Question 1

Crystal Corporation recorded a lease payment as follows:  Crystal must have a(n):

Accepted Answer

The answer of Crystal Corporation recorded a lease payment as...

Question 2

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

Accepted Answer

In operating leases, the lessee does not recognize the leased asset or liability on the balance sheet. Instead, the lessee recognizes only the rental payments as an expense in their income statement. The appropriate asset value reported in the balance sheet by the lessee for an operating lease is zero, unless a prepayment or accrual is involved.

Question 3

Of the four criteria for a capital lease, which two are not applied if the lease begins during the final quarter of the asset's useful life?

Accepted Answer

The answer of Of the four criteria for a capital...

Question 4

In this situation, Reagan:

Accepted Answer

In a capital lease, the lessee treats the leased asset as if it were purchased and owns it for accounting purposes. This means that the lessee assumes the risks and rewards of ownership, and is responsible for maintaining and insuring the asset. In this situation, Reagan has the option to purchase the asset at the end of the lease term for a nominal amount, which is typical of a capital lease arrangement. Therefore, choice B is the best answer.

Question 5

On February 1, 2013, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

Accepted Answer

According to ASC 840-10-25-1, a lease should be classified as a capital lease if "the present value at the beginning of the lease term of the minimum lease payments . . . equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized." 
In this case, the fair value of the equipment is $600,000, and there is no indication of any related investment tax credit. Therefore, the 90 percent threshold is $540,000 (90% of $600,000). As long as the present value of the minimum lease payments equals or exceeds this amount, the lease should be classified as a capital lease. Therefore, choice B ($540,000) is the correct answer.

Question 6

Which of the following is not among the criteria for classifying a lease as a capital lease?

Accepted Answer

The answer of Which of the following is not among...

Question 7

What is the net carrying value of the lease liability in Lone Star's June 30, 2013, balance sheet? Round your answer to the nearest dollar.

Accepted Answer

The net carrying value of the lease liability is the present value of the lease payments minus the present value of the lease receivable. The present value of the lease payments is $21,000,000, and the present value of the lease receivable is $3,056,846. Therefore, the net carrying value of the lease liability is $21,000,000 - $3,056,846 = $17,943,154.

Question 8

At what amount would Reagan record the leased asset at inception of the agreement?

Accepted Answer

The answer of At what amount would Reagan record the...

Question 9

What is the carrying value of the lease liability on Reagan's December 31, 2014, balance sheet (after the third lease payment is made)?

Accepted Answer

The carrying value of the lease liability is the present value of the remaining lease payments. The present value of the remaining lease payments is $280,531.

Question 10

On January 1, 2013, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $20,000 for 2013, $18,000 for 2014, $16,000 for 2015, and $14,000 for 2016. What is the correct amount of lease expense for 2014?

Accepted Answer

The lease expense for an operating lease is typically recognized on a straight-line basis over the lease term. The total lease payments are $68,000 ($20,000 + $18,000 + $16,000 + $14,000) over four years, resulting in an annual lease expense of $17,000 ($68,000 / 4).

Question 11

What is the effective annual interest rate charged to Reagan on this lease?

Accepted Answer

The answer of What is the effective annual interest rate...

Question 12

Technoid would account for this as:

Accepted Answer

In a sales-type lease, the lessor (Technoid) recognizes revenue and profit at the inception of the lease, and the lease is accounted for as a sale. This type of lease is common when the lessor is also the manufacturer of the leased asset.

Question 13

Which of the following statements characterizes an operating lease?

Accepted Answer

An operating lease is a type of lease in which the lessor (owner of the asset) specifies that the lessee (user of the asset) can use the asset for a specified period without transferring ownership. In this type of lease, the lessor continues to maintain ownership and records depreciation and lease revenue, while the lessee does not record the leased asset on its balance sheet and instead treats the lease payments as expenses. The lessee does not record depreciation or interest in an operating lease. The lessor does not transfer title at the end of the lease term in an operating lease.

Question 14

If the lessor records unearned rent at the beginning of a lease term, the lease must:

Accepted Answer

Unearned rent is a liability account that reflects the rent that has been paid by the lessee but has not yet been earned by the lessor. This is commonly associated with operating leases, where rent payments are made in advance. Direct financing leases and sales-type leases involve recognition of income rather than deferred income (unearned rent). A bargain renewal option is not necessarily relevant to the classification of a lease.

Question 15

On January 1, 2013, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2013, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2013?

Accepted Answer

Tabitha should record the following journal entry on January 1, 2013:
Lease receivable  = $144,000
Lease revenue      = $144,000
[$36,000 x 4 payments]

Option A is incorrect because it only records the first payment received, but not the lease receivable or the remaining payments. Option C is incorrect because it incorrectly records the full asset cost, rather than just the lease receivable. Option D is incorrect because it records the wrong amount for the lease receivable.

Question 16

Prepayments made on an operating lease are considered to be:

Accepted Answer

Prepayments made on an operating lease are considered a prepayment of rent, as they are payments made in advance for the right to use the leased asset for a specific period of time. They are not considered a lease expense, as they do not represent the actual cost of using the asset during that period. They are also not considered a depreciable asset, as the lessee does not have ownership or control over the asset. Finally, they are not considered executory costs, as these are costs incurred by both parties in fulfilling their obligations under the lease agreement.

Question 17

For the lessor to account for a lease as a capital lease, the lease must meet:

Accepted Answer

To account for a lease as a capital lease, the lease must meet any one of the first four classification criteria and both of the last two additional conditions specified by GAAP regarding accounting for leases. These criteria include ownership transfer, bargain purchase option, lease term, and present value of lease payments. Meeting all four criteria is not necessary for classification as a capital lease.

Question 18

What is the interest revenue that Technoid would report on this lease in its 2013 income statement?

Accepted Answer

The answer of What is the interest revenue that Technoid...

Question 19

Lone Star Company would account for this as:

Accepted Answer

A capital lease is a lease arrangement that transfers substantially all of the risks and rewards of ownership to the lessee and is accounted for as a purchase by the lessee. In this case, Lone Star Company is transferring ownership of the equipment to the lessee after the lease term, and the lease payments cover the cost of the equipment and interest charges. Therefore, it would be accounted for as a capital lease.

Question 20

What is the amount of residual value guaranteed by Reagan to the lessor?

Accepted Answer

The residual value guaranteed by Reagan is 25% of the original cost, which is $144,000. Therefore, the guaranteed residual value is 0.25 x $144,000 = $36,000.

Quiz 15: Leases

Crystal Corporation recorded a lease payment as follows: Crystal must have a(n) :