Exam 18: Accounting for Leases

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 expensed.

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 $103,000. The cost of the equipment to Elton is $98,000 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 $13,000 lease payments is probable. What is the principal balance in the Net Investment in Lease - Sale Type account at the commencement of 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. -Based on the above information, calculate the right-of-use asset on January 1, 2019.

Net investment in the lease for a direct financing lease (NIL-DF) is comprised of ________.

Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year. The lease payments are $78,000 per year. The fair value of the leased asset is $290,000. The lessor's deferred initial direct costs are equal to $24,000. The lessor's estimate of the unguaranteed residual asset is $115,000. Based on the above information, what is the implicit rate in the lease for Kataran?

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $76,000 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 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. In addition to the information provided above, assume that Bumble provided a $6,000 incentive. Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

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 10% is known to Wynn. At what amount is the lease liability recorded at lease commencement?

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 value of the leased asset at the lease commencement date.

For a(n) ________ lease, a lessor recognizes revenue on the sale and records the asset, ________ lease. It also removes the leased asset from its accounts and records the ________.

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. -Calculate Northern's implicit rate for the lease.

For lessors of sales-type leases, cost of goods sold is equal to the carrying value of the leased asset less the present value of any unguaranteed residual asset plus any deferred initial direct costs paid by the lessor.

Which of the following items are not examples of initial direct lease costs?

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 $98,000. The cost of the equipment to Elton is $93,000 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 $12,500 lease payments is probable. How much interest will Elton record for 2019?

Since IFRS makes an exception for leased assets that have low values, reporters may account for leased assets with values of less than $5,000 as a rental agreement rather than recognizing a right-of-use asset and a lease liability. For example, suppose a company leases a $4,800 computer for 2.5 years. How does IFRS differ from how U.S. GAAP would record this?

The initial direct costs cannot be deferred and the lessor must expense initial direct costs at the lease commencement.

The Group II criteria seem like a simple way to achieve a reporting outcome. FASB wanted lessors to recognize a profit at lease commencement from nonoperating lease treatment due partly to a third-party residual value guarantee.

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 $20,700, 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. What is the implicit rate assuming the initial direct costs are deferred?

If, at the lease commencement date, it is likely that the lessee will exercise the purchase option, then the amount of the purchase option is included in the computation of the lease payments.

Based on the above information, what is the journal entry for the lessor on 12/31/19?

Which of the following costs is a nonlease component for the lessee?