Intermediate Accounting II Chapter 15

Norma Manufacturing Company leases an asset to Maren Inc in a sales-type lease. The present value of the lease payments is $200,000 and the cost of the leased asset is $160,000. At the beginning of the four-year lease term, Norma should recognize a profit of:

-40,000

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

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

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

-90% or more

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 of the following is true regarding how a lessor reports cash flows from a sales-type lease?

-Cash receipts are reported as cash inflows from operating activities.

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

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

True or false: The residual value of a leased asset impacts the lessee's calculation of effective interest.

-False Reason: The lessee's accounting is unaffected by the residual value other than it causes the lessee's payments to be lower.

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

-irrelevant

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

-remaining economic life.

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

-remaining economic life.

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

-residual value

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

-residual value

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.

The lease term is typically considered to be...

-the contractual term of the lease plus any periods covered by options to extend if extension is reasonably certain to occur.

The lease term includes...

-the contractual term of the lease. any periods covered by options to extend with significant incentive.

The lessee records the right-of-use asset as....

-the present value of lease payments.

Which of the following are required disclosures related to leases?

-variable lease cost -residual values -nonlease payments

Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value .

Debit lease receivable --> PV of lease payments plus the PV of the residual value 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 Credit Inventory --> Lessor's cost of equipment

Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

Debit lease receivable --> PV of lease payments plus the PV of the residual value 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 Credit Inventory --> Lessor's cost of equipment

True or false: When a bargain purchase option is present, the lessor subtracts the future value of the exercise price from the amount to be recovered to determine the amount to be recovered through rental payments.

False -The lessor subtracts the present value.

Match the treatment of initial direct costs incurred by the lessor with the correct lease classification.

Sales-type lease with selling profit matches --> Expensed at the beginning of the lease Sales-type lease with no selling profit --> Deferred and expensed over the lease term by increasing the lease receivable Operating lease --> Deferred and expensed over the lease term typically on a straight-line basis

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

-Finance lease

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.

Fit Company leases building space from Lease Corp. Fit Company agrees to pay Lease Corp an additional amount if Lease Corp attracts a higher amount of traffic through the doors resulting in more profit for Fit Company. How are these variable lease payments treated?

-Lease Corp records lease revenue when the variable lease payment is received -Fit Company records lease expense when the variable lease payment is paid

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

-On a straight-line basis

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

-On a straight-line basis

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%?

-Reason: $300,000 - 50,000 = $250,000/4.46511 = $55,990

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%?

-Reason: $500,000-40,000 = $460,000/4.79079 = $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 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)

Operating (lease)

-Rights and responsibilities of ownership are retained by the lessor.

Finance or sales-type (lease)

-Rights and responsibilities of ownership are transferred to the lessee.

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.

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. -Ownership of the asset transfers to the lessee. -The present value of the total lease payments is greater than substantially all of the fair value of the asset.

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

Which of the following was not a criteria used to determine if a lease was a capital lease for the lessee under preexisting GAAP?

-The lease term is for the major part of the remaining economic life of the leased asset.

How does a residual value in a finance/sales-type lease affect the lessee?

-The lessee lease payments are lower.

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

-The lessor

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.

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

-The present value of the minimum lease payments is 90% or more of the fair value of the asset

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

-True Reason: The discount price is significantly below market value making the exercise of the option reasonably assured.

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 three years, and to change the amount of lease payments. The additional three years were not originally an option. How should Taylor address this lease modification? (Select all that apply)

-Update the right-of-use asset for the increase in present value -Reclassify from an operating lease to a finance lease

When is a nonlease component of a lease agreement recorded separately from the lease payments?

-When the amount represents transfer of a good or service 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

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.

Initial direct costs incurred by the lessee are...

-added to the right-of-use asset.

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

-are not

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

-as a rental or a purchase/sale.

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

-as a rental or a purchase/sale.

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

Initial direct costs include (Select all that apply)

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

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 lease payable $100,000 -debit maintenance expense $5,000

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

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 Lease Corp record the first payment? (Select all that apply)

-credit maintenance fee payable $5,000 -debit cash $105,000 -credit lease receivable $100,000

On January 1, Year 1, Samuel Company leases equipment from Lease Corp. The lease agreement specifies five annual payments of $50,000, with the first payment due at lease signing (January 1, Year 1), and at each January 1 from Year 2 to Year 5. At the end of the lease term, the equipment will be returned to the lessor and is expected to have a residual value of $30,000. The estimated useful life of the equipment is six years. The interest rate in the financing arrangement is 6%. The cost to Lease Corp of manufacturing the equipment is $150,000. The journal entry for the Lessor on January 1, Year 1 will include the following in its entry:

-credit sales revenue $223,255 -credit equipment $150,000 -debit lease receivable $245,673

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?

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

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?

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

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

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

-decreases Reason: The present value of the exercise price is deducted from the amount to be recovered

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

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

Sales revenue for the lessor ________ the expected residual value to be recovered.

-does not include

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.

An additional cash payment is _____ when a bargain purchase option is included in the lease agreement.

-expected

In an operating lease, the lessee reports lease ________and the lessor reports lease ________ , both on a straight-line basis.

-expense; revenue

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

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

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

A purchase option (Select all that apply)

-gives the lessee the option to purchase the asset during the lease term or at the end of the lease. -includes a specified exercise price.

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.

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

Sometimes a lease agreement includes a commitment by the lessee that the lessor will recover a specified amount when the asset is returned. This is known as...

-guaranteed residual value.

Agatha Corp. leases store space from Christie Company. Agatha agrees to pay $10,000 per month. In addition, if Agatha exceeds specified sales targets, it will pay additional monthly rent based on a percentage of those excess sales. The additional rent payments...

-have no effect on the lessee's lease liability and lessor's lease receivable.

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

-implicit

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

-implicit rate

The present value of the residual value is ______ in/from the lease receivable, and it is ______ in/from sales and cost of goods sold for the lessor.

-included; excluded

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

-initial direct costs.

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

-installment

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply)

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

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

-interest and a reduction in the principal

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 Reason: ($357,710-$100,000)x.08 -lease payable for $79,383 Reason: $100,000-$20,617

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

The short-cut method may be applied only if the maximum possible lease term is...

-less than or equal to 12 months

The _____ adds the present value of the bargain purchase option to the present value of periodic rental payments when computing the amount to be recorded as a right-of-use asset and a lease liability.

-lessee

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

-lessee

The _____ must disclose its net investment in the lease.

-lessor

A lease is a contractual agreement by which a(n) ____________provides a(n) ___________the right to use an asset for a specified period of time.

-lessor, lessee

Lease payments are often _________ than installment payments.

-lower

Lease payments are often__________ than installment payments.

-lower

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.

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

-nonlease component

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 called a(n) ______ lease

-operating

For a sales-type lease, the lessor should report cash received on the lease as a(n) ______ activity.

-operating

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) _______ lease

-operating

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

-operating

In which section of the statement of cash flows should a lessee report payments on an operating lease?

-operating

In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?

-operating

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 lessee are...

-operating and finance.

The two basic lease classifications by a lessor are...

-operating and sales-type.

If a lease modification substantially lengthens the amount of time the lessee has the right to use an asset, it is possible that the lessee might need to switch its lease classification from ________ to ________.

-operating; finance

In a finance lease, the lessee records the interest portion of payments as a cash outflow from _____ activities, and the principal portion as a cash outflow from _____ activities on the Statement of Cash Flows.

-operating; financing

In a finance lease, the lessee reports the interest portion of the payment as a cash outflow from ________ activities, and it reports the portion representing principal repayment as a cash outflow from ________ activities.

-operating; financing

Which of the following would be included in the lessor's gross investment in the lease?

-periodic lease payments -residual value

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

-present value of the lease payments

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 _____ is a lease provision giving the lessee the option to buy the leased property at the end of the lease term at a specified exercise price.

-purchase option

The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments.

-reduces

The present value of a residual asset in a lease...

-reduces the lessee's lease payments regardless of guarantee -provides a source of recovery of the lessor's investment regardless of guarantee

In a typical finance lease, the first lease payment at the beginning of the lease consists of...

-reduction in principal only