Exam 8: Accounting for Leases

Which statement is true?

Why do lessees generally prefer operating lease treatment? Explain.

Curtis Corporation started operations on March 1,2017.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 5 years.Lease payments would be $11,000 per year,due at the beginning of each fiscal year (March 1).Curtis's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Curtis is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $50,000 by borrowing the full purchase amount at 5% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years. Required: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Curtis for the first year of operations.Assume all payments were made when due.Show your calculations.

Viribana Corporation started operations on March 1,2017.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 10 years.Lease payments would be $11,200 per year,due at the beginning of each fiscal year (March 1).Viribana's incremental borrowing rate is 12%.There is no bargain purchase or renewal option.Viribana is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $71,000 by borrowing the full purchase amount at 12% over 10 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 10 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 10 years. Required: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Viribana for the first year of operations.Assume all payments were made when due.Show your calculations. d.Indicate which option you would recommend for Viribana.Provide one explanation to support your recommendation.

Here are the terms of a lease agreement: Required: a.Determine the amount of lease payment that the lessor would require to lease the asset. b.Compute the present value of minimum lease payments for the lessee. c.Compute the present value of minimum lease payments for the lessor. d.Evaluate whether the lessee should classify the lease as operating or finance.

The following are the characteristics of a lease: Required: Determine the present value of minimum lease payments (MLP)and the appropriate classification of this lease for the lessee.

Here are the terms of a lease agreement: Required: Determine the amount of lease payment that the lessor would require to lease the asset.

Company A and Company B operate in the same industry,where leasing assets is common practice.Company A engages in more finance leases than Company B.Company B's leases are classified as operating leases,but they are essentially a form of financing as well.Both companies disclose information with respect to their leases.Which of the two companies will tend to appear stronger financially according to the balance sheet and income statement?

Channel leased equipment to Montage Company on November 1,2016.The terms of the lease are as follows: Montage uses straight-line depreciation for its property,plant,and equipment. Required: Prepare the journal entries for the lessee from November 1 through December 31,2016.

For the following lease,determine the minimum present value calculation for the lessor.

Boris Corporation started operations on March 1,2017.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows. Option 1: Lease the equipment for 5 years.Lease payments would be $12,000 per year,due at the beginning of each fiscal year (March 1).Boris's incremental borrowing rate is 8%.There is no bargain purchase or renewal option.Boris is responsible for all executory costs of operating the equipment. Option 2: Purchase the equipment for $58,000 by borrowing the full purchase amount at 4% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28). The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years. Required: a.Calculate the present value of the lease payments (Option 1). b.Calculate the payment that would be required under the purchase option (Option 2). c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Boris for the first year of operations.Assume all payments were made when due.Show your calculations.

On April 1,2017,Janus Company entered into a five-year lease for equipment.Annual lease payments are $5,000,payable at the beginning of each lease year (April 1).At the end of the lease,possession of the equipment will revert to the lessor.The equipment has an expected useful life of 5 years.Similar equipment could be purchased for $50,000 cash.Janus's incremental borrowing rate is 6%.The company has a March 31 year-end,and it uses straight-line depreciation for its property,plant,and equipment. Required: a.Prepare the journal entries relating to the lease and leased asset for Janus's fiscal year ending March 31,2018. b.State the amounts related to the lease that would be reported on the March 31,2018 balance sheet,indicating the balance sheet classifications,account names,and amounts.

For the following lease,determine the minimum present value calculation for the lessee.

Soaring Pieces Inc.creates aluminium alloy parts for commercial aircraft.In a recent transaction Soaring leased a high precision lathe machine from Rapid Revolving Corp.The following information pertains to the leased asset and the lease agreement: The lathe machine will revert back to the lessor at end of lease term,title does not transfer to lessee at any time,and there is no bargain purchase option. Required: a.Classify this lease from the perspective of the lessee,Soaring Pieces Inc. b.Record the lessee's journal entries for the first year of the lease. c.Record the lessee's journal entries after (not including)the last lease payment is made. d.How would the answer to (c)change if the $20,000 residual value is guaranteed by Soaring Pieces and at the end of the lease the lathe was worth $16,000.

Which factor would contribute toward the lessor classifying a lease as a financial lease?

Here are the terms of a lease agreement: Required: Determine the amount of lease payment that the lessor would require to lease the asset.

The following are some of the characteristics of an asset available for lease: Required: a.Determine the amount of lease payment that the lessor would require to lease the asset. b.Compute the present value of minimum lease payments for the lessee.

Salisbury Creamery leases its ice cream making equipment from Little Rock Finance Company under the following lease terms: • The lease term is five years,non-cancellable,and requires equal rental payments of $56,926 due at the beginning of each year starting January 1,2016. • Upon inception of the lease on January 1,2016,Little Rock purchased the equipment at its fair value of $280,000 and immediately transferred it to Salisbury Creamery.The equipment has an estimated economic life of five years,and a $20,000 residual value that is guaranteed by Salisbury Creamery. • The lease contains no renewal options,and the equipment reverts to Little Rock Finance Company upon termination of the lease. • Salisbury's incremental borrowing rate is 4%; the rate implicit in the lease is also 4%. • Salisbury depreciates similar equipment that it owns on a straight-line basis. • Both companies have December 31 year-ends. Required: a.Evaluate how the lessee should account for the lease transaction. b.Evaluate how the lessor should account for the lease transaction. c.Prepare the lessee's amortization schedule for this lease. d.Prepare the journal entries on January 1,2016 for both parties. e.Prepare the journal entries on December 31,2016 and January 1,2017 for both parties.

Soaring Pieces Inc.creates aluminium alloy parts for commercial aircraft.In a recent transaction Soaring leased a high precision lathe machine from Rapid Revolving Corp.The following information pertains to the leased asset and the lease agreement: The lathe machine will revert back to the lessor at end of lease term,title does not transfer to lessee at any time,and there is no bargain purchase option. Required: a.Classify this lease from the perspective of the lessee,Soaring Pieces Inc. b.Provide the amortization schedule for the lessee. c.Record the lessee's journal entries for the first year of the lease.

Which statement is correct about "agency cost of leasing"?