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Exam 15: Leases

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Question 121

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If the lessee and lessor use different interest rates to account for a finance/sales-type lease, then:

A) The lessee is unaware of the lessor's implicit rate.
B) Total expenses for the lessee will equal the lessor's total revenues.
C) GAAP has been violated by at least one party.
D) The lessee will report more net income for the year.

E) A) and C)
F) A) and D)

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Question 122

Multiple Choice

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B Corp. is a lessee and has a debt/equity ratio of 2 to 1. The debt/equity ratio is increased when B records:

A) Option A
B) Option B
C) Option C
D) Option D

E) B) and D)
F) None of the above

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Question 123

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Discuss the financial statement disclosure requirements for all leases entered into by the lessee.

Interest expense is not calculated as the effective interest rate times the amount of the debt outstanding during the interest period for:

Sometimes a lease might specify that lease payments may be increased (or decreased) at some future time during the lease term depending on whether or not some specified event occurs such as revenues or profits exceeding some designated level. Under what circumstances are contingent rentals included or excluded from lease payments? If excluded, how are they recognized in income determination?

On January 1, 2018, Park Industrial leased equipment from Rochester Leasing for a four-year period ending December 31, 2018, at which time possession of the leased asset will revert back to Rochester. The equipment cost Rochester $412,184 and has an expected economic life of five years. Rochester expects the residual value at December 31, 2018, will be $50,000. Negotiations led to the lessee guaranteeing a $70,000 residual value. Equal payments under the lease are $100,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Park is aware that Rochester used a 5% interest rate when calculating lease payments. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the appropriate journal entries for both Park and Rochester on January 1, 2018, to record the lease. 2. Prepare all appropriate journal entries for both Park and Rochester on December 31, 2018, related to the lease.

We classify a lease as a finance lease if:

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -When a lease qualifies as a finance lease, what amount is recorded as the cost of the right-of-use asset?

Jacobs Eatery leased restaurant equipment from Gamma Leasing. Gamma earns interest under such arrangements at a 6% annual rate. The lease term is eight months with monthly payments of $20,000 due at the end of each month. Jacobs Eatery elected the short-term lease option. What is the effect of the lease on Jacobs Eatery's earnings during the eight-month term (ignore taxes) ?

Diablo Company leased a machine from Juniper Corporation on January 1, 2018. The machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at the end of each year in the amount of $6,309,410. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 10%. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the journal entry for Diablo Company at the beginning of the lease. 2. Prepare the journal entry for the first lease payment (ignore amortization). 3. Prepare the journal entry for the second lease payment (ignore amortization).

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. -Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the right-of-use asset should be recorded is the:

On January 1, 2018, Gemini Corporation leased equipment under a finance lease designed to earn the lessor a 12% rate of return for providing long-term financing. The lease agreement specified ten annual payments of $225,000 beginning January 1, and each December 31 thereafter through 2026. A 10-year service agreement was scheduled to provide maintenance of the equipment as required for a fee of $15,000 per year. Insurance premiums of $12,000 annually are related to the equipment. Both amounts were to be paid by the lessor and the lease payments reflect both expenditures. At what amount will Gemini record a right-of-use asset? (Round your answer to the nearest whole dollar amount.)

Advance payments made by the lessee on an operating lease are considered to be:

On January 1, 2018, PokemonGo Company leased equipment to Waldo Corporation under a lease agreement that qualifies as an operating lease to Waldo. The present value of the end-of-year lease payments of $138,585 discounted at 5% is $600,000. The expected economic life of the asset is seven years. The lease term is five years. What would Waldo record as amortization in 2018?

Matt Co. is the lessor in connection with an operating lease. Matt Co. would record:

Northwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018. Hi-Tech manufactured the equipment at a cost of $90,000. Other information: $\begin{array} { | l | l | } \hline \text { Lease term } & 3 \text { years } \\\hline \text { Annual payments } & \$ 40,000 \text { on January } 1 \text { each year } \\\hline \text { Life of asset } & 3 \text { years } \\\hline \text { Implicit interest rate } & 8 \% \\\hline \text { Incremental rate } & 8 \% \\\hline \text { PV, annuity due, } 3 \text { periods, } 8 \% & 2.7833 \\\hline \text { PV, ordinary annuity, } 3 \text { periods, } 8 \% & 2.5771 \\\hline\end{array}$ There is no expected residual value. Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2018 and 2019. Assume a December 31 year-end. Round your answers to the nearest whole dollar amounts.

On January 1, 2018, Salvatore Company leased several machines from Nola Corporation under a three-year operating lease agreement. The lease calls for semiannual payments of $15,000 each, payable on June 30 and December 31 of each year. The machines were acquired by Nola at a cost of $90,000 and are expected to have a useful life of five years with no expected residual value. Required: Prepare the appropriate journal entries for the lessor from the beginning of the lease through the end of 2018.

Franconia Leasing leases equipment to a variety of businesses. The company's primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term sales-type leases. Franconia earns interest under these arrangements at a 10% annual rate. The company leased an electronic typesetting machine it purchased for $123,600 to a local publisher, MacCleod Inc. on December 31, 2017. The lease contract specified annual payments of $32,000 beginning January 1, 2018, the beginning of the lease, and each December 31 through 2019 (three-year lease term). The publisher had the option to purchase the machine on December 30, 2020, the end of the lease term, for $48,000 when it was expected to have a residual value of $64,000, a sufficient difference that exercise seems reasonably certain. Required: Round your answers to the nearest whole dollar amounts. 1. Show how Franconia calculated the $32,000 annual lease payments for this sales-type lease. 2. Prepare the appropriate journal entries for Franconia Leasing from the beginning of the lease through the end of the lease term.

On January 1, 2018, 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, 2018, 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, 2018?

N Corp. entered into a nine-year finance lease on a warehouse on December 31, 2018. Lease payments of $26,000, which includes maintenance services of $1,000, are due annually, beginning on December 31, 2019, and every December 31 thereafter. N does not know the interest rate implicit in the lease; N's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should N report as recorded lease liability at December 31, 2018?