Exam 21: Accounting for Leases

On January 1, 2010, Stanley Corp., a lessor, signed a direct financing lease.Stanley was to receive annual year-end payments of $8, 000 for ten years, after which there was a guaranteed residual value of $6, 000.The implicit interest rate was 8%.Actuarial information for 8%, ten periods follows: Present value of ordinary annuity of \ 1 6.71008 Present value of amount of \ 1 0.46315 On January 1, 2010, Stanley should record a debit to Lease Receivable for

Which of the following criteria would not apply in determining if a lease is a capital lease if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased asset?

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: Present value of \ 1 for n=1 0.892857 Present value of \ 1 for n=5 0.567427 Present value of an ordinary annuity for n=5 3.604776 Present value of an annuity due for n=5 4.037349 - Refer to Exhibit 21-4.The cost of the leased property to General is (round the answer to the nearest dollar)

Which of the following indicators relating to lease capitalization is an example of IFRS criteria being more principles-based than GAAP with respect to lease accounting?

On January 1, Lessor Company incorrectly recorded a 10-year operating lease as a capital lease.The lease requires annual payments.As a result of the recording error, Lessor Company's rent revenue and interest revenue will be Rent Revenue Interest Revenue I. not affected not affected II. overstated understated III. understated overstated IV. underctated inderstated

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: Present value of \ 1 for n=1 0.934579 Present value of \ 1 for n=5 0.712986 Present value of an ordinary annuity for n=5 4.100197 Present value of an annuity due for n=5 4.387211 - Refer to Exhibit 21-5.If Chicago requires a 7% annual return, the lease should be classified as a(n)

Exhibit 21-1 On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60, 000, beginning December 31, 2010.The lease qualifies as a capital lease.Victor's incremental borrowing rate was 9% and the lessor's implicit rate, known by Victor, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. - Refer to Exhibit 21-1.The balance of the lease obligation on January 1, 2011, for financial reporting purposes after the lease payment would be (round answers to the nearest dollar)

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

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?

Which of the following correctly states a lessee criterion for classifying a lease as a capital lease?

The lessee should report capital lease obligations on the balance sheet as

Related to direct financing leases

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: Present value of \ 1 for n=1 0.934579 Present value of \ 1 for n=5 0.712986 Present value of an ordinary annuity for n=5 4.100197 Present value of an annuity due for n=5 4.387211 - 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.)

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows: Present value of \ 1 0.567427 Present value of ordinary annuity of \ 1 3.604776 - Refer to Exhibit 21-2.What would be the debit to Leased Equipment under Capital Leases on January 1, 2010? (Round amounts to the nearest dollar.)

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

On January 1, 2010, Becky Company signed a lease agreement requiring six annual payments of $50, 000, beginning December 31, 2010.The lease qualifies as an operating lease.Becky's incremental borrowing rate was 9% and the lessor's implicit rate, known by Becky, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. Rounded to the nearest dollar, interest and rent expenses for 2010 would be Interest Rent I. \ 50,000 \0 II. \ 0 \2 2,430 III. \ 22,430 \5 0,000 IV. \ 0 \5 0,000

On January 1, 2010, Scarlett signed a lease agreement with Amber.Amber will use the equipment and make ten annual payments of $15, 000 beginning December 31, 2010.The lease is considered to be a sales-type lease.When reading the Scarlett income statement, you would expect to find which of the following accounts?

From the lessee's viewpoint, all of the following are advantages of leasing except that

On January 1, 2010, Rayma Co.leased equipment by signing a five-year lease that required five payments of $30, 000 due on January 1 of each year with the first payment due January 1, 2010.The equipment remains the property of the lessor at the end of the lease and Rayma does not guarantee any residual value.Using a 10% cost of capital, Rayma capitalized the lease on January 1, 2010, in the amount of $125, 096.What is the amount of current portion of the lease liability Rayma should report on the December 31, 2011, balance sheet?

On January 1, 2010, Rayma Co.leased equipment by signing a six-year lease that required six payments of $30, 000 due on January 1 of each year with the first payment due January 1, 2010.The equipment remains the property of the lessor at the end of the lease, and Rayma does not guarantee any residual value.Using an 8% cost of capital, Rayma capitalized the lease on January 1, 2010, in the amount of $149, 781.What is the total amount of lease liability (including interest)Rayma should report as of December 31, 2011?