Question 1

On January 1,Teague Company leased office equipment from Sprague Corporation.The lease qualifies as an operating lease.The term is three years and calls for semiannual payments of $25,000 each,payable on June 30 and December 31 of each year.Sprague acquired the machines at a cost of $150,000 on January 1 of the current year.The expected life is five years with no residual value expected.
Required:
1.Prepare the appropriate journal entries for the lessee for the first year.
2.Show how the lessor would disclose this lease on the face of the balance sheet for December 31 of the current year.

Accepted Answer

The lease qualifies as an operating lease for the lessee, so the lessee will record rent expense and a lease liability for the present value of the lease payments.

Question 2

For an operating lease,the lessee is only required to report rent expense on its income statement.

Accepted Answer

This is true. Operating leases are treated like rental agreements, where the lessee is only required to report rent expense on their income statement. The asset being leased is not recorded on the lessee's balance sheet, which is a key difference between operating leases and capital leases.

Question 3

Initial direct costs are recorded as assets and amortized over the term of the lease in ________.
A)an operating lease
B)a capital lease
C)a sales-type lease
D)a direct financing lease

Accepted Answer

Initial direct costs are capitalized as an asset and amortized over the term of the lease in a capital lease. In an operating lease, initial direct costs are expensed immediately. In sales-type and direct financing leases, initial direct costs are recognized as income at lease inception.

Question 4

Compare and contrast the differences between accounting for leases under GAAP and IFRS.

Accepted Answer

The answer of Compare and contrast the differences between accounting...

Question 5

For an operating lease,the lessor maintains the leased asset on its balance sheet and records depreciation expense each period unless the asset is fully depreciated.

Accepted Answer

In an operating lease, the lessor maintains and records the leased asset on its balance sheet, and records depreciation expense each period, unless the asset is fully depreciated. This is in contrast to a finance lease, where the lessee records the leased asset on its balance sheet, and records depreciation expense each period.

Question 6

On January 1 of the current year,Fields Corporation leased a machine from Kilmer Company.The machine originally cost Kilmer $450,000.The lease is an operating lease that requires for five annual payments of $54,000 beginning on January 1 of the current year.Which of the following journal entries should Kilmer record on January 1 of the current year?
A)
  
B)
  
C)
  
D)

Accepted Answer

The answer of On January 1 of the current year,Fields...

Question 7

A lessor reports rental revenue if it classifies the leased asset as inventory and reports a gain on leased asset if it classifies the leased asset as property,plant,and equipment.

Accepted Answer

The statement is incorrect. A lessor reports rental revenue regardless of how the leased asset is classified (as inventory or property, plant, and equipment). Additionally, a lessor reports a lease income (not a gain) for operating leases, and reports a selling profit (or loss) for sales-type and direct financing leases.

Question 8

Sumner leases a copier from Jenks Corporation under an operating lease.Which of the following statements is correct?
A)Jenks records depreciation and lease revenue.
B)Jenks records profit at the inception of the lease.
C)Sumner will receive title at the end of the lease.
D)Sumner records depreciation and interest expense.

Accepted Answer

The answer of Sumner leases a copier from Jenks Corporation...

Question 9

Sumner leases equipment to Butler Corporation.Butler records the first payment as recorded as prepaid rent.This implies that the lease ________.
A)is an operating lease
B)is a sales type lease
C)is a direct financing lease
D)has a bargain purchase option

Accepted Answer

The answer of Sumner leases equipment to Butler Corporation.Butler records...

Question 10

The lessor's implicit rate is the rate that the lessor would incur in a debt agreement under similar terms and circumstances.

Accepted Answer

The answer of The lessor's implicit rate is the rate...

Question 11

A lessee normally computes the liability on a lease as the ________.
A)present value of minimum lease payments
B)fair market value of the leased asset
C)future value of the minimum lease payments
D)sum of the cash payments over the term of the lease

Accepted Answer

The answer of A lessee normally computes the liability on...

Question 12

Lessees generally depreciate leased assets over the lease term unless the lease includes a transfer of ownership or a bargain purchase option.

Accepted Answer

Depreciation of leased assets is generally done over the lease term, unless there is a transfer of ownership or a bargain purchase option included in the lease agreement.

Question 13

Jackson Corporation leases equipment to Andrews Company for a five year period.At the beginning of the lease,Jackson records sales revenue.The lease to Andrews must ________.
A)be a sales type lease
B)be a direct financing lease
C)have a bargain renewal option
D)be an operating lease

Accepted Answer

Sales type leases are used when the lease transfers ownership of the asset to the lessee at the end of the lease term, and the lessor can recognize profit on the sale at the beginning of the lease term. Since Jackson records sales revenue at the beginning of the lease, it indicates that the lease is a sales type lease. Direct financing leases transfer substantially all the risks and rewards of ownership to the lessee and do not allow for recognition of profit at the beginning of the lease. Bargain renewal option and operating lease are not relevant to the determination of the lease classification in this scenario.

Question 14

The lessor capitalizes initial direct costs associated with an operating lease and amortizes them over the life of the lease.

Accepted Answer

According to GAAP, initial direct costs associated with operating leases should be capitalized and amortized over the life of the lease.

Question 15

The appropriate asset value that a lessee reports on its balance sheet for an operating lease is ________.
A)zero,unless a prepayment or accrual is involved
B)the historical cost of the asset being leased
C)the sum of the minimum lease payments
D)the present value of the minimum lease payments

Accepted Answer

The appropriate asset value that a lessee reports on its balance sheet for an operating lease is the present value of the minimum lease payments. This is because under operating leases, the lessee does not have ownership of the asset and thus cannot recognize it on its balance sheet. Instead, the lessee recognizes a liability equal to the present value of the minimum lease payments and corresponding right-of-use asset, which represents the lessee's right to use the underlying asset for the lease term.

Question 16

In determining the present value of the minimum lease payments under U.S.GAAP,the discount rate used by the lessee is the lower of the lessor's implicit rate or the lessee's incremental borrowing rate.

Accepted Answer

This statement is correct according to U.S. GAAP. The lessee uses the lower of the two rates to determine the present value of the minimum lease payments.

Question 17

If a lessee makes prepayments on an operating lease,they are considered to be ________.
A)restoration costs
B)capitalizable costs
C)executory costs
D)prepaid rent

Accepted Answer

The answer of If a lessee makes prepayments on an...

Question 18

Lessee accounting for a capital lease records lease expense and amortization expense.

Accepted Answer

The answer of Lessee accounting for a capital lease records...

Question 19

On January 1 of the current year,Stephens Corporation leased machinery from Montgomery Company.The machine originally cost Montgomery $250,000.The lease agreement is an operating lease,the terms of which call for five annual payments of 25,000.The first payment is due at the inception of the lease; the other three payments are due on January 1 of subsequent years.What journal entry should Stephens make on January 1 of the current year?
A)
  
B)
  
C)
  
D)

Accepted Answer

The answer of On January 1 of the current year,Stephens...

Question 20

Under IFRS,the lessee must used the lessee's incremental borrowing rate in determining the present value of the minimum lease payments.

Accepted Answer

The answer of Under IFRS,the lessee must used the lessee's...

Quiz 22: Accounting Corrections and Error Analysis

For an operating lease,the lessee is only required to report rent expense on its income statement.

Initial direct costs are recorded as assets and amortized over the term of the lease in ________.

Compare and contrast the differences between accounting for leases under GAAP and IFRS.

For an operating lease,the lessor maintains the leased asset on its balance sheet and records depreciation expense each period unless the asset is fully depreciated.

A lessor reports rental revenue if it classifies the leased asset as inventory and reports a gain on leased asset if it classifies the leased asset as property,plant,and equipment.

Sumner leases equipment to Butler Corporation.Butler records the first payment as recorded as prepaid rent.This implies that the lease ________.

The lessor's implicit rate is the rate that the lessor would incur in a debt agreement under similar terms and circumstances.

A lessee normally computes the liability on a lease as the ________.

Lessees generally depreciate leased assets over the lease term unless the lease includes a transfer of ownership or a bargain purchase option.

Jackson Corporation leases equipment to Andrews Company for a five year period.At the beginning of the lease,Jackson records sales revenue.The lease to Andrews must ________.

The lessor capitalizes initial direct costs associated with an operating lease and amortizes them over the life of the lease.

The appropriate asset value that a lessee reports on its balance sheet for an operating lease is ________.

In determining the present value of the minimum lease payments under U.S.GAAP,the discount rate used by the lessee is the lower of the lessor's implicit rate or the lessee's incremental borrowing rate.

If a lessee makes prepayments on an operating lease,they are considered to be ________. A)restoration costs B)capitalizable costs C)executory costs D)prepaid rent

Lessee accounting for a capital lease records lease expense and amortization expense.

Under IFRS,the lessee must used the lessee's incremental borrowing rate in determining the present value of the minimum lease payments.