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%. Assuming that this qualifies as a finance lease, what would be the amount of DEF Inc's annual depreciation as per IFRS (rounded)?

LMO leased an asset for use in its factory.The lease specified that LMO was to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct financing lease because LMO was allowed to lease the asset at cost of $14,000 (i.e., the present value of the lease payments).The lessor received a 12 percent rate of return on the lease.The estimated residual value at the end of the lease term is zero.If the lease was classified as a finance lease by LMO, how much annual depreciation (using SL)should LMO record?

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, show how the leased asset and the lease obligation will be shown on th lessee's balance sheet at 31 December 2019.

A lessee is usually motivated to report a lease liability as a finance lease because the lessee can capitalize the "cost" of the leased asset.

On January 1, 2014, LOR leased a machine (original cost $60,000)to LES for a 5-year period at an implicit interest rate of 15 percent.The lease qualified as a direct financing lease and the annual lease payments ($17,306)are made each December 31.LOR retained the $4,000 estimated unguaranteed residual value , LOR's net receivable and LES's liability would be (round to the nearest dollar):

The following information relates to a lease contract: Lease inception = 1-1-x1 Market value and book value (to lessor)of New equipment under lease = $10,000 Interest rate used by both lessee and lessor The lease allows the lessee to purchase the asset for $200 on 1-1-x4. There are no uncertainties with respect to collectability of lease payments, or performance by lessor. (a)Determine the annual lease payment (b)Classify the lease for the lessee (c)Record the 2014 entries

The basic accounting issue for lessors is:

Equal monthly rental payments for a particular lease should be charged to rental expense by the lessee for which of the following?

For a finance lease, the amount initially capitalized by the lessee is the sum of the future value of the periodic lease payments, plus the future value of any bargain purchase option.

The lessee's incremental borrowing rate is the rate that, at the inception of the lease, the lessee would have incurred to borrow over a similar term the funds necessary to purchase the leased asset.

An asset with a market value of $100,000 is leased on 1/1/x0.Five annual lease payments are due each January 1 beginning 1/1/x0.The unguaranteed residual value on 12/31/x4, the last day of the lease term, is estimated at $40,000.The lessor's implicit interest rate is 8%.What is the annual lease payment?

On January 1, 2014, LE Corporation leased a machine from LOC for a period of three years and paid $4,800 at the inception of the lease. In addition, five equal rentals of $4,800 are to be paid at the beginning of each six-month period thereafter.The effective annual interest rate was 8%.The lease qualifies as a finance lease. (a)Compute the amount of the lease liability at 1/1/x1. (b)Complete LEC's partial amortization schedule given below. Round amounts to the nearest dollar.

ABC INC.entered into a sales-type lease to lease JKL an asset that cost ABC INC. $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.ABC INC.used a 15 percent interest rate to compute the rentals.The dealer's profit (or loss)that ABC INC.recognized was:

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 $3,500 each.The carts cost Ryan Corp.$3,000 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 31x1 to account for the lease and the first payment on December 31x2

Company A enters into a lease agreement with Company B.The fair value of the asset is $100,000.The present value of the minimum lease payments is $90,000.The yearly payment is $10,000, depreciation amounts to $5,000 and the lease meets the requirement of an operating lease.What is the journal entry at the end of the first year assuming a full 12 months have passed?

On January 1, 2014, LOR Company rented a machine (3-year life, no residual value, straight-line)to LEE Company for a cash rental payable each December 31, 20 11, 12, and x13.The rental is based on the regular sales price: cost, $35,665; sale price, $45,665.The agreed interest rate was 15% and the lessee retains the machine at the end of the lease term at no additional cost. (a)The annual rental is $ _. (b)Complete the following lease amortization schedule: (c)Give the lessor's and lessee's entries on the following dates:

Under ASPE, if a leased asset's fair value is less than its carrying value at the date of sale under a sale-and-lease-back transaction, the lessor has experienced an impairment loss.

The lessor's internal rate of return is normally the rate implicit in the lease.

What interest rate does a lessee use for lease capitalization purposes? Be as specific as possible.Also, once this rate is decided, specifically what does the lessee use the interest rate for?

In a sale and leaseback arrangement, the lessee is also: