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Exam 15: Leases

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Question 21

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A lessee should classify a lease transaction as a finance lease if it is noncancelable and one or more of five classification criteria are met. What are these criteria?

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The criteria are: (1) the agreement spec...

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Question 22

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Cook the Books is the lessee in a lease agreement. From the perspective of the lessee, the lease may be classified as:

A) operating, sales-type, indirect financing.
B) operating or finance.
C) operating or sales-type.
D) operating, finance, or sales-type.

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

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Question 23

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In an operating lease:

What nonlease costs might be included as part of lease payments? How are they accounted for by the lessee in a finance lease when paid by the lessee? Explain.

Terms of a lease agreement and related facts were: a. Costs of legal fees and commissions incurred by the lessor for the lease transaction were $16,968. b. The retail cash selling price of the leased asset was $2,000,000. Its useful life was three years with no residual value. c. The lease term is three years and the lessor paid $2,000,000 to acquire the asset. d. Annual lease payments at the beginning of each year were $737,320. e. Lessor's implicit rate when calculating annual rental payments was 11%. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare the appropriate journal entries for the lessor to record the lease and related payments at its beginning, January 1, 2018. 2. Calculate the effective rate of interest revenue after adjusting the net investment by initial direct costs. 3. Record any journal entry(s) necessary at December 31, 2018, the fiscal year-end.

In a finance lease, the amortization of the right-of-use asset in the third year is:

Warren Co. recorded a right-of-use asset of $800,000 in a 10-year finance lease. The interest rate charged by the lessor was 8%. The balance in the right-of-use asset after two years will be:

Red Co. recorded a right-of-use asset of $100,000 in a 10-year finance lease. Payments of $16,275 are made annually at the end of each year. The interest rate charged by the lessor was 10%. The balance in the lease payable after two years will be:

On January 1, 2018, Princess Corporation leased equipment to King Company. The lease term is eight years. The first payment of $675,000 was made on January 1, 2018. The equipment cost Princess Corporation $3,600,000. The present value of the lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2019 on this lease?

Star Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1 before entering into an operating lease. Not including any indirect effects on earnings, when Star Corp. records the operating lease, the immediate impact on these ratios is a(an) :

Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018. Other information: 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.

For companies that prepare their financial statements in accordance with IFRS, a lessee will reassess variable lease payments that depend on an index or a rate:

At January 1, 2018, Butterfly, Inc. leased mining equipment from Diamond Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $75,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescent at a cost of $540,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $33,684.) Diamond seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease. Required: Round your answers to the nearest whole dollar amounts. 1. What will be the effect of the lease on Butterfly's earnings for the first year (ignore taxes)? 2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Butterfly (ignore taxes)?

Recording a sales-type lease with a selling profit is similar to recording:

Sometimes a lease can be renewed for additional periods or terminated after a specified period. How do the lessee and lessor decide the lease term to be used in accounting for the lease?

Bishop Company is the lessee in an operating lease. Bishop will report straight-line lease expense if it uses:

To raise operating funds, Coyne Incorporated sold its office building to an insurance company on January 1, 2018, for $1,600,000 and immediately leased the building back. The operating lease is for the final 12 years of the building's estimated 20-year remaining useful life. The building has a fair value of $1,600,000 and a book value of $1,300,000 (its original cost was $2 million). The rental payments of $200,000 are payable to the insurance company each December 31. The lease has an implicit rate of 9%. Required: Round your answers to the nearest whole dollar amounts. Prepare the appropriate journal entries for Coyne Incorporated on: 1. January 1, 2018, to record the sale-leaseback. 2. December 31, 2018, to record necessary adjustments.

For the lessor to account for a lease as a sales-type lease, the lease must meet:

M & O Company is preparing an Excel spreadsheet for a 5-year finance lease. The implicit interest rate in the lease is 6%. The beginning of the lease is January 1. Lease payments are made each December 31. A portion of the spreadsheet appears as follows: - What formula should M & O use in cell E8 to calculate the carrying value of the lease payable after the second lease payment?

Jane Wright Company is preparing an Excel spreadsheet for a 6-year finance lease. The implicit interest rate in the lease is 4%. The beginning of the lease is December 31, 2018. Lease payments are made each December 31 starting at December 31, 2018. A portion of the spreadsheet appears as follows: Required: 1. Using the format followed in cell D7, provide the appropriate formula for cell B6. 2. Using the format followed in cell D7, provide the appropriate formula for cell C8. 3. Using the format followed in cell D7, provide the appropriate formula for cell E8.