Intermediate Accounting Chapter 21

Front 1

Major reasons why a company may become involved in leasing to other companies are

Back 1

Interest Revenue

High Residual Values

Tax Incentives

Front 2

What are advantages of leasing?

Back 2

Off-balance-sheet financing

Less costly financing

100% financing at fixed rates

Front 3

What describes current practice in accounting for leases?

Back 3

Leases similar to installment purchases are capitalized.

Front 4

What is the principal reason that supports justification for considering all leases to be sales or purchases?

Back 4

A lease reflects the purchase or sale of a quantifiable right to the use of property.

Front 5

An essential element of a lease conveyance is that the

Back 5

Lessor conveys less than his or her total interest in the property.

Front 6

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

Back 6

The lessee must increase the present value of the minimum lease payments by the present value of the option price.

Front 7

The amount to be recorded as the cost of an asset under capital lease is equal to the

Back 7

Present value of the minimum lease payments or the fair value of the asset, whichever is lower.

Front 8

The methods of accounting for a lease by the lessee are

Back 8

Operating and capital lease methods

Front 9

What is a correct statement of one of the capitalization criteria?

Back 9

The lease term is equal to or more than 75% of the estimated economic life of the leased property.

Front 10

Minimum lease payments may include

Back 10

Penalty for failure to renew

Bargain purchase option

Guaranteed residual value

Front 11

Executory costs include

Back 11

Maintenance

Property taxes

Insurance

Front 12

In computing the present value of the minimum lease payments, the lessee should

Back 12

Use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.

Front 13

In computing depreciation of a leased asset, the lessee should subtract

Back 13

A guaranteed residual value and depreciate over the term of the lease.

Front 14

In the earlier years of a lease, from the lessee's perspective, the use of the

Back 14

Capital method will cause debt to increase, compared to the operating method.

Front 15

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

Back 15

Asset's remaining economic life

Front 16

Based solely upon the following set of circumstances, which set gives rise to a sales-type or direct-financing lease of a lessor?

Back 16

Transfers ownership by end of lease?-No

Contains Bargain Purchase Option?-Yes

Collectibility of Lease Payments Assured?-Yes

Any important uncertainties?-No

Front 17

What would not be included in the lease receivable account?

Back 17

Guaranteed residual value

Unguaranteed residual value

A bargain purchase option.

Front 18

In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income

Back 18

Should be amortized over the period of the lease using the effective interest method.

Front 19

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

Back 19

The present value of minimum lease payments

Front 20

If the residual value of a leased asset is guaranteed by a third party

Back 20

It is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

Front 21

When lessors account for residual values related to leased assets, they

Back 21

Always include the residual value because they always assume the residual value will be realized.

Front 22

The initial direct costs of leasing

Back 22

Are expensed in the period of the sale under a sales-type lease

Front 23

The primary difference between a direct-financing lease and a sales-type lease is the

Back 23

Recognition of the manufacturer's or dealer's profit at the inception of the lease.

Front 24

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

Back 24

The present value of the minimum lease payments

Front 25

For a sales-type lease

Back 25

The gross profit will be the same whether the residual value is guaranteed or unguaranteed.

Front 26

Which statement is correct?

Back 26

In a direct financing lease, initial direct costs are added to the net investment of the lease.

IN a sales-type lease, initial direct costs are expensed in the year of occurrence.

For operating leases, initial direct costs are deferred and allocated over the lease term.

Front 27

The lease liability account should be disclosed as

Back 27

Current portions in current liabilities and the remainder in noncurrent liabilities

Front 28

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish the goal?

Back 28

Write in a bargain purchase option

Front 29

If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is therefore accounted for as a capital lease, who records the asset on its books and which party records interest expense during the lease period?

Back 29

Party recording the asset on its books - Seller-lessee

Party recording interest expense - Seller-lessee

Front 30

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

Back 30

The purchaser-lessor records a gain

Front 31

When a company sells property and then leases it back, any gain on the sale should usually be

Back 31

Deferred and recognized as income over the term of the lease.

Front 32

On December 31, Goetz Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the landlord the following amounts:

Rent deposit $90,000

First month's rent $90,000

Last month's rent $90,000

Installation of new walls and office $495,000

Total: $765,000

The entire amount was charged to rent expense. What amount should have been charged to expense at year end?

Back 32

$94,125

90,000 plus 495,000 divided by 10 times one divided by 12

Front 33

On January 1, 2013, Dean Corporation signed a ten year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $200,000 at the end of each year for ten years with title to pass to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2013

Back 33

Interest expense of $107,3561 and depreciation expense of $89,468

$1,342,016 times .08 equals $107,361

$1,342,061 divided by 15 = $89,468

Front 34

Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at

Back 34

$723,943

$170,000 minus $25,000 times 4.99271 (8%)

Front 35

On December 31, 2013, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2021. Equal annual payments of $400,000 are due on December 31 of each year, beginning with December 31, 2013. The lease properly classified as a capital lease on Lang's books. The present value at December 31, 2013 of the eight lease payments over the lease term discounted 10% is 2,347,370. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2014 balance sheet is

Back 35

$1,742,107

$2,347,370 minus $400,000 equals $1,947,370 times 10% equals $194,737

$1,947,370 minus ($400,000 - $194,737) equals $1,742,107

Front 36

On January 1, 2013, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years with title to pass to Sauder at the end of the period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all its fixed assets. Sauder accordingly account for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. In 2013, Sauder should record interest expense of

Back 36

$63,397

$833,972 minus $200,000 times 10%

Front 37

In 2014, Sauder should record interest expense of

Back 37

$49,732

$633,972 minus $200,000 minus $63,397 times 10%

Front 38

On December 31, 2013, Kuhn Corporation leased a plane from Bell Company for an eight-year period expiring December 31, 2021. Equal annual payments of $225,000 are due on December 31 of each year, beginning with December 31, 2013. The lease is properly classified as a capital lease on Kuhn's books. The present value at December 31, 2013 of the eight lease payments over the lease term discounted at 10% is $1,320,396. Assuming the first payment is made on time, the amount that should be recorded by Kuhn Corporation as the lease liability on its December 31, 2013 balance sheet is

Back 38

$1,095,396

$1,320,396 minus $225,000

Front 39

Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the lease property. How should the lessee classify these leases?

Back 39

Lease A - Capital lease

Lease B - Capital lease

Front 40

On December 31, 2013, Burton, Inc. leased machinery with a fair value of $1,050,000 from Cey Rentals Co. The agreement is six-year noncancelable lease requiring annual payments of $200,000 beginning December 31, 2013. The lease is appropriately accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%. In it's December 31, 2013 balance sheet, Burton should report lease liability of

Back 40

$758,160

$200,000 times 4.7908 (implicit) minus $200,000

Front 41

On December 31, 2012 Harris Co. leased a machine from Catt Inc. for a five-year period. Equal annual payments under the lease are $840,000 (including $40,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2012 and the second payment was made on December 31, 2013. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $3,336,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2013 balance sheet, Harris should report a lease liability of

Back 41

$1,989,600

$3,336,000 minus $840,000 plus $40,000 equals $2,536,000 (2012)

$2,536,000 minus $800,000 minus $2,535,000 times 10% equals $1,989,600 (2013)

Front 42

A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal

Back 42

The current liability shown for the lease at the end of year 1.

Front 43

On January 2, 2013, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $250,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all its plant assets. Aggregate lease payments were determined to have a present value of $1,500,000, based on implicit interest of 10%. In its 2013 income statement, what amount of interest expense should Hernandez report from this lease transaction?

Back 43

$150,000

$1,500,000 times 10%

Front 44

In its 2013 income statement, what amount depreciation expense should Hernandez report from this lease transaction?

Back 44

$100,000

$1,500,000 divided by 15

Front 45

In a lease that is recorded as a sales-type lease by the lessor, interest revenue

Back 45

Should be recognized over the period of the lease using the effective interest method.

Front 46

Torrey Co. manufacturers equipment that is sold or leased. On December 31, 2013, Torrey leased equipment to Dalton for a five-year period ending December 31, 2018, at which date ownership of the lease asset will be transferred to Dalton. Equal payments under the lease at $440,000 (including $40,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2013. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $1,540,000 and cost is $1,200,000. For the year ended December 31, 2013, what amount of income should Torrey realize from the lease transaction?

Back 46

$340,000

$1,540,000 minus $1,200,000

Front 47

Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported as

Back 47

A deferred gain

Front 48

On December 31, 2013, Haden Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows:

Sales price $900,000

Carrying amount $825,000

Present value of reasonable lease rentals ($7,500 for 12 months at 12%) $85,000

Estimated remaining useful life 12 years

In Haden's December 31, 2013 balance sheet, the deferred profit from the sale of this machine should be

Back 48

Zero

It is a minor leaseback