Exam 18: Accounting for Leases

For an operating lease, the lessee will record a(n) ________ and an associated lease liability on the balance sheet.

Revenue for a direct financing lease is calculated as ________.

The lessor would most likely prefer a ________ or ________ lease to an operating lease. Nonoperating lease treatment would permit a financial service company lessor to remove heavy machinery and equipment, jet airlines, oceangoing vessels, and such from its balance sheet and replace it with the ________, a financial asset compatible with the nature of its business. In addition, the nonoperating lease results in the recognition of ________, rather than ________ revenue.

Northern Equipment 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 $29,002 payments is probable. The lease is properly classified as a sales-type lease. -What amount will be recorded for cost of goods sold?

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

Prepare the journal entries for the lessor to record the commencement of the lease, the expensing of initial direct costs, and receipt of the first payment on January 1, 2019.

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 value of the right-of-use asset to Nace at the lease's commencement?

List the three additional indicators that IFRS recognizes individually or in combination that could lead to classifying a lease as a finance lease.

On January 1, 2019, Murray Manufacturing leased a building for use in its operations from Associated Realty. The 7-year, noncancellable lease requires annual lease payments of $22,000, beginning January 1, 2019, and at each December 31 thereafter through 2024. The lease payment includes costs related to property taxes of $2,000. They also include payments for common area maintenance. The observable standalone price for the lease (including the property taxes) is $20,000 and the observable standalone price for the common area maintenance is $4,000. In addition, Murray agrees to pay insurance on the building. Murray pays the insurance each year when it receives an invoice from Associated Realty for the insurance amount. On December 15, 2019, Murray was billed and paid $2,500 for this insurance. Murray does not make the election to account for each separate lease component, along with its associated nonlease components, as a single lease component. The lease agreement does not transfer ownership, nor does it contain a purchase option. The building has a fair value of $80,000 and an estimated remaining life of 8 years. Associated Realty's implicit rate of 10% is known to Murray. Round percentages to one decimal place. Assuming this is classified by Murray as a finance lease, at what amount should the right-of-use asset and lease liability be recorded?

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 $39,675 and has a carrying amount on Precision's books of $26,979. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,500. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,500; 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 first payment?

Why is operating income higher under a finance lease in the early years of the lease?

A direct financing lease meets the Group I but not the Group II criteria.

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 are 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. What is the proper classification of this lease for Precision Pumps?

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. -Based on the above information, calculate the right-of-use asset on January 1, 2019.

Describe the accounting for a finance lease by the lessee if the lessee provides a residual value guarantee.

Prepare an amortization table for Elton's net investment. Date Payment Interest Principal NIL-ST Balance Commencement 1-Jan-19 31- Dec-19 31-Dec-20 31-Dec-21 31- Dec-22 31- Dec-23 31- Dec-24 31- Dec-25

On January 1, 2019, Murray Manufacturing leased a building for use in its operations from Associated Realty. The 7-year, noncancellable lease requires annual lease payments of $17,000, beginning January 1, 2019, and at each December 31 thereafter through 2024. The lease payment includes costs related to property taxes of $2,000. They also include payments for common area maintenance. The observable standalone price for the lease (including the property taxes) is $15,000 and the observable standalone price for the common area maintenance is $4,000. In addition, Murray agrees to pay insurance on the building. Murray pays the insurance each year when it receives an invoice from Associated Realty for the insurance amount. On December 15, 2019, Murray was billed and paid $2,500 for this insurance. Murray does not make the election to account for each separate lease component, along with its associated nonlease components, as a single lease component. The lease agreement does not transfer ownership, nor does it contain a purchase option. The building has a fair value of $87,000 and an estimated remaining life of 8 years. Associated Realty's implicit rate of 10% is known to Murray. Round percentages to one decimal place. What amount of the $17,000 lease payment is used to compute the lease obligation?

List the lessee's disclosures that provide the user with information about the nature of 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 $10,400 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,400, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 5% and is known by Starboard. Starboard guarantees a residual value of $4,500 and incurs initial direct costs of $1,600. Assuming that this is classified as an operating lease, what is the value of the right-of-use asset at the lease's commencement?

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 and assuming that Sidekick allocates consideration based on relative standalone selling prices, determine the allocation of the total consideration to the computer servers and the consulting and training services.