Deck 18: Extension: Ol Accounting for Leases Current Standard

Question 1

Under a capital lease, the lessee reports both interest expense and depreciation expense associated with the lease.

Answer 1

True

Question 2

A lease is classified as a capital lease if the lease term is at least 75% of the estimated life for the property.

Answer 2

True

Question 3

One disadvantage of leasing an asset is that the lessee bears the risk of obsolescence.

Answer 3

False

Question 4

Under some circumstances, the lessee does not record the leased asset and lease obligation on the balance sheet.

Question 5

The amount of minimum lease payments includes executory costs required to be paid by the lessee.

Question 6

A guaranteed residual value reduces the amount of minimum lease payments.

Question 7

Under U.S. GAAP, a lease is classified as a capital lease if the leased asset is of such a specialized nature that only the lessee can use it.

Question 8

Which of the following is an advantage of leasing an asset for the lessee?

A) There are lower overall costs for the asset.
B) Ownership automatically passes to the lessee at the end of the lease.
C) The lessee absorbs the risk of obsolescence.
D) Some leases are not disclosed on the lessee's balance sheet.

Question 9

The party acquiring the use of a leased asset is the lessor.

Question 10

By leasing an asset for less than 75% of its economic life or less than 90% of its fair market value, a company may avoid classifying the lease as a capital lease.

Question 11

Under a capital lease, the lessee reports rent expense on the income statement.

Question 12

Under IFRS, a capital lease is referred to as a finance lease.

Question 13

If a lease transaction is in essence a purchase of an asset with the issuance of debt, then the lessee records both the asset and the liability on the balance sheet.

Question 14

Under IFRS, the terms of a lease imply a finance lease if the lessee may extend the lease with a bargain renewal option.

Question 15

To be classified as a capital lease, a lease must meet all four of the capital lease criteria.

Question 16

Which of the following is not an advantage of leasing an asset for the lessee?

A) lower overall costs
B) risk of obsolescence is reduced
C) potential tax benefits
D) improved cash flows

Question 17

For a lessor to classify a lease as a capital lease, collectability of the required minimum lease payments must be reasonably assured.

Question 18

Generally, the lease term is the duration of the non-cancellable portion of the lease plus any bargain renewal options.

Question 19

Discuss the economic advantages and disadvantages of leasing assets.

Question 20

A lease is classified as a capital lease if the present value of the minimum lease payments is at least 75% of the fair market value of the property at the inception of the lease.

Question 21

Which of the following is not a component of a minimum lease payment?

A) an unguaranteed residual value
B) the minimum rental payments
C) a bargain purchase option
D) a penalty for failure to extend or renew the lease

Question 22

With an operating lease, ________.

A) the lessee records rent expense and the lessor records rent revenue
B) the lessee records interest expense and the lessor records interest revenue
C) the lessee records rent expense and the lessor records interest revenue
D) the lessee records depreciation expense and the lessor records rent revenue

Question 23

Which of the following is a true statement regarding treatment of leases under GAAP and IFRS?

A) Under IFRS, capital leases are referred to as finance leases.
B) Both GAAP and IFRS use bright-line tests as criteria for classifying leases.
C) Both GAAP and IFRS use qualitative tests to classify leases.
D) Both GAAP and IFRS require a specific number of criteria to be satisfied in order to classify a lease as a capital lease.

Question 24

Which of the following costs are excluded from a minimum lease payment?

A) a guaranteed residual value
B) a bargain purchase option
C) executory costs
D) a penalty for failure to renew the lease

Question 25

For a lessor to classify a lease as a capital lease, there can be no material uncertainties regarding the amount of reimbursable costs to be incurred by the lessee.

Question 26

For a lessor to classify a lease as a capital lease, ________.

A) any one of the lessee criteria must be met; collectibility of the required minimum lease payments must be reasonably assured; and there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease
B) all four of the lessee criteria must be met; and collectibility of the required minimum lease payments must be reasonably assured OR there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease
C) any one of the lessee criteria must be met; and collectibility of the required minimum lease payments must be reasonably assured OR there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease
D) all four of the lessee criteria must be met; collectibility of the required minimum lease payments must be reasonably assured; and there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease

Question 27

If the lease term must be greater than or equal to ________, the lessee will record the lease as a capital lease.

A) 50% of the expected economic life of the leased property
B) 75% of the expected economic life of the leased property
C) 80% of the expected economic life of the leased property
D) 90% of the expected economic life of the leased property

Question 28

On March 1 of the current year, Hill Corporation leased sound equipment from McEntire Company. The equipment has a life of 8 years. There is no bargain purchase option or passage of title. For the lease to be considered a capital lease, it must have a term of at least ________.

A) 5 years
B) 6 years
C) 3 years
D) 8 years

Question 29

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

Question 30

On the books of a lessee, a lease may be classified as either ________.

A) direct financing or sales-type
B) capital or direct financing
C) direct financing or operating
D) capital or operating

Question 31

On January 1 of the current year, Jenkins Company signed a 6-year lease for equipment having a 9-year economic life. The present value of the monthly lease payments equaled 75% of the fair value of the equipment. No bargain purchase option or transfer of title was included. How will this lease be reflected on Jenkins' current year income statement?

A) Rent expense equal to the current year lease payments.
B) Rent expense equal to the current year lease payments less interest expense.
C) Interest expense and depreciation expense.
D) Lease amortization equal to one-sixth of the equipment's fair value.

Question 32

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

Question 33

On March 1 of the current year, Stafford Corporation leased equipment under a six-year noncancellable lease. The estimated economic of the equipment is nine years. The fair value of the equipment is $780,000. The lease does not contain a bargain purchase option or a transfer of title. Stafford must classify this lease as a capital lease if the present value of the minimum lease payments is at least ________.

A) $390,000
B) $585,000
C) $702,000
D) $780,000

Question 34

On February 1 of the current year, Greenstein Corporation leased equipment under a six-year noncancellable lease. The estimated economic of the equipment is ten years. The fair value of the equipment is $1,100,000. The lease does not contain a bargain purchase option or a transfer of title. Greenstein must classify this lease as a capital lease if the present value of the minimum lease payments is at least ________.

A) $825,000
B) $880,000
C) $990,000
D) $1,100,000

Question 35

If the present value of the minimum lease payments is be greater than or equal to ________, the lessee will record the lease as a capital lease.

A) 75% of the cost of the asset
B) 75% of the fair market value of the asset
C) 90% of the cost of the asset
D) 90% of the fair market value of the asset

Question 36

Compare and contrast the major types of leases from the point of view of the lessee under GAAP.

Question 37

Which of the following is not among the criteria used by a lessee to classify a lease as a capital lease?

A) The present value of the minimum lease payments is greater than or equal to 75% of the fair market value of the asset.
B) The noncancellable lease term is greater than or equal to 75% of the estimated economic life of the asset.
C) The lease specifies that ownership of the asset transfers to the lessee.
D) The lease contains a bargain purchase option.

Question 38

Which of the following factors is most indicative that a lease should be recorded as a a finance lease under IFRS?

A) Ownership of the property is transferred to the lessee at the end of the lease.
B) The present value of the minimum lease payments is at least equal to the majority of the cost of the property at the lease's inception.
C) The lease term equals at least 50% of the economic life of the asset.
D) The leased asset can be transferred to a subsequent owner during the course of the lease.

Question 39

How do the total expenses over the life of a capital lease compare with the total expenses over the life of an operating lease?

A) The expenses of a capital lease are greater for a capital lease than for an operating lease.
B) The expenses of an operating lease are greater than for a capital lease.
C) There is no difference between total expenses for an operating lease and a capital lease.
D) The total expenses cannot be compared.

Question 40

Compare and contrast the major types of leases from the point of view of the lessor under GAAP.

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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.

Question 46

On January 1 of the current year, Stephens Corporation leased machinery from Montgomery Company. The machine originally cost Montgomery $277,000. The lease agreement is an operating lease, the terms of which call for five annual payments of $34,000. The first payment is due at the inception of the lease; the other four payments are due on January 1 of subsequent years. What journal entry should Stephens make on January 1 of the current year?

A) $\begin{array}{lrr} \text {Rent Expense } &34,000\\ \text { Cash} &&34,000\\\end{array}$

B) $\begin{array}{lrr} \text {Prepaid Rent } &34,000\\ \text { Cash} &&34,000\\\end{array}$
C) $\begin{array}{lrr} \text {Rent Expense } &55,400\\ \text { Cash} &&55,400\\\end{array}$

D) $\begin{array}{lrr} \text {Prepaid Rent } &55,400\\ \text { Cash} &&55,400\\\end{array}$

Question 47

StatMed Corporation leases medical equipment under a five-year capital lease. The terms of the lease call for five equal payments of $21,000, with the first payment due at the inception. The interest rate implicit in the lease is 10%. At what value is the leased equipment recorded at the inception of the lease?

A) $21,000
B) $105,000
C) $87,567
D) $79,607

Question 48

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.

Question 49

Betz Corporation entered into a capital lease on January 1 of the current year. The lease is for 8 years and calls for the first payment to be made at the inception. The first annual minimum lease payment will contain which of the following components?

A) $\begin{array} { | c | c | } \hline \text { Interest Expense } & \text { Lease Liability } \\\hline \text { Yes } & \text { Yes } \\\hline\end{array}$
B) $\begin{array} { | c | c | } \hline \text { Interest Expense } & \text { Lease Liability } \\\hline \text { No } & \text { No } \\\hline\end{array}$
C) $\begin{array} { | c | c | } \hline \text { Interest Expense } & \text { Lease Liability } \\\hline \text { No } & \text { Yes } \\\hline\end{array}$
D) $\begin{array} { | c | c | } \hline \text { Interest Expense } & \text { Lease Liability } \\\hline \text { Yes } & \text { No } \\\hline\end{array}$

Question 50

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

Question 51

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. What journal entry should Montgomery make on January 1 of the current year?

Question 52

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

Question 53

StatMed Corporation leases medical equipment under a five-year capital lease. The terms of the lease call for five equal payments of $25,000, with the first payment due at the inception. The interest rate implicit in the lease is 8%. The first year's interest expense will be ________. (Do not round interim calculations and round your final answer to the nearest whole dollar.)

A) $0
B) $1000
C) $6624
D) $2000

Question 54

Which of the following statements are correct regarding an operating lease?

A) The lessor records depreciation expense and lease revenue.
B) The lessee records the leased asset as a long-term asset.
C) The lessee receives title to the asset at the end of the lease.
D) The lessee records interest expense.

Question 55

On January 1 of the current year, Fields Corporation leased a machine from Kilmer Company. The machine originally cost Kilmer $500,000. The lease is an operating lease that requires for five annual payments of $72,000 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) $\begin{array}{lrr} \text { Cash } &72,0000\\ \text { Lease Receivable} &&72,000\\\end{array}$

B) $\begin{array}{lrr} \text { Cash } &72,00\\ \text { Unearned Rent Revenue } &&72,000\\\end{array}$

C) $\begin{array}{lrr} \text { Cash} &72,000\\ \text { Rent Revenue } &&72,000\\\end{array}$

D) $\begin{array}{lrr} \text {Cash } &72,000\\ \text { Rent Expense } &&72,000\\\end{array}$

Question 56

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson knows this rate. At what interest rate should the minimum lease payments be computed?

A) 7%
B) 9%
C) 11%
D) 13%

Question 57

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

Question 58

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.

Question 59

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.

Question 60

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson does not know this rate. At what interest rate should the minimum lease payments be computed?

A) 7%
B) 9%
C) 11%
D) 13%

Question 61

Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $14,000,000. The lease agreement between SuperByte and Laguna Madre had the follow terms: 1. The lease is noncancellable.
2) The lease has no residual value or bargain purchase option.
3) The lease term is 8 years; payments are made semiannually.
4) Depreciation is recorded each December 31 using the straight-line approach.
5) The economic life of the equipment is 8 years.
6) The lessee's incremental borrowing rate and the implicit interest rate are both 12% annually.
7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1.
8) The fair value of the equipment at the inception of the lease is $16,000,000.
What amount of depreciation will Laguna Madre record in its income statement on December 31 of the current year?

A) $1,443,500
B) $1,750,000
C) $2,000,000
D) $1,875,000

Question 62

Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $12 million. The lease agreement between SuperByte and Laguna Madre had the follow terms: 1. The lease is noncancellable.
2) The lease has no residual value or bargain purchase option.
3) The lease term is 8 years; payments are made semiannually.
4) Depreciation is recorded each December 31 using the straight-line approach.
5) The economic life of the equipment is 8 years.
6) The lessee's incremental borrowing rate and the implicit interest rate are both 8% annually.
7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1.
8) The fair value of the equipment at the inception of the lease is $16,000,000.
What is the net book value of the lease liability in Laguna Madre's balance sheet on June 30 of the current year?

A) $11,970,536
B) $15,777,260
C) $10,455,319
D) $14,506,383

Question 63

In a direct-finance capital lease, the lessor capitalizes any initial direct costs as part of the lease receivable and expenses them over the term of the lease.

Question 64

U.S. GAAP and IFRS accounting is the same with regard to the lessor accounting for capital leases.

Question 65

Lessors classify leases as either sales-type leases or incremental-borrowing type leases.

Question 66

Stillwater Sports
Stillwater Sports Company leased manufacturing equipment from Premier Leasing on January 1 of the current year. Premier purchased the equipment for $326,189.
Other information:
$$\begin{array} { l l } \text { Lease term } & 4 \text { years } \\\text { Annual Payments } & \$ 90,000 \text { on January } 1 \text { beginning with the current year. } \\\text { Life of Asset } & 4 \text { years } \\\text { Fair value of Asset } & \$ 326,189 \\\text { Implicit interest rate } & 7 \% \\\text { Incremental rate } & 7 \%\end{array}$$
There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year.

-Refer to Stillwater Sports:
Required:
1. Prepare appropriate journal entries for Stillwater Sports for the first year.
2. Show how the lease-related information will be presented on Stillwater's balance sheet for the first year.

Question 67

In a sales-type capital lease, the lessor expenses initial direct costs at the inception of the lease.

Question 68

For a direct-finance capital lease, the lessor removes the leased asset from its balance sheet and records a lease receivable at the inception of the lease.

Question 69

StatMed Corporation leases medical equipment under a five-year capital lease. The terms of the lease call for five equal payments of $26,000, with the first payment due at the inception. The interest rate implicit in the lease is 11%. At what value is Obligation under Capital Lease recorded at the end of the first year?

A) $115,537
B) $71,791
C) $89,537
D) $106,664

Question 70

On the books of a lessor, a lease may be classified as either ________.

A) operating, capital, or direct-finance
B) direct-finance or sales type
C) operating, direct-finance, or sales type
D) operating, sales type or indirect-finance

Question 71

Under a sales-type capital lease, a dealer's profit is measured as the difference between the property's fair value and its carrying value.

Question 72

Under a direct-finance capital lease, a lessor recognizes both interest revenue and gross profit.

Question 73

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-finance lease
C) have a bargain renewal option
D) be an operating lease

Question 74

For a direct-finance capital lease, the lease receivable is the present value of the minimum lease payments plus an element of gross profit.

Question 75

Crest Industries
Crest Industries leased store furnishings from Santa Fe Leasing on January 1 of the current year. Santa Fe had purchased the furnishings from Steelman Enterprises for $700,000.
Other information:
$$\begin{array} { | l | l | } \hline \text { Lease term } & 5 \text { years } \\\hline \text { Quarterly Payments } & \$ 45,681 \text { at the beginning of each quarter } \\\hline \text { Life of Asset } & 5 \text { years } \\\hline \text { Fair value of Asset } & \$ 700,000 \\\hline \text { Implicit annual interest rate } & 12 \% \\\hline \text { Incremental rate } & 12 \% \\\hline\end{array}$$
There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year.

-Refer to Crest Industries:
1. Prepare an amortization schedule for the first year of the lease.
2. Prepare the appropriate journal entries for Crest for the first two payments of the current year and depreciation expense for December 31 of the current year.
3. Show how the lease-related information will be presented on Crest's financial statements at December 31 of the current year.

Question 76

In a sales-type capital lease, the lessor records a lease receivable and depreciates the leased asset.

Question 77

A direct-finance lease is classified in the lessor's balance sheet as ________.

A) a liability
B) an asset
C) interest revenue
D) a contra account to lease liability

Question 78

Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $12 million. The lease agreement between SuperByte and Laguna Madre had the follow terms:
1) The lease is noncancellable.
2) The lease has no residual value or bargain purchase option.
3) The lease term is 8 years; payments are made semiannually.
4) Depreciation is recorded each December 31 using the straight-line approach.
5) The economic life of the equipment is 8 years.
6) The lessee's incremental borrowing rate and the implicit interest rate are both 12% annually.
7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1.
8) The fair value of the equipment at the inception of the lease is $16,000,000.
Laguna Madre Company would account for this lease as ________.

A) a capital lease
B) an operating lease
C) a sales-type lease
D) a direct financing lease

Question 79

Lawson leased equipment from Tirado on January 1 of the current year. The lease is a 6-year lease with annual payments of $215,000 due on each January 1, beginning with the current year. Lawson's incremental borrowing rate is 8%; Lawson knows that Tirado's implicit interest rate is 6%. What is the balance of Lawson's lease liability at December 31 or the current year?

A) $815,019
B) $905,658
C) $713,735
D) $840,154

Question 80

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

A) is an operating lease
B) is a sales-type lease
C) is a direct-finance lease
D) has a bargain purchase option