Exam 18: Accounting for Leases

On January 1, 2018, Jones AutoWorld, Inc. leases an SUV to Mains Company. The lease term is 4 years with no renewal options and the economic life of the SUV is 7 years. The fair value of the automobile is $65,000 and Jones' cost or carrying value is also $65,000. There are no lease incentives. The lease calls for monthly payments of $800 at the end of each month. Mains incurs initial direct costs of $2,400 on January 1, 2018. The implicit rate in the lease is 5%. There is no transfer of ownership at the end of the lease term. Lease payment collection is probable. To determine whether Jones, the lessor, should classify the lease as operating, direct financing, or sales-type, we assess both Group I and Group II criteria. Complete the below table and draw a conclusion about how the lease should be classified. Group I Criteria Met? Explanation Transfer of ownership? Purchase option likely to be exercised? Lease term major part of economic life? Present value substantial part of fair value? Asset is specialized? Group II Criteria Present value including third-party guarantees substantially all of fair value? Lease payment collection probable?

Appendix A: Complexities in Accounting for Lease Transactions Sidekick Services Sidekick Services leases several computer servers from Lycoming Computing Company. The lease agreement includes consulting and training updates. The standalone prices charged by Lycoming for each separate component are $750,000 for the servers and $250,000 for the consulting and training updates. The lease is a 5-year lease with fixed payments of $400,000 per year. There are also variable payments required amounting to $7,000 per year, on average, based on the metered usage of the servers. There is no minimum charge included in the contract. -Using the above information, the total consideration in this contract ________ the variable payments.

What is the proper accounting treatment to record a variable lease payment indexed off the CPI?

For lessors of sales-type leases, the lease receivable is the present value of payments to be received plus the present value of residual value guarantees.

On the balance sheet, the right-of-use asset under an operating lease is ________.

For a dealer or manufacturer lessor, the use of a nonoperating lease is preferred because it recognizes financing income and also accelerates revenue recognition in the form of the gross profit on the sale in the year of commencement. Under an operating lease treatment, the lessor only records rental income each year, spreading the revenue flow over the lease term.

Nace Manufacturing Company 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 $4,000, 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 on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured. -What is the proper classification of the lease to Nace?

Assuming that this is classified as an operating lease, create an amortization table for the right-of-use asset. Amortization of Right-of-Use Asset Lease Expense Interest Amortization of Right- of-Use Asset 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Total

How does IFRS differ from U.S. GAAP for direct financing leases?

Based on the information provided above, what are the journal entries on the lease termination date of December 31, 2028, assuming that Nice does not have to pay the guaranteed residual value.

On January 1, 2019, Wynn Manufacturing leased a floor of a building for use in its North American operations from Easymoney Bank. The 9-year, noncancellable lease requires annual lease payments of $12,000, beginning January 1, 2019, and at each January 1 thereafter through 2027. The lease agreement does not transfer ownership, nor does it contain a purchase option. The floor of the building has a fair value of $85,000 and an estimated remaining life of 10 years. Easymoney Bank's implicit rate of 11% is known to Wynn. At the end of 2019, which of the following journal entries will be used by Wynn to record Interest Expense?

Nice Manufacturing Company Nice 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 a $5,000 residual value at the end of the lease term on December 31, 2028, which is guaranteed by Nice. Nice's incremental borrowing rate is 9%. Initial direct costs of $2,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured. -What is the value of the right-of-use asset to Nice at the lease's commencement?

On the statement of cash flows, the total lease payment reduces cash flow from operating activities for the operating lease. Only the ________ reduces operating cash flows under the ________ lease. Therefore, cash flows from operating activities are ________ under the finance lease each year and in total.

On the balance sheet, the lease liability is measured as ________.

The ________ date is when the lease agreement is signed. The ________ date is the date on which the lessee is allowed to begin using the leased asset.

Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $8,500 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $44,996 and has a carrying amount on Precision's books of $30,597. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,100. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,100; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 4%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What is the balance in the net investment in the lease account after the second payment on December 31, 2019?

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 $4,000, 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 $27,000. Collection of all lease payments is reasonably assured. What is the proper classification of the lease to Nace?

Starboard Industries Starboard Industries 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 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 $10,000 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 Starboard. Starboard guarantees a residual value of $5,000 and incurs initial direct costs of $2,000. -Assuming this is an operating lease, what journal entries does Starboard make on January 1, 2019?

What is the proper accounting treatment to record improvements to leased property for a lessee?