McGrawl Hill Financial Accounting Chapter 15

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

Which of the following are required disclosures related to leases?

nonlease payments residual values variable lease cost

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

residual lease

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

residual value

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?

10

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

implicit

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

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

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

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

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

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

The _____ must disclose its net investment in the lease.

lessor

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.

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

operating

The two basic lease classifications by a lessee are

operating and finance.

The lessee amortizes the right-of-use asset over the asset's useful life, when (Select all that apply.)

ownership transfers at the end of the lease term. exercise of a purchase option is reasonably certain.

In an operating lease, the lessor

rents the asset to the lessee for a period of time.

The lessee records the right-of-use asset as

the present value of lease payments.

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

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

as a rental or a purchase/sale.

At the inception of a finance lease for computer equipment, the lessee should

credit lease payable debit right-of-use asset

An operating lease

is similar to a typical rental agreement.

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 lease payable. Kluge records a right-of-use asset.

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 credit

Lease payable 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. Lessee pays the lessor periodic cash payments. Contractual agreement.

Which of the following best describes the period over which the right-of-use asset is amortized when ownership transfers at the end of the lease?

The asset's estimated useful life

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

True

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.)

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

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

finance

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

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

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

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

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

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

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. Tucker should allocate the cost of the right-of-use asset annually by (round to a whole dollar)

debiting amortization expense for $86,243

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

operating

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

Selling profit exists in a sales-type lease when the

present value of the lease payments is greater than the cost of the asset.

A bargain purchase option is a provision in a lease contract that

gives the lessee the right to purchase the leased asset at a price significantly less than the expected fair value of the property.

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

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

debiting amortization expense of $39,971

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)

debiting cash for $100,000 crediting deferred lease revenue for $100,000

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)

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 lessor are

operating and sales-type.

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.

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.

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. Ownership of the asset transfers to the lessee. The lease includes a purchase option the lessee is reasonably certain to exercise.

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.

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?

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

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 effective interest rate of return the lease payments provide the lessor is referred to as the

implicit rate.

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

present value of the lease payments

If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over

the useful life of the asset.