Exam 18: Leases

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 that ABC Inc.would recognize throughout the lease?

Lessee ABC INC.leased from Lessor QRS a machine that cost $35,000, which was properly classified as a finance lease by both parties.Assume the lessor used a 12 percent implicit interest rate and that the lessee was informed of that rate.The lease did not include a bargain purchase option and the estimated residual value at termination of the lease was zero.Equal semi-annual lease payments are to be made at the start of each such period, including one on the date the lease was signed.The amount of each semi-annual payment, assuming a five-year lease term, would be:

To qualify as a lessor for tax purposes, a company must derive at least 90% of its revenues from leasing.

What is the cost basis of an asset acquired by a lease, which is in substance an instalment purchase?

A company became a lessee by leasing equipment on January 1, 2014 from a lessor.The lease has the following characteristics: Six end-of-year lease payments are due beginning December 31, 2014 in the amount of $41,788 The lease term ends December 31, 2019 Assume this is a finance lease for both parties.What is the present value of minimum leas payments for the lessee?

The amount of each rental payment on a sales type lease includes:

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the:

Sale and Leaseback arrangements may be finance or operating leases.

ML leased a computer to LH on January 1, 2014.The lease was a five year fixed, non-cancellable agreement.The payments were finalized at $2,380 per year with the first payment on January 1, 2014 and ML paid $9,500 for the computer.Carrying value is equal to fair value and there was a guaranteed residual value by lessee of $2,000.The lease is deemed a finance lease.Based on the above information, what type of lease is this for the lessor? Prepare the journal entries for at the inception of the lease using the gross method.

ABC Inc.leased a computer to the Lennox Silver Company on 1 April 2018.The terms of the lease are as follows: *** ABC Inc.company charges a half-year depreciation in the year of acquisition and a half-year in the year of disposition, regardless of the actual dates of acquisition and disposal. From the above information classify the lease from the perspective of the lessee.

The term of a finance lease includes the initial lease term and any bargain renewal terms.

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 ASPE (rounded)?

A 5-year lease contract is signed on 1/1/x1 calling for $4,000 to be paid by the lessee on 12/31/x1, and $6,000 on 12/31/x2, x3, and x4.Total lease payments over the lease term are therefore $22,000.The lessee expects to use the leased asset evenly throughout the lease term, which ends 12/31/x4.No payment is due in 20x2.The entry recorded by the lessee for this operating lease, on 12/31/x1 includes which of the following?

Ryan Corp.enters into an agreement with Montgomery Corp.to lease some office space in town.There are currently a large number of vacant units which allowed Ryan Corp.to obtain favourable lease terms.The agreement called for payments of $150,000 per year for five years; however, given the large number of vacancies, Montgomery Corp.forgave the first year's lease payment.Prepare the journal entries for the five years of the lease.

What are the income tax implications for the lessor with respect to a finance lease?

LAC has negotiated a lease agreement with LEC effective January 1, 2014.LAC will provide LEC with a special-purpose building for ten (10)years.The lease is non-cancellable; requires LEC to provide maintenance, insurance, taxes, etc.; and stipulates that the building reverts back to LAC's control at the end of the lease.The building cost LAC $200,000 and is expected to have no residual value at the end of the lease.LAC expects a 15% return on investments and the lease qualifies as a direct financing lease.Rents are paid each December 31 starting in 2014. (a)How much annual rent will the lessee pay (rounded to the nearest dollar)? $ _. (b)Complete the following schedule of lease amortization for the lessee for the first two years: (c)Complete the following entries for the lessee: January 1, 2014, inception of lease. December 31, 2014, first rental payment and lessee's year-end entries (end of the accounting period).December 31, 2014, accrual by lessee of $4,000 taxes on the building and payment of $800 for repairs on the building.

Ryan Corp.is a manufacturer of high tech golf carts.On December 31, 1999, Ryan Corp.leases 100 golf carts to a local golf course for five years at $95,000 per year payable at the beginning of the lease term.The normal cash sales price of the carts is $4,000 each.The carts cost Ryan Corp.$2,000 each to manufacture.The lease meets all the conditions necessary to be a sales-type lease from the lessor's point of view.Provide the journal entry(ies)on December 31 to account for the lease.

All four finance lease criteria must be met in order for a lease to be deemed a finance lease.

How is the cash flow statement impacted if the lease is deemed to be an operating lease versus a finance lease?

Leased assets treated as a finance lease for accounting purposes and an operating lease for tax purposes will create a temporary difference.