Exam 18: Accounting for Leases

Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $73,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,300 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,300, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Starboard. Starboard guarantees a residual value of $3,000 and incurs initial direct costs of $1,700. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment?

Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $180,000. The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Northern's implicit rate is 8% and they expect that collection of the $22,000 payments is probable. The lease is properly classified as a sales-type lease. What amount will be recorded for cost of goods sold? (Round any present value calculations to the nearest dollar, and round any percentages two decimal places, X.XX%.)

In general, the cost of an asset over the life of the lease is lower than if the lessee purchased the asset.

Leewin Brokerage Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000. -Based on the above information, record the lessee's journal entry for the payment of initial direct costs.

With finance leases, interest payments decrease cash flows from operating activities.

Elton Electronics Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $90,000. The cost of the equipment to Elton is $85,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Elton's implicit rate is 8% and they expect that collection of the eight payments of $14,500 payments is probable. -How will Elton Electronics classify this lease?

Which of the following assets is always considered a separate lease component in a lease, unless the impact on the financial statements of not separating it from the other asset(s) is insignificant?

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $7,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $46,813. Collection of all lease payments is reasonably assured. What is the amortization of the right-of-use asset recorded in 2019 and 2020, respectively?

Elliott Brothers enters into a lease agreement with Central Leasing for a piece of equipment. The terms of the 5-year lease state that payments of $22,500 will be made annually on January 1, commencing with the date that the lease begins. The lease contains a provision that Elliott Brothers may purchase the equipment at the end of the lease period for $16,000, which is well below the expected fair value at the end of the lease. As such, it is expected that Elliott Brothers will exercise this option. The implicit rate in the lease is 10%. If this lease is treated as a finance lease for Elliott Brothers, at what value will the right-of-use asset be recorded?

For a finance lease, what are the components of lease expense recorded by the lessee?

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $78,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,700 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,700, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000. Assuming that this is classified as an operating lease, how much interest expense is recorded in 2019?

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,900 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,900, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,200. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment?

If the lessor meets any one of the five Group I criteria, then the lessor classifies the lease as a(n) ________. If the lessor meets both of the Group II criteria, but none of the Group I criteria, then the lessor classifies the lease as a(n) ________. If the transaction does not meet either the Group I or Group II criteria, then the lessor classifies the lease as a(n) ________.

The concept of substance over form can be applied to leases. Which lease terms are most important to understanding the economic substance of the lease contract?

Based on the above information, prepare Nice Manufacturing's journal entries at the commencement of the lease, January 1 and December 31, 2019 payments, and amortization of the right-of-use asset.

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $8,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 6%. Initial direct costs of $1,400 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $63,468. Collection of all lease payments is reasonably assured. What is the amount of the lease liability recorded by Nace at the lease's commencement?

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $80,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,800 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,800, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, how much amortization is recorded on the right-of-use asset in 2019?

Based on the above information, what is the journal entry for the lessor on 12/31/20?

Based on the above information, prepare an amortization table for the Nice Manufacturing's lease liability. Payment Interest Reduction Balance Commencement 1-Jan-19 B1-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 31-Dec-24 31-Dec-25 31-Dec-27 31-Dec-28

Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,000, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. Compute the implicit rate assuming the initial direct costs are deferred.