ACTG 15 Chap

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

Which method should normally be used to amortize the right-of-use asset?

Straight-line

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.

Periods covered by renewal options

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

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

as a rental or a purchase/sale.

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

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

should recognize amortization of the right-of-use asset.

lessee

The two basic lease classifications by a lessor are

operating and sales-type.

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

operating lease

If a lease does not meet any of the criteria to be classified as a finance or sales-type lease, it is classified as a(n)

operating lease

In an operating lease, interest expense plus amortization expense is equal to

the straight-line lease payment.

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.

75% or more

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

Answer Mode Multiple Choice QuestionYour Answer incorrect 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

How is lease revenue recorded by the lessor in an operating lease?

On a straight-line basis

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

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. Ownership of the asset transfers to the lessee.

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.

For an operating lease, the lessee will report

a single lease expense.

The lessor's receipt of payment on an operating lease is

all recorded as lease revenue.

The accounting for finance leases is similar to the purchase of an asset using an

installment note.

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 second lease payment by debiting (round to the nearest whole dollar and select all that apply)

interest expense for $20,617 lease payable for $79,383

An operating lease

is similar to a typical rental agreement.

In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.

operating

The lessee records the right-of-use asset as

the present value of lease payments.

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

90% or more

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?

Amortization expense Interest expense

In an operating lease, the lessee reports lease--------and the lessor reports lease

Blank 1: expense Blank 2: revenue

The right-of-use asset is amortized straight-line, unless the lessee's

Blank 1: pattern or manner

Rights and responsibilities of ownership are transferred to the lessee.

Finance or sales-type

In which type of lease does the lessee report a single straight-line lease expense amount in its income statement?

Operating

Rights and responsibilities of ownership are retained by the lessor.

Operating matches

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

irrelevant

The two basic lease classifications by a lessee are

operating and finance.

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

remaining economic life.

The rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.

are not

True or false: When a bargain purchase option exists, a renewal option is considered irrelevant because it is assumed that the purchase option will be exercised.

True

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

implicit

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.

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 debit

Right-of-use asset for $431,213 Reason: $100,000 x 4.31213 (PV of lease payments, 8%, 5 years)

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

implicit rate.

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

Finance lease

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

debiting interest expense for $9,741.

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 lease payment is $100,000. Tucker should recognize the first lease payment on January 1, 20X1 by (Select all that apply)

debiting lease payable for $100,000 crediting cash for $100,000

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 Reason: The present value of the minimum lease payments (3.67301 x 10,000 = $36,730) is less than substantially all of the fair value of the leased asset Also, there is no transfer of title, and no purchase option. Therefore, it is an operating lease.

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

present value of the lease payments

The lessee's payment in an operating lease is

reported as a single lease expense. allocated between interest expense and amortization for the right-of-use asset.

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

debiting lease payable for $45,000.

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 lease payment is $100,000; the first payment is due on January 1, 20X1. Tucker should recognize the second lease payment by debiting (Select all that apply.)

interest expense for $26,497 lease payable for $73,503

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

Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Lease Corp account for this lease modification? (Select all that apply)

credit sales revenue for $300,000 debit accumulated depreciation for $142,857 credit asset $500,000 debit lease receivable for $300,000 debit cost of goods sold for $357,143

Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Taylor account for this lease modification? (Select all that apply)

credit lease payable for $200,000 debit right-of-use asset for $200,000

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 ____________.

equivalent to a sale.

In which type of lease does the lessee report interest expense and amortization expense separately in the income statement?

Finance