Exam 18: Leases

A lessee is attempting to circumvent the accounting rules, which require lease capitalization.Which of the following is most likely to lead to classification of a lease as an operating lease for the lessee?

The inception of a lease is 1/1/x1.A third party guarantees the residual value of the asset under lease, estimated to be $12,000 at 1/1/x6, the end of the lease term.Annual lease payments are $10,000 due each December 31 beginning 12/31/x1.The last payment is due 12/31/x5.Both the lessor and lessee use 10% as the interest rate.The remaining useful life of the asset was 6 years at inception.What is the net asset balance for the lesso and net liability balance for the lessee, at inception (rounded to the nearest dollar)?

On December 10, 2014, LMN purchased a special machine for leasing purposes; it cost $10,000.On January 1, 2015, the machine was leased to ABC INC.under the following terms (it is a direct financing lease): a.lease term 4 years; interest rate 10 percent; rentals payable at year-end.b.LMN retains the residual value of $1,000 .There is no guarantee on the residual value. On January 1, 2015, when the lease term starts, the following accounting amounts should be used:

You are analyzing the balance sheet of a large manufacturing company and come across the followin account in the property, plant and equipment section: Equipment acquired under finance lease = $400,000 The footnotes indicate that the lease was signed three years ago, that there are several years left in the finance lease, and that the equipment reverts to the lessor at the end of the lease term.The reporting company does not use the accumulated depreciation account for assets under finance leases. Explain (a)what this account and (b)amount means, and (c)how it came to be included as a long-term asset.

A lessor leased equipment to a lessee on January 1, 2014.The lease has the following characteristics: Book value of the asset to the lessor: $100,000 Market value: $167,417 on that date. Lessor's implicit rate: 10% Lessee's borrowing rate: 12% Lessee knows the lessor's implicit rate. Five equal payments of $40,000 are due each January 1, beginning 2014 Lease term ends: December 31, 2018 Remaining useful life of equipment at January 1, 2014: 8 years (at the end of which time the equipment will have no residual value) Estimated residual value on December 31, 2018: $30,000 Lessee has the option to buy the asset on December 31, 2018 for $1,000. Assume there is no uncertainty as to payment of lease payments by lessee or unreimbursable costs fo lessor. Assume straight-line depreciation or amortization. (a)Is this an operating or finance lease for the lessee, and why? (b)Prepare all the required journal entries for the lessor and lessee for 2014.

What amount of sales is recognized by the lessor in a sales type lease when the residual value is unguaranteed?

If the title to a leased asset does not transfer to the lessee at the end of the lease term, and no party guarantees the residual, what is the period and residual value used by the lessor t depreciate the leased asset?

What is a sales-type lease?

XYZ leased a tract of land for a 20-year term.The lease agreement did not contain a bargain purchase option, and consequently, the land will revert back to the lessor at the end of the lease term.At the inception of the lease, XYZ initiated construction on a small building on the land.The building was completed at the end of the third year of the lease, at a cost of $60,000.The building was a permanent structure on the land.Its estimated life was 20 years and was expected to have no residual value.XYZ should record annual depreciation (straight-line)on the building of:

If the lessor and lessee use different interest rates to account for a finance lease, then:

Under ASPE, any initial gain or loss arising from a sale leaseback arrangement which is an operating lease must be recognized over the lease term.

State completely criterion 2 (bargain purchase option)and criterion 4 (90%)as they pertain to capitalizing leases under ASPE.Then, explain why fulfilling either constitutes a capitalized lease for the lessee.

Off-balance sheet financing occurs when a company makes use of assets but does not record the asset or corresponding liability on the financial statements.

The lessor recognizes two different kinds of earnings for a sales-type lease, that is, dealer's profit and interest revenue.

ABC INC.leased a new machine from QRS on July 1, 2014, under a lease with the following pertinent information: ABC INC.has the option to purchase the machine at the end of the lease term, by paying $40,000, which approximates the expected fair value of the machine on the option exercise date.The cost of the machine on QRS's accounting records is $150,000.On July 1, 2014, ABC INC.should record a net capitalized leased asset of:

In a sale and leaseback situation:

JMR Company leases an asset from KAR Company.The rate implicit in the lease is 12% and JMR's incremental borrowing rate is 11%.JMR is aware of the implicit rate.Assuming that both rates would provide an MLP amount well below the fair value of the leased asset, the rate that KAR should use for discounting the net lease payment is:

Lessor Company rented a machine to Lessee Company on January 1, 2014, for a period of 3 years.Rent of $6,000 is due January 1, of each year (starting in 2014).The lease qualified as an operating lease for both the lessor and lessee.In addition to the monthly rentals, the lease contract required Lessee Company to pay $1,000 on January 1, 2014 (this is non-refundable).The accounting period ends December 31.Complete the entries required for Lessee Company on the following dates, using the straight-line method. (a)January 1, 2014: (b)December 31, 2014:

Current IFRS standards do not distinguish between sales-type leases direct financing lease, as both are finance leases.

Why is the gross method used by the lessor in most cases instead of the net method if both produce the same results?