Exam 7: Financial Assets: Cash and Receivables

Contingent rent is a bargaining tool used by the lessee in order to negotiate a more favourable lease agreement.

Ryan Corp.enters into and sale and leaseback agreement with Geisler Corp.Ryan Corp.sold its building to Geisler Corp.for $400,000.The building had a historical cost of $600,000 and accumulated depreciation of $300,000.Ryan Corp.then leased it back from Geisler corp.for $80,000 per year for 10 years.Prepare the journal entry to record the sale.

ABC INC.leased a new machine from QRS on July 1,2014,under a lease with the following pertinent information: ABC INC.has the option to purchase the machine at the end of the lease term,by paying $40,000,which approximates the expected fair value of the machine on the option exercise date.The cost of the machine on QRS's accounting records is $150,000.On July 1,2014,ABC INC.should record a net capitalized leased asset of:

The use of contingent lease payments is one method companies use to avoid lease capitalization.

Define the following terms: (1)bargain renewal option (2)incremental borrowing rate (3)lease term

Sale and Leaseback arrangements may be finance or operating leases.

The straight-line method is frequently used to amortize non-refundable rental payments made in advance on leased assets because:

On January1st,2014,ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000. Lease term: 5 years (no bargain renewal terms). Executory costs of $10,000 are reimbursed by the lessee. 5 Annual lease payments of $23,000 each are made on January 1^st of each year starting on January 1^st,2014. Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease. Economic life of the asset is 10 years,after which the equipment will be worthless.Straight-line depreciation applies. ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DEF Inc. DEF Inc's incremental borrowing rate is 9%. What would be the amount of finance revenue that ABC Inc.would recognize throughout the lease?

A 5-year lease contract is signed on 1/1/x1 calling for $4,000 to be paid by the lessee on 12/31/x1,and $6,000 on 12/31/x2,x3,and x4.Total lease payments over the lease term are therefore $22,000.The lessee expects to use the leased asset evenly throughout the lease term,which ends 12/31/x4.No payment is due in 20x2.The entry recorded by the lessee for this operating lease,on 12/31/x1 includes which of the following?

In a sale and leaseback situation:

Explain what a temporary difference is and how it arises?

What interest rate does a lessee use for lease capitalization purposes? Be as specific as possible.Also,once this rate is decided,specifically what does the lessee use the interest rate for?

Over the life of a lease,ABC Inc.received a total cash inflow of $73,000; $65,000 from lease payments plus the $8,000 estimated residual value.The present value of the future cash flow is $55,000.The $18,000 difference between the gross cash flows and the discounted present value is the interest income (or finance revenue)that will be reported by ABC Inc. Using the gross method,record the cash inflow from lease payment of $73,000.

On January 1,2014,TA acquired a machine (for leasing purposes)for $52,000 cash.The machine had an estimated eight-year useful life and no residual value.On January 1,2014,the machine was leased to LTB on an eight-year direct financing lease that required year-end annual rentals of $9,395 starting on December 31,2014.The lessor's implicit interest rate was (rounded to the nearest percent): ___________%.

What guidelines are used under IFRS to determine whether a lease is an operating lease?

LAS owns a building in North Bay.LAS enters into an agreement with BH as follows: LAS sells the building to BH on 1/1/2014 for $2,900,000 (which was the building's fair value on that date)and immediately leases it back for $500,000 per year for 10 years.The historical cost of the building was $9,000,000 and accumulated amortization amounted to $7,000,000.Part of the journal entry to record these transactions would include:

The treatment of gains and losses under Sale and Leaseback arrangements are identical under ASPE and IFRS.

What amount of sales is recognized by the lessor in a sales type lease when the residual value is unguaranteed?

Ryan Corp.enters into and sale and leaseback agreement with Geisler Corp.Ryan Corp.sold its building to Geisler Corp.for $400,000.The building had a historical cost of $600,000 and accumulated depreciation of $300,000.Ryan Corp.then leased it back from Geisler corp.for $80,000 per year for 8 years.The lease qualifies as a finance lease.It is Ryan Corp's policy to depreciate buildings over 10 years.Prepare the journal entry to record the amortization for the first year.(assume a January 1 transaction and a December 31 year end).

Lease Y contains a bargain purchase option and the lease term is equal to 75 percent of the estimated economic life of the leased property.Lease Z contains a bargain purchase option and the lease term is less than 75 percent of the estimated economic life of the leased property.How would the lessee classify these leases?