Exam 12: Financial Reporting for Leases

If a lease agreement contains a bargain purchase option,the lessee must depreciate the leased asset over the asset's useful life rather than over the lease term.

If a lease contains a residual value guarantee,the lessee must include the guaranteed amount in the present value of the minimum lease payments.

On October 1,2014,Kelly Company leased a boat from Grant Company.The lease is noncancelable and requires five equal annual payments of $50,000 each.The lease payments are due each October 1,beginning October 1,2014.The boat is recorded on Grant's books at $180,000,but its fair value is $207,542.Grant expects that the boat's residual value at the end of the lease term will be $10,000,but it is not guaranteed by Kelly.However,Kelly has an option to purchase the boat for $10,000 at the end of the lease term.At the inception of the lease,the boat has a remaining economic life of six years with a $2,500 estimated salvage value at the end of its life.Both firms use the straight-line method of depreciation and have December 31 year-ends for financial reporting purposes.The interest rate used by Grant Company to calculate the annual lease payment is 12%,and known by Kelly.Collection of the lease payments is reasonably predictable by Grant. Required: 1.Complete the following table for Grant's and Kelly's December 31,2014 income statements: Sales $\quad$$\quad$$\quad$$\quad$$\quad$ Grant (Lessor) $\quad$$\quad$ Kelly (Lessee) Interest income Rent revenue Cost of goods sold Depreciation expense Rent expense Interest expense Be sure to show and clearly label all calculations.

On January 1,2014 Lessee Company entered into a five-year lease which required annual payments of $60,000.The first payment was due at the inception of the lease.The present value of the minimum lease payments to record the lease was $250,192;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 as of December 31,2014?

On July 1,2015,Colby Company sold equipment to Cheddar Corporation and simultaneously leased it back for five years.The equipment's fair market value on July 1,2015 was $875,000 and its book value was $700,000.Colby and Cheddar agreed to an 8% interest rate with respect to the lease transaction.The equipment has a remaining life of five years and an estimated salvage value of zero after five years.Colby is required to make annual payments of $202,916 beginning July 1,2015. Required: Prepare the necessary journal entries for Colby Company to record the sale-leaseback for the year ended December 31,2015.Assume that the lease qualifies as a capital lease from Colby's perspective.

Flat Iron Corporation,a lessor,entered into a lease agreement on November 1,2014.The lease was for 6 years and required the lessee to make annual payments of $187,800 on November 1^st of each year;the first payment was received by Flat Iron on November 1,2014.The leased asset cost Flat Iron $600,000,the implicit interest rate was 9%,and the asset's useful life was 6 years.There were not any uncertainties regarding the collection of the lease payments and Flat Iron's performance was considered to be complete as of November 1,2014. Required: 1.Determine the amount of income that will be reported by Flat Iron for the year ended December 31,2014. 2.Prepare the necessary journal entries for the year ended December 31,2014.

Under IFRS,an indicator that could lead to a lease being classified as a finance lease is if the lessee cancels the lease,the lessor's losses will be borne by the lessee.

It is possible that the lessee and the lessor could both treat the same lease as a capital lease.

Under IFRS,a lessee may classify some assets held under leases as investment property which allows the lessee to

The lessor of a building with an operating lease will present on its balance sheet an asset equal to

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 -How much straight-line depreciation expense will Pepper record for Year 1? (Round all calculations to the nearest whole dollar amount.)

Hatfield Corporation leases a tractor from Star 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) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. -If Hatfield's incremental borrowing rate is 11% and the implicit rate is not known to the lessee,what interest rate will Hatfield use to account for this lease?

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 -If the equipment is worth $12,500 at the end of the lease,Pepper will make which one of the following journal entries?

When accounting for an operating lease,which one of the following accounts are charged with the expense on the lessee's income statement?

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. -Blue Manufacturing treats a lathe lease as a/an

The lessee must depreciate a leased asset over the lease term assuming that any one of the four lease criteria applicable to the lessee are met.

The FASB and the IASB issued a jointly developed leasing exposure draft which will ultimately result in all leases being treated as capital leases.

GAAP establishes specific criteria for the treatment of leases.For a lessee,if any of the criteria are met,the lease must be treated as an operating lease.

To remain in accordance with GAAP,operating leases require note disclosure of the future cash flows arising from operating leases.