Exam 21: Accounting for Leases

The primary difference between a direct-financing lease and a sales-type lease is the manufacturer's or dealer's gross profit (or loss).

Which of the following statements is correct?

On June 30, 2015, Falk Co. sold equipment to an unaffiliated company for $1,000,000. The equipment had a book value of $900,000 and a remaining useful life of 10 years. That same day, Falk leased back the equipment at $10,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Falk's rent expense for this equipment for the year ended December 31, 2015, should be

The total lease-related expenses recognized by the lessee during 2015 is which of the following? (Rounded to the nearest dollar.)

Minimum rental payments are the same as minimum lease payments.

Use the following information for questions 104 and 105. On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $200,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,200,000, based on implicit interest of 10%. -In its 2015 income statement, what amount of interest expense should Hernandez report from this lease transaction?

Which of the following is a one of the criteria for recording a lease as a finance lease, under IFRS?

Both a guaranteed and an unguaranteed residual value affect the lessee's computation of amounts capitalized as a leased asset.

The Lease Liability account should be disclosed as

In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income

A capitalized leased asset is always depreciated over the term of the lease by the lessee.

Use the following information for questions 65 and 66. On January 1, 2014, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $90,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $375,289 at an effective interest rate of 10%. -With respect to this capitalized lease, for 2014 Ogleby should record

Direct-financing lease (essay).Explain the procedures used to account for a direct-financing lease.

purchased a machine on January 1, 2015, for $1,500,000 for the express purpose of leasing it. The machine is expected to have a five-year life, no salvage value, and be depreciated on a straight-line monthly basis. On April 1, 2015, under a cancelable lease, Maris leased the machine to Dunbar Company for $450,000 a year for a four-year period ending March 31, 2019. Maris incurred total maintenance and other related costs under the provisions of the lease of $15,000 relating to the year ended December 31, 2015. Harley paid $450,000 to Maris on April 1, 2015. Instructions [Assume the operating method is appropriate for parts (a) and (b).] (a) Under the operating method, what should be the income before income taxes derived by Maris Co. from this lease for the year ended December 31, 2015? (b) What should be the amount of rent expense incurred by Dunbar from this lease for the year ended December 31, 2015?

Which of the following would not be included in the Lease Receivable account?

Mays Company has a machine with a cost of $500,000 which also is its fair value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $50,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2015 it leased equipment with a cost of $320,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $520,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2015?

Use the following information for questions 82 and 83. Hull Co. leased equipment to Riggs Company on May 1, 2015. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2016. Riggs could have bought the equipment from Hull for $4,800,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2012, of $4,200,000. Hull's depreciation on the equipment in 2015 was $540,000. During 2015, Riggs paid $1,080,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $96,000 in 2015. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. -Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2015, should be

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

sells machinery to Beck Corp. at its fair value of $720,000 and leases it back. The machinery had a carrying value of $630,000, the lease is for 10 years and the implicit rate is 10%. The lease payments of $106,500 start on January 1, 2015. Hester uses straight-line depreciation and there is no residual value. Instructions (a) Prepare all of Hester's entries for 2015. (b) Prepare all of Beck's entries for 2015.