Exam 7: Financial Assets: Cash and Receivables

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

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

Current IFRS standards do not distinguish between sales-type leases direct financing lease,as both are finance leases.

The following information relates to a lease contract: Inception: 1/1/x1 Annual lease payments of $3,000 due each 12/31 beginning 12/31/x1 End of lease term: 1/1/x5 There are 4 lease payments in all Useful life of asset at inception: 10 yrs Expected residual value at 1/1/x5: $6,000 Lessee is given option to purchase asset at 1/1/x5 for $1,000 Using an interest rate of 10%,what is the present value of minimum lease payments for the lessee at inception?

Ryan Corp.enters into an agreement with Montgomery Corp.to lease some office space in town.There are currently a large number of vacant units which allowed Ryan Corp.to obtain favourable lease terms.The agreement called for payments of $150,000 per year for five years; however,given the large number of vacancies,Montgomery Corp.forgave the first year's lease payment.Prepare the journal entries for the five years of the lease.

Under proposed changes to IFRS leasing standards,leases will generally be classified as short-term or long-term.The finance and operating lease classifications will disappear.

Leasing assets can result in much time and effort on the part of the lessee.Contracts,details,complex calculations and journal entries are all required to accurately track each lease.Why then,with all the extra work involved would a company be inclined to lease instead of buy?

A lessee wants to lease an asset on a long-term non-cancellable basis,but wants to avoid capitalizing the lease.The lessee is considering several strategies: 1)use a lessee guarantee of residual value; 2)make it impossible for the lessee,who has a very low borrowing rate,to determine the lessor's implicit rate,which is much higher than the lessee's borrowing rate; 3)include a bargain purchase option in the lease agreement; 4)include title transfer in the lease agreement. Which of the above strategies will provide the desired result?

On January 1,2014,ABC INC.leased a machine to MNO.The lease was for a 10-year period,which approximated the useful life of the machine.ABC INC.purchased the machine for $120,000 and expects to earn a 10 percent return on its investment,based upon an annual rental of $17,754 payable in advance each January 1st.Assuming that the lease was a direct financing lease,what should be the interest entry on ABC INC.'s books on December 31,2014?

Operating leases are usually of shorter duration than finance leases and under this type of lease,the risks and rewards of asset ownership remain with the lessor.

The following information relates to a lease contract: The lessee guarantees the residual value at 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 both lessee and lessor (c)Record the 2014 entries for both parties

Explain the most common methods of avoiding lease capitalization?

One incentive for entering into sale-and-leaseback arrangements is:

If the lessor and lessee use different interest rates to account for a finance lease,then:

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 December 31,2015,JKL leased a new machine from MNO.The following information relates to the lease transaction: * Market value of the machine at inception of lease: $500,000 * the machine has an estimated useful life of seven years,which coincides with the lease term. * lease rentals consist of seven equal annual payments of $100,000,the first of which was paid on December 31,2015. * MNO's implicit interest rate is 12 percent,which is known by JKL. * JKL's incremental borrowing rate is 14 percent at December 31,2015. * present value of an annuity of $1 in advance for seven periods at 12 percent is 5.11. * present value of an annuity of $1 in advance for seven periods at 14 percent is 4.89. At the inception of the lease,JKL should record a capitalized lease liability of:

A lease which contains a bargain purchase option,but which has a term equal to only 70% of the estimated economic life of the leased property cannot properly be classified as a finance lease by a lessee.

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):

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? A lease is operating therefore only record the payment.

LMN leases construction equipment on sales-type leases.LMN wants to record a $7,000 dealer's profit on assets leased,each of which cost $60,000.What annual year-end rentals should LMN quote to earn a 12 percent return on 8-year leases?