Exam 12: Financial Reporting for Leases

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. -For Morey,this lease is treated as a/an

Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. -Ford uses which one of the following interest rates to record this lease?

With a leveraged lease,the lessor must treat the lease as a/n

GAAP defines lessors' treatment of leases according to Type I and Type II characteristics.Type I characteristics are linked to

The difference between the expense charged with a capital lease and an operating lease is

Constructive capitalization provides a preview of how the FASB/IASB exposure draft will affect lessee financial statements.

GAAP establishes specific criteria for the treatment of leases.If any of the criteria are met,the lessee

If a car dealership leases cars for four years with guaranteed purchase options,guaranteed residual values,and insured financing agreements,these leases are treated as

Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%. Present value interest factors are: PVIF \1 10 periods 0.38554 0.32197 PVIF Annuity 10 periods 6.14457 5.65022 -The Pepper lease is a/an

Fischer Corporation leased new equipment to Swix Company on January 1,2014.The lease is for an eight-year period and requires equal annual payments of $35,000 due on January 1 of each year.The first payment was made at the inception of the lease.The fair value of the equipment and the present value of the payments was $217,223.The implicit interest rate is 8%.The equipment cost Fischer Corporation $160,000,has an estimated eight-year life,and a residual value of zero.Fischer Corporation uses straight-line depreciation.Fischer Corporation should have recorded the lease as a sales-type lease but mistakenly recorded the lease as an operating lease. Required: Determine the amount of the lease classification error on the following financial statement elements of Fischer Corporation,and whether the amount is overstated or understated: Total assets as of $12 / 31 / 15$ _____ Net Income for the year ended $\mathbf { 1 2 } / \mathbf { 3 1 } / \mathbf { 1 4 }$ ______

When accounting for an operating lease,interest expense is recognized over the lease term by the lessee.

Current GAAP defines lessors' treatment of leases according to Type I and Type II characteristics.Type I characteristics are linked to the critical event criteria for revenue recognition.

Conroy Company leased equipment on January 1,2015.Information pertinent to the lease is as follows: • The lease term is 6 years. • Annual payments of $60,000 are due on January 1 of each year;the first payment was made at the inception of the lease. • Conroy's incremental borrowing rate is 12%. • The implicit interest rate is 10%;Conroy knew the implicit interest rate. • The unguaranteed residual value is $50,000. • The useful life of the equipment is 10 years. • Conroy uses the straight-line depreciation method. • The fair value of the equipment is $325,000. • The lease agreement did not contain either a bargain purchase option or a transfer of title. Required: Prepare all the necessary journal entries for the year ended December 31,2015 with respect to Conroy Company's lease.

When accounting for an operating lease,a liability is recognized when the lease is signed by the lessee.

On January 1,2015,Lessor Corporation entered into a lease which was treated as a sales-type lease by Lessor Corporation;the leased asset's book value within Lessor Corporation's financial statements was $350,000 as of January 1,2015.The lease required the lessee to make ten annual payments of $50,000;the first payment was due at the beginning of the lease term and each January 1 thereafter.The present value of the minimum lease payments was $362,345.The implicit rate of interest,known to the lessee,was 8%,while the lessee's incremental borrowing rate was 10%.The increase in Lessor Corporation's net income for the year ended December 31,2015 was approximately

Compared to a firm with a capital lease,operating leases help the lessee firm earn a higher return on assets in the early years of the lease.

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. -Which of the following entries will Morey prepare to record the lease of the tractor on January 1,2014?

Goff Industries has applied for a loan,and as the bank loan officer,you've been assigned to evaluate Goff's financial statements.Your evaluation reveals that Goff has no capital leases recorded on its financial statements while most other companies in its industry do have such leases.To effectively evaluate Goff's financial position and compare it to industry standards,you've decided to constructively capitalize Goff's operating leases.The following information is available from Goff's financial statements for the year ended December 31,2015: (Round all intermediate calculations to the nearest whole dollar.) Minimum operatinglease payments: 2016 \ 1,000 2017 900 2018 820 2019 760 2020 700 2020-2024 2,500 Assuming Goff's long-term debt rate is 10%,what amount would you constructively capitalize in order to effectively analyze Goff's financial position?

Executory costs of a lease are treated as operating expenses by the lessee.

A lessee's minimum lease payments includes the present value of a residual value guarantee.