%, and Company A is aware of this rate.•Present values are as follows:▫Present value of lease payments at 4%: $469,240▫Present value of lease payments at 5%: $460,737▫Present value of residual at 4%: $38,457▫Present value of residual at 5%: $37,021 Which amount should be used to record the lease on January 1, Year 1? $506,750 $469,240 $460,737 $507,697

Company A will record the lease at present value using the known implicit rate of Company B (4%) and will not consider the expected fair value of $50,000 when considering the lease liability.

Company A (lessee) has reached a lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. This is an operating lease with no renewal option and contains the following information: •The lease is for three years, requiring annual payments at the beginning of the year of $10,213.•The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a non-guaranteed residual value of $12,500.•Present value of the residual value is $10,798.•Company B depreciates assets like the boom lift using straight-line depreciation. How should Company B record the lease payments received on January 1, Year 2? Debit Cash for $10,798; Credit Lease Revenue for $10,798 Debit Cash for $8,000; Credit Unearned Lease Revenue for $8,000 Debit Cash for $9,167; Credit Lease Revenue for $9,167 Debit Cash for $10,213: Credit Unearned Lease Revenue for $10,213

Company B will record a debit for the cash received from the lease payment. It will credit the Unearned Lease Revenue account since the payment is on the annuity-due basis.

In order to be an operating lease, the lease must fail all five of the classification tests. Which of the following describes the lease term test? If the lease term is 60% or less of the economic life, it is a finance lease If the asset has an alternative use during the lease term, it is a finance lease If there is a bargain purchase option during the lease term, it is an operating lease If the lease term is 75% or more of the economic life, it is a finance lease

If the lease term greater than or equal to the majority (75%) of the remaining economic life of the asset, the lease fails the lease term test and the lease is classified as a finance lease.

In a finance lease, what does the lessee record? Amortization expense and interest expense Lease expense only Amortization expense only Interest expense only

In a finance lease, the lessee records both amortization and interest expense.

n an operating lease, what does the lessee record? Lease expense Lease expense and amortization expense Interest expense Interest expense and amortization expense

In an operating lease, the lessee records the lease expense.

In computing the present value of the lease payments, which rate should the lessee use? The implicit rate of the lessor, assuming that the implicit rate is known to the lessee The incremental borrowing rate in all cases The incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee The implicit rate in all cases

In computing the present value of the lease payments, the lessee should use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

A lessor incurs $10,000 of initial direct costs related to an operating lease.How should the $10,000 cost be treated? Expense the cost in the period in which the lessor recognizes the profit from the sale. Add the cost to the net investment in the lease and amortize it over the life of the lease as a yield adjustment. Defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue. Allocate the cost using the straight-line method to each period of the lease and expense it each period.

Initial direct costs are allocated in proportion to rental revenue and expenses over the term of the lease.

Company A leases cars from Company B for their salespeople. The leases are for three years. Company A paid a commission to a third party for helping to negotiate the leases from Company B.How should Company A account for this commission? Include the commission in the amount for the right-of-use asset and in the lease liability Exclude the commission in the amount for the right-of-use asset and from the lease liability Include the commission in the amount for the right-of-use asset but not in the lease liability Exclude the commission in the amount for the right-of-use asset but include it in the lease liability

Initial direct costs like commissions are included for the right-of-use asset but are not included in the lease liability.

A start-up company is trying to decide if it should purchase or lease cellular phones for its 2,500 new employees.Which decision should the company make? Lease, because leasing can pass the risk of residual value to the lessor Lease, because leasing requires a larger down payment, but smaller monthly payments Purchase, because purchasing creates current tax benefits for a new company with no taxable income Purchase, because purchasing equipment offers the flexibility of only using the equipment the desired amount of time

Leasing reduces the risk of obsolescence to the lessee.

What is an advantage of leasing? Leases often require a down payment. Leases offer protection again restrictive provisions. Leases offer protection against obsolescence. Lease agreements contain more restrictive provisions than other debt agreements.

Protection against obsolescence is an advantage of leasing.

A sales-type lease has an unguaranteed residual value at the end of the lease term. At which amount would the lessor report sales revenue in the period of the inception of the lease? The present value of the lease payments plus the present value of the unguaranteed residual value The sales price less the present value of the residual value The cost of the asset to the lessor, less the present value of any unguaranteed residual value The lease payments plus the unguaranteed residual value

Sales revenue of a sales-type lease is determined by calculating the sales price minus the present value of the residual value of the asset at the end of the lease.

Which amount should be recorded as the cost of an asset under a finance lease? Present value of the lease payments Present value of the lease payments or the fair value of the asset, whichever is lower Present value of the lease payments plus the present value of any unguaranteed residual value Carrying value of the asset on the lessor's books

The amount to be recorded as the cost of an asset under a finance lease is equal to the present value of the lease payments.

Which two finance lease elements are a part of each lease payment? A reduction of the lease liability and the financing cost (interest expense) An adjustment to the residual value and the right-of-use An increase in the lease liability and the financing cost (interest expense) A reduction of the lease liability and a valuation adjustment

The company and landlord have a gross lease for the warehouse. The landlord is responsible for accounting for the property insurance and property taxes.

On January 1, Year 1, a corporation signed an agreement to lease a delivery truck for 36 months. The fair market value of the truck was $80,000 as of January 1, Year 1. The corporation estimates that the truck's fair market value will be $20,000 on December 31, Year 3. The corporation is reasonably certain it will exercise the lease option to purchase the delivery truck for $1,000 at the end of the lease.How will the corporation report lease payments in its income statement? As lease expense Partially as rent expense and partially as interest expense Partially as amortization expense and partially as interest expense As interest expense

The fact pattern indicates a purchase option that the company is reasonably certain to exercise. Thus, it is appropriate to classify the lease as a finance lease and to report the payments in this manner.

Which of these would be included in the Lease Receivable account?• I. Guaranteed residual value• II. Unguaranteed residual value• III. Overhead costs• IV. Rental payments I and II only II, III, and IV I and III only I, II, and IV

The following would be included in the Lease Receivable account: I. Guaranteed residual value and II. Unguaranteed residual value and IV. Rental payments.

A company is leasing cars for four years at an agreed price of $500 per month, per car. The company provides the option to lease one additional year for $100 per month, per car. Each car has a useful life of six years. The company classifies the lease as a finance lease based on a specific test.Which test did the company use for this purpose based on the information provided? Purchase option Lease term Transfer of ownership Alternative use

The lease is five out of the six years, which is greater than 75% of the asset's useful life.

Company A agrees to lease racks to Company B for five years. The expected economic life of the racks are five years. At the end of the lease, Company B has the right to purchase the racks for $5,000, but the company is not certain it will exercise the right.Which test does the lease pass to be classified as a finance lease? Purchase option Alternative use Transfer of ownership Lease term

The lease term is for 100% of the expected economic life of the racks, so it meets the requirements of the lease term test.

Metcalf Company leases a machine from Vollmer Corp. under an agreement that meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of $170,000 for six years at 8% is $848,761. The present value of an annuity due of $170,000 for six years at 10% is $814,435. The present value of an annuity due of $145,000 for six years at 8% is $723,943. The present value of an annuity due of $145,000 for six years at 10% is $694,664.At which value should Metcalf record the leased asset? $694,664 $723,943 $848,761 $814,435

The lessor sets the terms of the lease and, therefore, the lessor's rate of 8% is used. Metcalf's lease payable will include amounts associated with maintenance, insurance, and taxes. Those amounts would be expenses in the period the payment is made. Therefore, Metcalf should report the leased asset on its balance sheet at $848,761.

Company A has agreed to lease a full body scanner from Company B. The lease has the following information: •The lease is for three years, requiring annual payments at the beginning of the year of $6,352.•At the end of the lease, Company B may purchase the scanner for $5,000, and the company feels certain it will exercise this right.•The scanner has a fair value at the beginning of the lease of $25,000; an estimated economic life of five years; and a guaranteed residual value of $7,800.•Present value of the scanner is $18,333. Which test does the lease pass in order to be classified as a finance lease? Purchase option Present value Transfer of ownership Lease term

The purchase option test is met if Company B is certain it will exercise the right to purchase the scanner at the end of the lease.

Hull Co. bought equipment and immediately leased it to Riggs Company on May 1, 2021. At that time, the collectibility of the lease payments was NOT probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2021, of $4,900,000. Hull's depreciation on the equipment in 2021 was $630,000. During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2021. After the lease with Riggs expires, Hull will lease the equipment to another company for two years.What is Hull's income before income taxes related to his lease for the year ended December 31, 2021? $518,000 $630,000 $1,148,000 $1,260,000

This is an operating lease because the lease does not pass any of the classification tests. (1) The ownership of the asset remains with Hull, (2) there is no purchase option, (3) the lease term is less than 75% of the economic life of the asset, (4) the total payments (and therefore the present value of the payments) of $1,260,000 is less than the fair value of the asset of $5,600,000, and (5) the asset is not specialized and is expected to have an alternate use after the end of Riggs' lease term. Therefore, the Hulls' revenue related to the lease with Riggs is the number of lease payments less any expenses related to the leased asset. $1,260,000 - $112,000 - $630,000 = $518,000.

A lessor leases a piece of equipment to a lessee, under lease terms that qualify as an operating lease. The present value of required rental payments is $280,000; and the present value of the estimated residual value, which is unguaranteed, is $30,000. The lessor incurred total costs of $160,000 to build the leased asset.Which amount of lease receivable, if any, should the lessor record? $160,000 $0 $310,000 $280,000

Under an operating lease, the lessor does not recognize a lease receivable because the asset never left the books