Deck 19: Leases

Question 1

The main difference between the operating lease classification and finance lease classification is:

A) Risk and rewards of ownership
B) Assets/Liabilities
C) Expenses
D) None of the above

Answer 1

Risk and rewards of ownership

Question 2

What is not one of the criteria for classifying a lease as a finance lease

A) Ownership is transferred at the end of the lease term
B) The asset may be purchased at a bargain price
C) The leased asset is customized for the lessee
D) Present value of the minimum lease payments, at the inception of the lease is equal to or less than the fair value of the leased asset
E) None of the above

Answer 2

Present value of the minimum lease payments, at the inception of the lease is equal to or less than the fair value of the leased asset

Question 3

Roselle Entity has a contract with another entity regarding a piece of machinery. In the contract, certain contingencies are laid out for obtaining the title of the machinery in addition to monthly payments. This contract is most accurately called a(n) _____________________.

A) Finance lease
B) Hire purchase lease
C) Operating lease
D) Contingent lease
E) None of the above

Answer 3

Hire purchase lease

Question 4

When would initial direct costs be recognized as an expense?

A) Manufacturers
B) Brokers
C) Dealers
D) Lessors not in the business of manufacturing or leasing
E) More than one of the above

Question 5

When a lease includes both land and buildings, the land and buildings are

A) allocated, based on the assets costs, on a pro rata portion of the present value of the minimum lease payments.
B) considered separately because land normally has indefinite useful life.
C) required to have the same depreciation period.
D) amortized over a longer period of time because the land doesn't lose value.

Question 6

Lessees account for operating leases by

A) recognizing lease payments in profit or loss on a straight-line basis over the lease term.
B) recording the leased asset in property, plant, and equipment.
C) recording a liability for the present value of the minimum lease payments.
D) making no entries in the financial statements because operating leases are considered off-balance sheet financing.

Question 7

An entity incurs periodic expenses over the life of a finance lease. Which of the following expense(s) are normally incurred?

A) Depreciation expense
B) Lease (rent) expense
C) Finance costs
D) a and c
E) a and b
F) all of these costs are incurred in a finance lease

Question 8

Milwaukee West is leasing 20 General Motors F40PH electro-motive diesel train engines from Bellweather Brokerage. The lease is considered a finance lease. At the end of the lease, ownership reverts back to Bellweather. The useful life of the engines is 15 years while the life of the lease is 13 years. Milwaukee west uses the double-declining balance method of depreciation. The engines should be fully depreciated at the end of 13 years.

Question 9

Bertolino Entity has a lease for which the present value of the minimum lease payments is greater than the fair value of the leased asset. The lease is cancelable and is six years long. This lease should be capitalized as a finance lease.

Question 10

An entity must disclose total payments due, including all future payments, for all operating leases.

Question 11

There is more judgment with regard to leases under IFRS than under U.S. GAAP.

Question 12

You just bought a new Royal Sheffield motorcycle with a 500 cc "British Single" engine. As you hear the deep growl of 27 untamed horses under your seat and as you see others gawk at the classic war-era styling, you start thinking about how you're paying for it. You got a 6 percent APR loan through your bank with a term of three years. Until you pay off your motorcycle, the bank will keep the title; as a result, this would be considered a finance lease.

Question 13

The majority of leased assets and liabilities are reported in the lessee statement of financial position.

Question 14

Lease accounting is based on the premise that the lessor transfers rights to use an asset to the lessee even if the lessor is required to provide ongoing maintenance or service to the asset transferred.

Question 15

Complete the following table of lessee capitalization criteria for finance leases.

Question 16

Explain "lessee's incremental borrowing rate."

Question 17

The main principle to consider in classifying leases is the extent to which risks and rewards of ownership remain with the lessor or are transferred to the lessee. What risks should be considered?

Question 18

Blithe Entity, a windmill manufacturer, leases a truck to deliver its products to its customers. The lessor specifies in the standard lease agreement that the truck can be driven for 250,000 miles before extensive and costly repairs are needed to extend its economic life. At the inception of the lease, Blithe Entity expects to drive the truck 55,000 miles per year. The term of the lease is four years. How should this lease be classified?

Question 19

Roadway Entity (RE) leases a road grader from Big Equipment Entity (BEE). RE agrees to pay $40,000 at the end of each year for 5 years. The equipment has a useful life of 6 years. The implicit rate of the lease is 6% and the lease contains a guaranteed residual value of $30,000. The lease is appropriated classified as a finance lease.
-How should this lease be classified?

Question 20

Roadway Entity (RE) leases a road grader from Big Equipment Entity (BEE). RE agrees to pay $40,000 at the end of each year for 5 years. The equipment has a useful life of 6 years. The implicit rate of the lease is 6% and the lease contains a guaranteed residual value of $30,000. The lease is appropriated classified as a finance lease.

-Prepare RE's journal entry to record the initial recognition of the leased asset.