Exam 15: Leases

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -If the lessor retains title to leased property under the terms of the lease:

On January 1, 2018, Tennessee Valley Corporation (TVC) leased equipment from Great Lakes Leasing under a finance lease. Lease payments are made annually. Title does not transfer to the lessee and there is no purchase option or guarantee of a residual value by TVC. Portions of the Great Lakes Leasing's lease amortization schedule appear below: Required: 1. What is TVC's lease payable at the beginning of the lease (after the first payment)? 2. What is the lease term in years? 3. What is the asset's residual value expected at the end of the lease term? 4. What is the effective annual interest rate? 5. What is the total amount of lease payments for Great Lakes? 6. What is the total amount of lease payments for TVC? 7. What is Great Lakes' total effective interest revenue recorded over the term of the lease? 8. What amount would TVC record as a right-of-use asset at the beginning of the lease?

On October 1, 2018, Sonoma Company leased equipment from Napa Inc. in lease payable in five equal annual payments of $500,000, beginning Oct 1, 2019. Similar transactions have carried an 11% interest rate. The right-of-use asset would be recorded at: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

From the perspective of the lessor, two possible lease classifications are:

On January 1, Sepe Vineyard Supply leased a truck for a five-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $11,000 due on December 31 of each year, calculated by the lessor using a 4% discount rate. If Sepe's revenues exceed a specified amount during the lease term, Sepe will pay an additional $3,000 lease payment at the end of the lease. Sepe estimates a 70% probability of meeting the target revenue amount. What amount, if any, should be added to the right-of-use asset and lease liability under the contingent rental agreement?

Is it possible that a finance lease under IFRS be classified as an operating lease under U.S. GAAP? Explain.

On January 2, 2018, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a finance lease for $240,000, which includes a $10,000 purchase option at the end of the lease. Nori is reasonably certain to exercise the purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. For the year ended December 31, 2018, what amount should Nori recognize as amortization expense on the right-of-use asset?

If the lease begins "at or near the end" of an asset's economic life, the criterion of the lease term being for the major part of the economic life does not apply when classifying the type of lease. This is consistent with the basic premise of this criterion that most of the risks and rewards of ownership occur prior to that time.

Lansing West leased computer hardware from Franklin Leasing on January 1, 2018. Franklin purchased the equipment from International Machines at a cost of $56,040. Related Information: Lease term 2 years ( 8 quarterly periods) Quarterly rental payments \ 7,500 at the beginning of each period Economic life of asset 2 years Fair value of asset \ 56,040 Implicit interest rate 8\% (Also lessee's incremental borrowing rate) -Required: Prepare appropriate journal entries for Franklin Leasing from the beginning of the lease through January 1, 2019. Franklin's fiscal year ends December 31. Round your answers to the nearest whole dollar amounts.

Compare and contrast the way leases are classified between operating leases and finance leases under U.S. GAAP and IFRS.

The discount rate influences virtually every amount reported in connection with a lease by both the lessor and the lessee. What is the lessor's discount rate when determining the present value of lease payments? What is the lessee's discount rate?

Durney Co. recorded a right-of-use asset of $800,000 in a ten-year finance lease. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:

In an eight-year finance lease, the portion of the annual lease payment that represents interest in the lease's third year payment is:

On a transaction that qualifies for sale-leaseback accounting, any gain on the "sale" portion of the transaction is recognized immediately.

Distinguishing between operating and finance leases is due in large part to the accounting concept of:

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -What amount would the lessee record as annual amortization on the right-of-use asset using the straight-line method?

Describe the use of amortization for an asset leased under a finance lease. Include a discussion of the amortization period.

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -What is the outstanding balance after payment 9?

Which of the following is not among the criteria for classifying a lease as a finance lease?

Charles River Hospital leased medical equipment from Plymouth Industries on January 1, 2018. Plymouth Industries manufactured the equipment at a cost of $600,000. The equipment has a fair value of $750,654. Appropriate adjusting entries are made quarterly. Required: Round your answers to the nearest whole dollar amounts. 1. Prepare appropriate journal entries for Charles River Hospital to record the arrangement at its commencement, January 1, 2018, and on March 31, 2018. 2. Prepare appropriate journal entries for Plymouth Industries to record the arrangement at its commencement, January 1, 2018, and on March 31, 2018.