Exam 7: Financial Assets: Cash and Receivables

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%. Assuming that this qualifies as a finance lease,at what amount would DEF Inc.capitalize the leased machinery at the inception of the lease as per ASPE (rounded)?

The same quantitative thresholds for determining the existence of finance leases apply under both IFRS and ASPE.

In a sale and leaseback arrangement,the lessee is also:

Under proposed changes to IFRS leasing standards,a lease that is less than 12 months in duration may be classified as long-term if there are substantial penalties for non-renewal.

XYZ Rental leased a special crane to ABC INC.that originally cost $40,000.The lease was for six years and the rentals were $10,000 per year,payable at each year-end.The implicit interest rate was 10 percent.XYZ Rental recognized a gross margin (dealer's profit)of (rounded to nearest dollar):

ABC Inc.leased a computer to the Lennox Silver Company on 1 April 2018.The terms of the lease are as follows: *** ABC Inc.company charges a half-year depreciation in the year of acquisition and a half-year in the year of disposition,regardless of the actual dates of acquisition and disposal. Suppose that at the end of the lease,the lessor tells the lessee to dispose of the asset,and to keep any proceeds in excess of the guaranteed residual value.Provide entries for the lessee on 1 April 2014,assuming that the lessee sells the asset for $2,100 and remits the required $2,000 payment to the lessor.

The following information relates to a lease contract: The lease allows the lessee to purchase the asset for $200 on 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 the lessor (c)Record the 2014 entries

Finance revenue is recognized on a finance lease because the leased asset is considered sold at the inception of the lease,and the lease is a way of financing the lease.

JKL leased an asset to RST that cost $100,000 when purchased by JKL.The lease term was for six years and specified year-end rentals.JKL earns a $12,000 dealer's profit and uses an interest rate of 14 percent to compute the annual rentals.The amount of each annual rental must be:

A lessee rented a machine that had a market value (cost new to the lessor)of $26,132,for a 6-year term,with annual year-end rentals (ordinary annuity situation)of $6,000 each.The annual implicit interest rate would be ________________%

The lessor recognizes two different kinds of earnings for a sales-type lease,that is,dealer's profit and interest revenue.

The term usually used to describe the situation where a lessee has an option to purchase the leased property at a price that is sufficiently lower than its fair market value so that the exercise of the option appears reasonably assured is:

Amanda Company leased an office building for six years for an annual rent of $170,000.The lessor agreed to forgive the first year of the lease (i.e.payments would not begin until the second year).The entry in the second year would include a debit to:

The amount of each rental payment on a sales type lease includes:

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 recorded by ABC Inc.in the first year of the lease (rounded)?

On January 1,2014,a lessor and lessee signed a lease calling for 5 annual payments of $10,000 to be made starting on December 31,2014.The market value and book value of the asset at inception is $41,013.The lessee also guarantees the full $5,000 residual value at December 31,2018,the end of the lease term.Both parties use 10%.The lessee uses straight-line depreciation.Provide the first year (2014)entries for both lessor and lessee.Assume there are no uncertainties concerning collection of lease payments by lessor,nor unreimbursable costs of lessor.

What are the income tax implications for the lessor with respect to a finance lease?

RST entered into a sales-type lease with EFG to rent special equipment for six years.The equipment cost $40,000 and RST will earn a $4,000 dealer's profit and 12 percent interest revenue.Therefore,RST will receive year-end lease payments of:

Under ASPE,a lessor may classify a lease as a finance lease if:

Both the lessee's interest and depreciation expense should be added back to net income to calculate cash flows from operating activities under the indirect method.