Yun Ke Chapter 15

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, present value being $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%? Multiple choice question.

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

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: Multiple choice question. $160,000 $0 $360,000 $200,000 $40,000

40,000

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. True false question.

FALSE:Reason: The implicit rate is the desired rate of return of the lessor.

Which of the following type of leases follows the same accounting method as that of an installment purchase? Multiple choice question. Direct-financing lease Finance lease Operating lease Installment lease

Finance Lease

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply) Multiple select question. Higher debt to asset ratios Lower net income Avoiding the risk of decreasing selling prices Tax benefits No additional fees Lower periodic payments on the asset

Higher debt to asset ratios Avoiding the risk of decreasing selling prices Tax benefits No additional fees Lower periodic payments on the asset

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? (Select all that apply.) Multiple select question. Lease Corp records a lease receivable when the agreement is made Lease Corp records lease revenue when the variable lease payment is received Fit Company records a lease payable when the agreement is made Fit Company records lease expense when the variable lease payment is paid

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

Rights and responsibilities of ownership are retained by the lessor.

OPERATING

How is lease expense recorded by the lessee in an operating lease? Multiple choice question. On a straight-line basis On a front-load basis On an accelerated basis

On a straight-line basis

The ______ of leased property is an estimate of what its commercial value will be at the end of the lease term. Multiple choice question. bargain purchase option residual value lease payment depreciation expense

Residual Value

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

Residual Value

Which one of the following will determine classification of a lease transaction as a finance lease? Multiple choice question. The asset is of a very specialized nature and will have no alternative use to the lessor. The present value of the lease payments is 50% of the fair value of the leased asset. The lease term is for 50% of the remaining economic life of the leased asset. Ownership of the asset remains with the lessor at the end of the lease.

The asset is of a very specialized nature and will have no alternative use to the lessor.

The lease term includes Multiple select question. any periods covered by options to extend with significant incentive. the contractual term of the lease. the useful life of the asset. 75% of the expected life of the asset.

any periods covered by options to extend with significant incentive. the contractual term of the 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. Franz should recognize the first lease payment by (Select all that apply) Multiple select question. debiting lease payable for $79,383 crediting deferred lease revenue for $100,000 debiting lease payable for $100,000 debiting interest expense for $20,617 crediting cash for $100,000 debiting cash for $100,000

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

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. Tucker should recognize the first lease payment by (Select all that apply) Multiple select question. crediting deferred lease revenue for $100,000 debiting lease payable for $79,383 debiting lease payable for $100,000 crediting cash for $100,000 debiting interest expense for $20,617 debiting cash for $100,000

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

If a lease is modified and is reclassified from an operating to a sales-type lease, the lessor will record interest revenue at the ____________ rate, instead of the ___________ rate. Multiple choice question. historical; index effective; straight-line straight-line; effective stated; market

effective; straight-line

Which of the following type of leases follows the same accounting method as that of an installment purchase? Multiple choice question. Finance lease Operating lease Installment lease Direct-financing lease

finance lease

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 Multiple choice question. guaranteed interest value. guaranteed residual value. bargain purchase option. unguaranteed residual value.

guaranteed residual value.

The effective interest rate of return the lease payments provide the lessor is referred to as the Multiple choice question. incremental borrowing rate. simple interest rate. implicit rate.

implicit rate.

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

installment

After the first lease payment, each lease payment in a finance lease consists of an amount representing Multiple choice question. interest and a reduction in the principal interest only a reduction in the principal only

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) Multiple select question. interest expense for $20,617 lease payable for $71,383 lease payable for $79,383 interest expense for $28,617

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

An operating lease Multiple choice question. transfers the risks and rewards of ownership. is similar to a typical rental agreement. is similar to a sales-type lease.

is similar to a typical rental agreement.

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) Multiple select question. lease payable for $79,383 interest expense for $28,617 lease payable for $71,383 interest expense for $20,617

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

The short-cut method may be applied only if the maximum possible lease term is Multiple choice question. more than twelve months less than or equal to six months shorter than the lessee's operating cycle less than or equal to twelve months

less than or equal to twelve months

The short-cut method may be applied only if the maximum possible lease term is Multiple choice question. more than twelve months less than or equal to twelve months less than or equal to six months shorter than the lessee's operating cycle

less than or equal to twelve months

In a lease, the______s the owner of the property, whereas the________is the user of the property.

lessor, lessee

Lease payments are often____ than installment payments.

lower,smaller, cheaper

The short-cut method of accounting for leases Multiple choice question. may be used if the lease has a lease term (including any options to renew or extend) of twelve months or less. may be used if the lease has a lease term of twelve months with an option to renew the lease at the end of twelve months. may be used if the lease has a lease term of twelve months or less with an option for the lessee to purchase the asset.

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

When the rights and responsibilities of ownership are retained by the lessor, the lease is classified as a(n) ______ lease. Multiple choice question. capital operating sales-type finance

operating

The two basic lease classifications by a lessee are Multiple choice question. current and noncurrent. sales-type and direct-financing. operating and finance. investing and financing.

operating and finance.

The two basic lease classifications by a lessor are Multiple choice question. operating and direct-financing. operating and sales-type. current and noncurrent. investing and financing.

operating and sales type

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? Multiple choice question. Finance lease Sales-type lease Operating lease Direct financing lease

operating lease

Lessor

owner of the property

The right-of-use asset is amortized straight-line, unless the lessee's_________ of using the asset is different.

pattern

Selling profit exists in a sales-type lease when the Multiple choice question. present value of the lease payments is greater than the cost of the asset. cost of the asset is greater than the present value of the lease payments. cost of the asset is greater than the fair value. carrying value of the asset is greater than the present value of the lease payments.

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

In a typical finance lease, the first lease payment at the beginning of the lease consists of interest and reduction in principal reduction in principal only interest only

reduction in principal only

Which method should normally be used to amortize the right-of-use asset? Multiple choice question. Straight-line Sum of the years' digits Double-declining balance method Productive output method

straight-line method

The lease term is typically considered to be Multiple choice question. 75% of the expected life of the asset. the contractual term of the lease plus any periods covered by options to extend regardless of certainty of extension. the contractual term of the lease plus any periods covered by options to extend if extension is reasonably certain to occur. 90% of the economic life of the asset.

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

In an operating lease, interest expense plus amortization expense is equal to Multiple choice question. the straight-line lease payment. the straight-line lease amount less interest. the straight-line lease amount plus interest.

the straight-line lease payment.

Lessee

user of the property

Which of the following are criteria for classification as a finance lease? (Select all that apply.) Multiple select question. The present value of the total lease payments is less than substantially all of the fair value of the asset. The asset will have an alternative use to the lessor at the end of the lease term. 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. Ownership of the asset is retained by the lessor. 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. The lease includes a purchase option the lessee is reasonably certain to exercise.

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 Lease Corp address this lease modification? (Select all that apply) Multiple select question. Reclassify from an operating lease to a sales-type lease Terminate the original lease and create a new lease with the new terms Record a lease receivable for the present value of remaining lease payments Recognize straight-line revenue of the lease payments

Reclassify from an operating lease to a sales-type lease Record a lease receivable for the present value of remaining lease payments

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 Multiple choice question. are treated as a loss for the lessee. are estimated and used to calculate the lessee's lease liability and the lessor's receivable. have no effect on the lessee's lease liability and lessor's lease receivable.

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

Rights and responsibilities of ownership are transferred to the lessee.

FINANCE OR SALES-TYPE

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? Multiple choice question.

Operating