Question 1

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...

Question 2

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

Accepted Answer

The answer of The appropriate asset value that a lessee...

Question 3

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

Accepted Answer

The liability on a lease is typically calculated as the present value of the minimum lease payments, which reflects the current worth of the payments to be made over the lease term, discounted at the interest rate implicit in the lease or the lessee's incremental borrowing rate.

Question 4

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

Accepted Answer

Lessees typically depreciate leased assets over the lease term unless ownership is transferred or a bargain purchase option exists, in which case the asset is depreciated over its useful life.

Question 5

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

Under U.S. GAAP, the lessee uses the lower of the lessor's implicit rate or the lessee's incremental borrowing rate to determine the present value of the minimum lease payments.

Question 6

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?

Accepted Answer

Since the lease is an operating lease and the payment is made at the inception of the lease, Stephens should record the payment as a prepaid rent, which will be expensed over the lease term.

Question 7

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?

Accepted Answer

The present value of the lease payments is $87,567. This is the value at which the leased equipment is recorded at the inception of the lease.

Question 8

Sumner leases a copier from Jenks Corporation under an operating lease. Which of the following statements is correct?

Accepted Answer

In an operating lease, the lessor (Jenks Corporation) retains ownership of the asset and records depreciation and lease revenue.

Question 9

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?

Accepted Answer

The first payment in a capital lease made at inception does not include interest expense because no time has passed to accrue interest. It only reduces the lease liability.

Question 10

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

Accepted Answer

Initial direct costs for an operating lease are capitalized by the lessor and amortized over the lease term, as per accounting standards.

Question 11

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?

Accepted Answer

The answer of On January 1, Teague Company leased office...

Question 12

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

Accepted Answer

In a capital lease, the lessee records interest expense and amortization expense, not lease expense.

Question 13

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.)

Accepted Answer

The first payment reduces the principal, so the interest for the first year is calculated on the remaining balance. The initial lease liability is $100,000 ($25,000 x 5). After the first payment, the balance is $75,000. The interest expense for the first year is $75,000 x 8% = $6,624.

Question 14

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

Accepted Answer

In an operating lease, the lessor retains ownership and records depreciation and lease revenue, while the lessee does not record the asset or interest expense.

Question 15

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?

Accepted Answer

Kilmer Company should record the receipt of cash and recognize it as unearned rent revenue since the lease is an operating lease and revenue is recognized over time.

Question 16

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?

Accepted Answer

The minimum lease payments should be computed using the lessor's implicit rate in the lease if it is known to the lessee and is less than the lessee's incremental borrowing rate. In this case, Swanson knows Gray's implicit rate of 9%, which is less than Swanson's incremental borrowing rate of 13%.

Question 17

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 lessor's implicit rate is the interest rate that causes the present value of lease payments and unguaranteed residual value to equal the fair value of the leased asset plus any initial direct costs.

Question 18

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

A lessor reports rental revenue when it leases out an asset classified as property, plant, and equipment, not inventory. If the asset is classified as inventory, the lessor recognizes revenue from the sale of the asset, not rental revenue.

Question 19

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 retains ownership of the asset, keeps it on their balance sheet, and records depreciation over the asset's useful life.

Question 20

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?

Accepted Answer

Swanson should use its incremental borrowing rate of 13% to compute the minimum lease payments since it does not know Gray's implicit rate.

Quiz 18: Extension: Ol Accounting for Leases Current Standard