Exam 18: Accounting for Leases

For both finance and operating leases, if the residual value is guaranteed by a third party or is unguaranteed, then the residual value does not impact the lessee's accounting treatment.

List U.S. GAAP Lease Classification Criteria for both Group I and Group II.

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 6% 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, what is the annual lease expense reported on the income statement?

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 $9,500, 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 $2,000 residual value at the end of the lease term on December 31, 2028, which is guaranteed by Nice. Nice's incremental borrowing rate is 7%. Initial direct costs of $2,500 are incurred on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $64,012. Collection of all lease payments is reasonably assured. What is the amount of the lease liability recorded by Nice at the lease's commencement?

Which of the following statements is true?

Assume that Constance Industries leases equipment for 3 years with fixed rentals of $10,000 per year. The agreement also requires that Constance purchase consumables such as drive belts, etc. directly from the lessor and must spend a minimum of $1,500 per year over the lease term. What are the lease payments to be used to classify the lease?

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. -Assuming that this is classified as an operating lease, what is the amount of the lease liability at January 1, 2019 before the payment?

Assuming this is an operating lease, what journal entries does Leewin make on January 1, 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 9%. 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 $29,035. Collection of all lease payments is reasonably assured. What is the value of the right-of-use asset to Nace at the lease's commencement?

Revenue for a sales-type lease is the lower of ________.

Catwalk Enterprises is currently leasing land with a lease that expires in 20 years. On January 1 of the current year, Catwalk built a barn on the land costing $10,000 that is expected to last for 40 years. Catwalk depreciates its assets using the straight-line method. What is the journal entry to record the leasehold improvement?

Generally, lease disclosures vary by the type of lease and whether the party to the lease is the lessee or the lessor.

Prior to 2019, lessees did not include the right-of-use asset and the lease liability for operating leases on their balance sheets. Both FASB and IASB wrote new standards to require that lessees nearly always report an asset and liability on their balance sheets when they engage in a lease transaction. This accounting results in which of the following?

Captive Leasing Company Captive Leasing Company recently leased machinery to VonBurn Building Associates. The 5-year lease contract requires rental payments of $10,000 at the beginning of each year. The lease meets at least one of the Group I criteria. The 9% implicit rate on the lease is known at VonBurn. There is a $4,000 guaranteed residual value by the lessee, which is equal to the expected residual value at the end of the lease term. Therefore, there is no unguaranteed residual asset. -Based on the above information, calculate the present value of the guaranteed residual value on the lease commencement date.

Precision Pumps 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 $7,000 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 $37,592 and has a carrying amount on Precision's books of $22,000. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,000. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,000; collection of this guaranteed residual value and lease payments is reasonably certain. The rate implicit in the lease is 6%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. -Assuming that Precision Pumps classifies this lease as a direct financing lease, prepare the journal entries for the commencement of the lease and the payment of the first and second lease payments.

What journal entries does Incentive make on January 1? Assume this is an operating lease.

Measuring the right-of-use asset includes the following components: the lease liability determined as the future value of the remaining lease payments, lease payments the lessee makes to the lessor at or before the commencement date, a reduction for any lease incentives the lessee receives and any initial direct costs the lessee incurs.

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 amount of the lease liability recorded by Nace at the lease's commencement?

Incentive Industries Incentive 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. Bumble provides Incentive Industries with a lease incentive in the amount of $6,000 to terminate another lease. The lease commences on January 1, 2019, and Incentive will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Incentive 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 Incentive. Incentive incurs initial direct costs of $2,000. -Assuming that this is classified as an operating lease, what is the amount of the lease liability at on January 1, 2019 before the lease payment?

How does IFRS report leased assets with low values?