AC 311 Chapter 15

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

Initial indirect costs include

- costs that would not have been incurred if the lease did not exist - costs associated with completing the lease agreement - costs necessary to acquire the lease

On January 1, 2018, 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 lease payment is $100,000. Franz should recognize receipt of the first lease payment on January 1 by

- debit cash for $100,000 - credit lease receivable for $100,000

Sarah Company leases a machine with a fair value of $200,000 from Eden Inc. The present value of the future lease payments in $120,000. At the inception of the lease, Sarah should

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

Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should credit

- equipment for $200,000 - sales revenue for $320,000

The lessee amortizes the right of use asset over the assets useful life when

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

In a short-term lease, periodic rental payments are

- recorded as a rent expense by the lessee - recorded as rent revenue by the lessor

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

What are the classifications that determine a finance lease?

1. ownership of the asset transfers to the lessee 2. agreement contains a purchase option 3. lease term is at least 75% of remaining life 4. present value of lease payments equals or exceeds fair value of asset 5. specialized nature that prevents alternative use

A reasonable conclusion is that __________ of the fair value of the asset amount to "substantially all" of the fair value

90% or more

Initial direct costs incurred by the lessee are

added to the right of use asset

How is amortization expense computed on the right of use asset by the lessee in an operating lease?

as the payment less the interest expense

Both the lessee and the lessor use the same amortization schedule for a finance/sales-type lease. The lessee records interest __________ and the lessor records interest __________.

expense, revenue

In an operating lease, the lessee reports lease _________ and the lessor reports lease __________, both on a straight-line basis.

expense, revenue

t/f: The incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments.

false

Corr Inc. leases equipment for 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?

finance lease

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

initial direct costs

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

interest and a reduction in the principal

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

lessor, lessee

When a portion of a lease payment represents the transfer of a good or service to the lessee, it is considered a

nonlease component

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

on a straight-line basis

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 calls a(n) __________ lease.

operating

The two basic lease classifications by a lessee are

operating and finance

Lessor

owner of the property

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

remaining economic life

An advanced payment on an operating lease is allocated to __________ over the lease term by the lessor.

rent revenue

The right of use asset is amortized over what period when ownership transfers at the end of the lease?

the assets estimates useful life

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

the lessor

The lessee records the right of use asset as

the present value of the lease payments

t/f: The incremental borrowing rate is the rate the lessee would expect to pay a bank if funds were borrowed to purchase the asset.

true

Lessee

user o the property

The cost of a leasehold improvement is depreciated or amortized over its __________ to the lessee.

useful life