Question 1

Lessee leased some land and buildings from Lessor.There was no transfer of ownership and no bargain purchase option.If the fair value of the land is less than a certain percentage of the total fair value of the leased property at the inception of the lease, both the lessee and the lessor may consider the land and buildings as a single unit.What is that percentage?

Accepted Answer

If the fair value of the land is less than 25% of the total fair value of the leased property, the land and buildings can be considered as a single unit.

Question 2

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp
2. Contains a bargain purchase option
3. Lease tem is $ 75 \% $ of economic life
4. Present value of lease payments is $ 90 \% $ of fair value

Accepted Answer

The answer of Which of the following criteria would require...

Question 3

Any initial direct costs incurred by the lessor for a sales-type lease should be

Accepted Answer

In a sales-type lease, the lessor recognizes any initial direct costs as an expense in the period the lease receivable is recognized, as these costs are associated with the sale of the leased asset.

Question 4

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.934579\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.712986\
 \text { Present value of an ordinary annuity for $ n=5 $ } &4.100197\
 \text { Present value of an annuity due for $ n=5 $ } &4.387211\

\end{array}\)

- Refer to Exhibit 21-5.If Chicago requires a 7% annual return, what is the correct amount that should be credited to Unearned Interest: Leases on January 1, 2010, by Chicago? (Round the answer to the nearest dollar.)

Accepted Answer

The answer of Exhibit 21-5 The Chicago, Inc.entered into a...

Question 5

Exhibit 21-4 On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee Company.The lease agreement calls for five equal annual payments of $60, 000 at the beginning of each year with the first payment due on January 1, 2010.The leased property has an estimated residual value of $10, 000, which Lee does not guarantee.The property remains the property of General at the end of the lease term.General desires a 12% rate of return.Present value factors for a 12% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.892857\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.567427\
 \text { Present value of an ordinary annuity for $ n=5 $ } &3.604776\
 \text { Present value of an annuity due for $ n=5 $ } &4.037349\

\end{array}\)

- Refer to Exhibit 21-4.What is the amount of interest revenue that General should recognize on the lease for the year ended December 31, 2010? (Round the answer to the nearest dollar.

Accepted Answer

The first step is to calculate the present value of the minimum lease payments:
PV = $60,000 x 3.6048 (from the present value table) = $216,288

Next, we need to calculate the present value of the residual value:
PV of Residual Value = $10,000 x 0.5674 (from the present value table) = $5,674

Total present value = $221,962

Since General desires a 12% rate of return, the interest revenue can be calculated as follows:

Interest Revenue = Total Present Value x Rate of Return
= $221,962 x 12%
= $26,635.44

Thus, the answer is B) $22,550.

Question 6

Which of the following is a required disclosure by a lessor of an operating lease?

Accepted Answer

All of these disclosures are required by a lessor of an operating lease according to accounting standards. A) provides information on the cost and carrying amount of the leased property, B) discloses the minimum future rentals for the next five years, and C) includes information on contingent rentals that may be received by the lessor.

Question 7

Depreciation expense will be recorded in the accounts of the lessee and lessor for which type of leases? $\begin{array}{lll}
 & \text { Lessee} & \text { Lessor}\
\text { I. } & \text { operating } & \text { direct financing } \
\text { II. } & \text { capital } & \text { operating } \
\text { III. } & \text { operating } & \text { operating } \
\text { IV. } & \text { capital } & \text { sales-type }
\end{array}$

Accepted Answer

Depreciation expense will be recorded in the accounts of the lessee and lessor for finance leases or capital leases, which fall under category II. Other types of leases such as operating leases (Category I) do not require the recording of depreciation expense for the lessee, and for lessors, only sales-type leases or direct financing leases (Category III) require the recording of depreciation expense. Category IV leases refer to leases that do not meet any of the criteria for the other categories.

Question 8

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.934579\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.712986\
 \text { Present value of an ordinary annuity for $ n=5 $ } &4.100197\
 \text { Present value of an annuity due for $ n=5 $ } &4.387211\

\end{array}\)

- Refer to Exhibit 21-5.If Chicago requires a 7% annual return, what is the correct amount of interest revenue to be recognized by Chicago for 2010? (Round the answer to the nearest dollar.)

Accepted Answer

The answer of Exhibit 21-5 The Chicago, Inc.entered into a...

Question 9

If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified as a(n)

Accepted Answer

The accounts Equipment Leased to Others and Accumulated Depreciation: Equipment Leased to Others indicate that the lessor is leasing equipment to others and depreciating it over time. This is characteristic of an operating lease, where the lessor retains ownership of the equipment and the lessee only uses it for a limited period of time. Direct financing leases involve the lessor financing the purchase of the equipment for the lessee, while sales-type leases involve the lessor recognizing a profit on the sale of the asset to the lessee. Leveraged leases involve a third party providing additional financing to the lessor. None of these scenarios are indicated by the accounts listed in the question.

Question 10

Exhibit 21-4 On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee Company.The lease agreement calls for five equal annual payments of $60, 000 at the beginning of each year with the first payment due on January 1, 2010.The leased property has an estimated residual value of $10, 000, which Lee does not guarantee.The property remains the property of General at the end of the lease term.General desires a 12% rate of return.Present value factors for a 12% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.892857\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.567427\
 \text { Present value of an ordinary annuity for $ n=5 $ } &3.604776\
 \text { Present value of an annuity due for $ n=5 $ } &4.037349\

\end{array}\)

-Refer to Exhibit 21-4.Given the structure of the lease, the payments, and the residual value information, what is General's net investment in the lease during 2011? (Round the answer to the nearest dollar.)

Accepted Answer

The answer of Exhibit 21-4 On January 1, 2010, General...

Question 11

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.934579\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.712986\
 \text { Present value of an ordinary annuity for $ n=5 $ } &4.100197\
 \text { Present value of an annuity due for $ n=5 $ } &4.387211\

\end{array}\)

- Refer to Exhibit 21-5.If Chicago requires a 7% annual return, the lease should be classified as a(n)

Accepted Answer

To determine the classification of the lease, we need to compare the present value of the lease payments to the cost of the leased property.

Using the present value factor for a 7% interest rate, we can calculate the present value of the lease payments as follows:

PV = $25,000 x 3.387 = $84,675

The cost of the leased property is $95,000, which is higher than the present value of the lease payments. Therefore, this lease qualifies as a sales-type lease, since the lessor will earn a profit on the lease.

Additionally, the bargain purchase option price of $12,000 allows the lessee to purchase the leased property at a price lower than its normal selling price. This further supports the classification of a sales-type lease.

Question 12

Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

Accepted Answer

According to ASC 840-30-25-1, when a capital lease transfers title or contains a bargain purchase option, the lease must be amortized over the useful life of the assets or the lease term, whichever is shorter. In this case, the assets being leased include both land and buildings.

ASC 970-605-25-1 states that land is not subject to amortization, so the amount assigned to Leased Land is not amortized.

Therefore, the correct amortization policy for this type of capital lease is to assign an amount to Leased Buildings that is amortized over the expected economic life of the asset, and the amount assigned to Leased Land is not amortized. Choice D is the only option that reflects this policy.

Question 13

The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as

Accepted Answer

The initial portion of the lease receivable that is expected to be collected in the upcoming year should be reported as a current asset, while the remaining amount should be reported as a long-term asset. This is in accordance with the accounting principle of separating current and long-term balances on the balance sheet.

Question 14

Related to direct financing leases

Accepted Answer

In a direct financing lease, the lessor recognizes interest revenue over the lease term as it pertains to the net investment in the lease. The lessor does not report gross margin or amortize initial direct costs in the same way as in sales-type leases. Instead, the focus is on the interest income generated from the financial component of the lease.

Question 15

Which of the following is not a required disclosure by a lessor of a sales-type lease?

Accepted Answer

The guaranteed residual value accruing to the benefit of the lessor is a required disclosure by a lessor of a sales-type lease, as it impacts the lessor's recognition of revenue and lease income. All the other options listed are also required disclosures by a lessor of a sales-type lease.

Question 16

When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?

Accepted Answer

When a lessor receives cash on a sales-type lease, the Lease Receivable account is decreased as the lease payments are being received and applied towards the outstanding lease balance. Option A, Interest Revenue: Leases, would only be decreased if the lease payments were being made towards the interest portion of the lease. Option B, Lease Rental Revenue, would not be decreased as this account represents the total income earned from the lease and is not affected by cash received. Option D, Unearned Interest: Leases, would only be decreased if the lease contained an interest component that was paid in advance by the lessee.

Question 17

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.934579\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.712986\
 \text { Present value of an ordinary annuity for $ n=5 $ } &4.100197\
 \text { Present value of an annuity due for $ n=5 $ } &4.387211\

\end{array}\)

-Refer to Exhibit 21-5.If Chicago requires a 7% annual return, how much gross profit will Chicago record at the inception of the lease?

Accepted Answer

The gross profit is calculated as the difference between the selling price and the cost of the leased property. The selling price is $118,236, and the cost is $95,000. Therefore, the gross profit is $118,236 - $95,000 = $23,236.

Question 18

FASB's rules concerning leases are an attempt to record in the financial statements

Accepted Answer

The answer of FASB's rules concerning leases are an attempt...

Question 19

Which of the following facts would preclude a lessor from classifying a lease as a sales-type or direct financing lease?

Accepted Answer

For a lessor to classify a lease as a sales-type or direct financing lease, the lease must meet certain criteria. One criterion is that the present value of the lease payments must be substantially all (typically at least 90%) of the fair value of the leased asset. However, this criterion refers to the present value (discounted sum), not the undiscounted sum as mentioned in option A. Therefore, the fact that the undiscounted sum of the minimum lease payments is 90% of the fair value does not meet the criteria for classification as a sales-type or direct financing lease, precluding such classification.

Question 20

The account Unearned Interest: Leases should be reported on the lessor's financial statements as

Accepted Answer

The answer of The account Unearned Interest: Leases should be...

Quiz 21: Accounting for Leases

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp 2. Contains a bargain purchase option 3. Lease tem is $75 \%$ of economic life 4. Present value of lease payments is $90 \%$ of fair value

Any initial direct costs incurred by the lessor for a sales-type lease should be

Which of the following is a required disclosure by a lessor of an operating lease?

If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified as a(n)

Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as

Related to direct financing leases

Which of the following is not a required disclosure by a lessor of a sales-type lease?

When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?

FASB's rules concerning leases are an attempt to record in the financial statements

Which of the following facts would preclude a lessor from classifying a lease as a sales-type or direct financing lease?

The account Unearned Interest: Leases should be reported on the lessor's financial statements as

Quiz 21: Accounting for Leases

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp 2. Contains a bargain purchase option 3. Lease tem is 75% 75 \% 75% of economic life 4. Present value of lease payments is 90% 90 \% 90% of fair value

Any initial direct costs incurred by the lessor for a sales-type lease should be

Which of the following is a required disclosure by a lessor of an operating lease?

If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified as a(n)

Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as

Related to direct financing leases

Which of the following is not a required disclosure by a lessor of a sales-type lease?

When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?

FASB's rules concerning leases are an attempt to record in the financial statements

Which of the following facts would preclude a lessor from classifying a lease as a sales-type or direct financing lease?

The account Unearned Interest: Leases should be reported on the lessor's financial statements as

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp 2. Contains a bargain purchase option 3. Lease tem is $75 \%$ of economic life 4. Present value of lease payments is $90 \%$ of fair value