Exam 18: Leases

Non-refundable payments made in advance on operating leases may be amortized either over the term of the lease, or any other period consistent with the GAAP guidelines for amortizing intangible assets.

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms). Executory costs of $10,000 are reimbursed by the lessee. 5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014. Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease. Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies. ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc. DEF Inc's incremental borrowing rate is 9%. Assuming that this qualifies as a finance lease, at what amount would DEF Inc.capitalize the leased machinery at the inception of the lease as per IFRS (rounded)?

Under both operating and finance leases, periodic rent expense for a lessee is likely to be the same over successive periods.

Sales-type leases are essentially a selling tool used by manufacturers to sell their merchandise.

Which of the following is not a possible advantage of long-term leases?

On January 1, 2014, a lessor and lessee signed a lease calling for 5 annual payments of $10,000 to be made starting on December 31, 2014.The market value and book value of the asset at inception is $41,013.The lessee also guarantees the full $5,000 residual value at December 31, 2018, the end of the lease term.Both parties use 10%.The lessee uses straight-line depreciation.Provide the first year (2014)entries for both lessor and lessee.Assume there are no uncertainties concerning collection of lease payments by lessor, nor unreimbursable costs of lessor.

Leasing assets can result in much time and effort on the part of the lessee.Contracts, details, complex calculations and journal entries are all required to accurately track each lease.Why then, with all the extra work involved would a company be inclined to lease instead of buy?

Any operating or executory costs should be excluded from the calculation of the minimum lease payments.

The following information relates to a lease contract: Inception: 1/1/x1 Annual lease payments of $3,000 due each 12/31 beginning 12/31/x1 End of lease term: 1/1/x5 There are 4 lease payments in all Useful life of asset at inception: 10 yrs Expected residual value at 1/1/x5: $6,000 Lessee is given option to purchase asset at 1/1/x5 for $1,000 Using an interest rate of 10%, what is the present value of minimum lease payments for t lessee at inception?

Ryan Corp.leased an asset from Amanda Corp.under a finance lease.The original entry for finance lease included a debit to leased asset for $75,000.Amortization on the asset amounted to $7,500.At the end of the year, the lease liability on the books was $64,567.What is the after tax impact assuming a tax rate of 40%?

A lessee rented a machine that had a market value (cost new to the lessor)of $26,132, for a 6-year term, with annual year-end rentals (ordinary annuity situation)of $6,000 each.The annual implicit interest rate would be %

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms). Executory costs of $10,000 are reimbursed by the lessee. 5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014. Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease. Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies. ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc. DEF Inc's incremental borrowing rate is 9%. -What would be the amount of finance revenue recorded by ABC Inc.in the first year of the lease (rounded)?

Companies that opt for finance leases usually do so because of the tax advantages finance leases provide.

Assume now that JKL Inc.adheres to ASPE.The interest rate used by the company to impute its interest revenue would now be:

JKL leased an asset to RST that cost $100,000 when purchased by JKL.The lease term was for six years and specified year-end rentals.JKL earns a $12,000 dealer's profit and uses an interest rate of 14 percent to compute the annual rentals.The amount of each annual rental must be:

Ryan Corp.enters into and sale and leaseback agreement with Geisler Corp.Ryan Corp.sold its building to Geisler Corp.for $400,000.The building had a historical cost of $600,000 and accumulated depreciation of $300,000.Ryan Corp.then leased it back from Geisler corp.for $80,000 per year for 10 years.Prepare the journal entry to record the sale.

What is the difference between the net method and gross method of accounting for leases by the lessor?

If the title to a leased asset transfers to the lessee at the end of the lease term, what is the period and residual value used by the lessor to depreciate the leased asset?

In a sales-type lease with an unguaranteed residual value, the gross margin recognized by the lessor in the year of inception is:

RST leased equipment from MNO to be used in its warehouse.The lease term is five years.RST spent $5,000 for ordinary repairs during the second year of the lease.RST should: