Exam 21: Accounting for Leases

Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Geary gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and obligation accounts have the following balances: If, at the end of the lease, the fair value of the residual value is $9,800, what gain or loss should Geary record?

Torrey Co. manufactures equipment that is sold or leased. On December 31, 2015, Torrey leased equipment to Dalton for a five-year period ending December 31, 2020, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $550,000 (including $50,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2015. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $1,925,000, and cost is $1,500,000. For the year ended December 31, 2015, what amount of income should Torrey realize from the lease transaction?

The FASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.

Because IFRS is very general in its provisions for lease accounting, the required disclosures for leases under IFRS are more detailed and extensive than those required under U.S. GAAP.

The total lease-related income recognized by the lessee during 2015 is which of the following?

Explain the procedures used by the lessee to account for a capital lease.

On December 31, 2015, Haden Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows: In Haden's December 31, 2015 balance sheet, the deferred profit from the sale of this machine should be

Use the following information for questions 94 through 98. Gage Co. purchases land and constructs a service station and car wash for a total of $360,000. At January 2, 2014, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $400,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: -From the viewpoint of the lessor, what type of lease is involved above?

The primary difference between a direct-financing lease and a sales-type lease is the

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 of $146,518 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 book value of the leased asset at December 31, 2015?

A lessee records interest expense in both a capital lease and an operating lease.

The amount to be recorded as the cost of an asset under capital lease is equal to the

In computing depreciation of a leased asset, the lessee should subtract

Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?

On January 2, 2014, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning January 2, 2014. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2014 to record the lease?

Use the following information for questions 75 through 80. (Annuity tables on page 21-25.) Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2015, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. -From the viewpoint of Yates, what type of lease agreement exists?

When lessors account for residual values related to leased assets, they

Lessee and lessor accounting (sale-leaseback).On January 1, 2015, Morris Company sells land to Lopez Corporation for $8,000,000, and immediately leases the land back. The following information relates to this transaction:1. The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term.2. The land has a cost basis of $6,720,000 to Morris.3. The lease agreement calls for equal rental payments of $754,459 at the beginning of each year.4. The land has a fair value of $8,000,000 on January 1, 2015.5. The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez Corporation set the annual rentals to ensure a rate of return of 8%.6. Morris Company pays all executory costs which total $255,000 in 2015."7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) Prepare the journal entries for the entire year 2015 on the books of Morris Company to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.)(b) Prepare the journal entries for the entire year 2015 on the books of Lopez Corporation to reflect the above purchase and lease transactions."

When a company sells property and then leases it back, any gain on the sale should usually be

If the residual value of a leased asset is guaranteed by a third party