Exam 18: Accounting for Leases

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

When a company purchases equipment by issuing a long-term note, the interest element of the payment is tax deductible. However, if the company leases equipment, the entire lease payment may be tax deductible.

Present value of lease payments + Present value of guaranteed or unguaranteed residual asset = Fair value of leased asset + Deferred initial direct costs.

Each period of a finance lease, the lessee records a lease expense that includes which of the following?

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $71,000 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 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 $1,500. Compute the present value of the lease payments in order to determine if the lease meets the fourth Group I criterion. Calculate the present value of each payment individually. Assuming that this is classified as an operating lease, what is the value of the right-of-use asset at the lease's commencement?

The net investment in the lease for a sales-type lease reflects the assets related to the lease transaction and is comprised of the following: ________.

Prepare the journal entry required on December 31, 2019. Assume this is an operating lease.

Wynn Manufacturing 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 December 31 thereafter through 2026. The lease payment includes costs related to property taxes of $3,000. They also include payments for common area maintenance. The observable standalone price for the lease (including the property taxes) is $16,000 and the observable standalone price for the common area maintenance is $2,000. In addition, Wynn agrees to pay insurance on the floor of the building. Wynn pays the insurance each year when it receives an invoice from Easymoney Bank for the insurance amount. On December 15, 2019, Wynn was billed and paid $1,500 for this insurance. Wynn 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 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. Round percentages to two decimal places. -Based on the above information, what is the present value of the leased asset on the lease commencement date?

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. What is the type of lease for the lessee?

The lessor of a sales-type lease records the following items in net income, if they are part of the lease agreement: Interest revenue on the net investment in the lease for a sales-type lease and any variable payments received that were not included in the net investment.

If the risks and rewards have been transferred, then IFRS classifies the lease as a finance lease.

Based on the information provided above, what are the journal entries on the lease termination date of December 31, 2028, assuming that Nice must pay the guaranteed residual value.

With respect to lessees, how do IFRS and U.S. GAAP differ in the accounting treatment of operating and finance leases?

What journal entry does Leewin make on January 1, 2019 to record the annual lease payment?

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 $9,000 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 $44,859 and has a carrying amount on Precision's books of $30,504. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $14,900. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $14,900; 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 amount is recorded for net investment in the lease at commencement of the lease?

After identifying a lease, both the lessee and the lessor are required to separate the various lease and nonlease components and allocate consideration to these components.

Based on the above information, prepare an amortization table for the Nace Manufacturing's lease liability. Payment Interest Reduction 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 31-Dec-26 31-Dec-27

Incentive Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair 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

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 depreciation for the barn every year?

In cases where the standalone price is highly variable or uncertain, the lessee may use what type of method for determining standalone prices?