Exam 15: Leases

For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option,the depreciation period used by the lessee must be:

On January 1,2016,Salvatore Company leased several machines from Nola Corporation under a three-year operating lease agreement.The lease calls for semiannual payments of $15,000 each,payable on June 30 and December 31 of each year.The machines were acquired by Nola at a cost of $90,000 and are expected to have a useful life of five years with no expected residual value. Required: Prepare the appropriate journal entries for the lessor from the inception of the lease through the end of 2016.

From the perspective of the lessor,leases may be classified as either:

On December 31,2016,Perry Corporation leased equipment to Admiral Company for a five-year period.The annual lease payment,excluding executory costs,is $40,000.The interest rate for this lease is 10%.The payments are due on December 31 of each year.The first payment was made on December 31,2016.The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000.For the year ended December 31,2016,by what amount will Perry's pretax earnings increase due to this lease?

In addition to the criteria that must be met by the lessee,the lessor must meet additional conditions for classification as a capital lease to satisfy revenue recognition criteria.

Under both U.S.GAAP and IFRS,a lease is a capital lease (called a finance lease under IFRS)if substantially all risks and rewards of ownership are transferred.In making this determination,more judgment,and less specificity,is applied using:

On September 1,2016,Custom Shirts Inc.entered into a lease agreement appropriately classified as an operating lease.The lease term is three years.The annual payments are (a)$20,000 for year 1, (b)$24,000 for year 2,and (c)$28,000 for year 3.How much rent expense will Custom Shirts recognize for 2016?

How do U.S.GAAP and International Financial Reporting Standards (IFRS)differ with respect to classifying a lease as a capital lease?

When a lease qualifies as a capital lease,what is the cost basis of the asset acquired?

Each of the four independent situations below describes a lease requiring annual lease payments of $30,000. Required: For each situation,determine the appropriate lease classification by the lessee and indicate why.

C Corp.has a rate of return on assets of 10%.Not including any indirect effects on earnings,the rate of return on assets is immediately increased when C records:

Use the following to answer questions Refer to the following lease amortization schedule.The five payments are made annually starting with the inception of the lease.A $2,000 bargain purchase option is exercisable at the end of the five-year lease.The asset has an expected economic life of eight years. -What would be the amount of interest expense recorded with payment 5?

If the lessee is expected to take ownership of a leased asset at the end of the lease term,the lessor must use an estimated residual value when calculating the lease payments necessary to achieve a desired rate of return.

Under the new ASU,what amount of interest revenue from the lease should SmithCo report in its December 31,2016,income statement?

At the inception of a lease agreement,the company's debt to equity ratio and rate of return on assets are both affected whether the lease is classified as a capital lease or as an operating lease.

On January 1,2016,Green Co.recorded a right-of-use asset of $270,360 in a Type B lease.The lease calls for ten annual payments of $40,000 at the beginning of each year.The interest rate charged by the lessor was 10%.The balance in the right-of-use asset at December 31,2016,will be:

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs.Initial direct costs are expensed at the inception of the lease in:

P Corp.leased an asset to L Corp.using an operating lease in February.P Corp.'s December 31 statement of cash flows will report:

Describe the use of depreciation for an asset leased under a capital lease.Include a discussion of the depreciation period.

On October 1,2016,Justine Company purchased equipment from Napa Inc.in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000,beginning Oct 1,2017.Similar borrowings have carried an 11% interest rate.The equipment would be recorded at: