Exam 18: Leases

If a lease transfers the residual value of the leased asset to the lessee at the end of the lease term, the lessee has permanent ownership of the leased asset.

In a sale and leaseback situation

Lamont Company leases computers for a three-year term, at the end of which they are regarded as obsolete with no residual value because Lamont donates them to schools.Rents are collected at the end of each six-month period; the leases qualify as direct financing leases to Lamont (lessor).The computers cost Lamont $20,000 each.Lamont bases the rents on a 16% annual rate. (a)The semi-annual rental on one computer, rounded to the nearest dollar, is $ _. (b)Complete the following amortization schedule for the lease of one computer. (c)Give the entries that should be made by the lessor on the following dates: (1)At the date the lease is signed: (2)At the date of collection of the first rental payment: (d)Show the lessor's income statement and balance sheet amounts with respect to the lease immediately after the first rental collection:

Which of the following is included in the lessor's cash flows but not the lessee's minimum lease payments?

The effective interest method is normally used to compute the lessor's finance expense related to a finance lease.

The definition of an operating lease is essentially a lease wherein the criteria for finance lease classification have not been met.

LOR leased to LEE a computer that cost LOR $20,000.The explicit interest rate is 20%; rentals are paid at each year-end; and the lease term is three years.Residual value at the end of the lease term is $2,000.Assume a direct financing lease. Requirement 1: LEE retains the computer at the end of the lease term at a BPO cost of $1,500. (a)The rental amount computed by LOR is $ _. (b)The amount LEE should capitalize is $ _. Requirement 2: How much interest should be recognized at the end of year 1, in the above situation, by: (a)LOR? $________ (b)LEE? $________ Requirement 3: At the end of year 1, in the above situation, how much would the principal be reduced for (a)LOR's lease receivable? $ and (b)LEE's lease liability? $________.

A finance lease signed on January 1, 2014, calls for 5 annual lease payments of $40,000 starting January 1, 2014.The asset reverts to the lessor on December 31, 2018 at which time it is expected to be worth $25,000.The lessor's implicit interest rate is 10%.What is the market value of the asset at inception?

Under ASPE, a lessor may classify a lease as a finance lease if:

Initial direct costs include lessor costs incurred:

Under proposed changes to IFRS leasing standards, leases will generally be classified as short-term or long-term.The finance and operating lease classifications will disappear.

LAS owns a building in North Bay.LAS enters into an agreement with BH as follows: LAS sells the building to BH on 1/1/2014 for $2,900,000 (which was the building's fair value on that date)and immediately leases it back for $500,000 per year for 10 years.The historical cost of the building was $9,000,000 and accumulated amortization amounted to $7,000,000.Part of the journal entry to record these transactions would include:

A lease with a three-year term calls for a $5,000 payment at the end of each of those years.The three payments are the only ones required in the lease.The residual value at the end of the lease term is not guaranteed.The asset reverts to the lessor at the end of the term.The lessee has no way of knowing the unguaranteed residual value at the end of the lease term, or the one at the end of the asset's useful life, or the total useful life of the asset at inception.However, the lessee does know the lessor's implicit rate (10%), and the asset's fair market value at inception ($14,000).The lessee's borrowing rate on similar debt is 8%.Therefore:

Each periodic rent collected on a finance lease by the lessor is usually part principal and part interest revenue.

The same quantitative thresholds for determining the existence of finance leases apply under both IFRS and ASPE.

To be classified as a finance lease by the lessee, no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor may exist.

In an operating lease, if a non-refundable down payment is made in advance, the lessor should initially debit Cash and credit Unearned Rent (liability).

A finance lease is based upon the view that there was a sale/purchase (between the parties)of the leased asset at the inception date of the lease.

The lessor recognizes a profit at the inception of the lease when the lease is classified as a(n):

On January 1, 2014, WXY signed an operating lease agreement, which required $5,800 annual rentals to be paid at the end of each year.The accounting period ends December 31.At the end of 2014, WXY (lessee)should make the following entry: