Exam 12: Financial Reporting for Leases

Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell for $32,000. For credit-approved customers, Blue leases the lathes for $8,500 per year for five years. The lathes are guaranteed to last four years and generally have a six-year life. -What is the financing profit of Blue Manufacturing on a leased lathe?

Under IFRS,operating lease treatment could be required if the leased asset is so specialized that significant modifications would be needed for another party to use it.

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 -To value the lease asset,Pepper should use a discount rate of

On January 1,2014,Lessee Company entered into a five-year lease which required annual payments of $120,000.The first payment was due at the inception of the lease.The present value of the minimum lease payments to initially record the lease was $500,384;the applicable discount rate was 10%.Lessee Company treated the lease as a capital lease.What is the balance of Lessee Company's lease liability immediately after the January 1,2015 payment was made?

The manufacturer's or dealer's profit earned by the lessor is the same whether the residual value is guaranteed or unguaranteed.

The most straightforward method for making lessees' balance sheet data comparable is to treat all leases as if they were

GAAP established specific criteria for the treatment of leases.One of the criteria states that the lessee must capitalize a lease if the present value of the minimum lease payments is greater than or equal to 75% of the leased asset's fair value.

Under IFRS the two additional lessor criteria provided under U.S.GAAP,regarding revenue recognition,are absent.

Which of the following statements pertaining to lease accounting is not correct?

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 entry to record this lease on Pepper's books is (Round all calculations to the nearest whole dollar amount.)

Gross Investment in Leased Asset is classified on a lessor's balance sheet as a current asset.

Which of the following is a reason why lease accounting under GAAP should be reconsidered?

The amount charged to expense over the life of a lease is the same for operating and capital leases.

Which one of the following ratios deteriorates with the lessee's capitalization of a lease?

Executory costs paid by the lessee associated with a capital lease are recorded as a component of the lease liability.

If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease,the gain on the sale is recognized immediately as an ordinary gain.

A lessee will record a leased asset at the lower of the present value of the minimum lease payments or the leased asset's fair value when the lease is a capital lease.

Loan covenants are one reason lessees prefer operating lease treatment.

The current ratio will be lower over the lease term when the lessee treats the lease as a capital lease rather than an operating lease.

On January 1,2015,Avalanche Company entered into an agreement to lease equipment for a ten-year period.The lease requires Avalanche to pay $220,000 on January first of each year,with the first payment required at the lease inception.Included within the $220,000 annual payment are executory costs totaling $15,000.Avalanche has the option to purchase the equipment at the end of the lease term for $55,000;the fair value of the equipment at the end of the lease term is estimated to be $120,000.The equipment's useful life is estimated to be 12 years and the salvage value after 12 years is estimated to be $10,000.Avalanche's incremental borrowing rate is 8% and the implicit rate known by Avalanche is 7%. Required: 1.Determine the lease liability immediately after the January 1,2016 payment was made. 2.Determine the book value of the leased asset as of December 31,2016. 3.Determine the total expenses to be reported on the income statement for the year ended December 31,2015.