Exam 20: Accounting for Leases

The Kimberly Equipment Company has had a flat pattern of sales revenue for the past five years. A consultant for the company has stated that the company could experience an estimated 25% sales revenue growth if it permitted customers to lease equipment in addition to its normal sales procedures. Required: a.Describe the accounting procedures that should be used by the Kimberly Equipment Company if the lease agreements were classified as "sales-type" leases. b.List two reasons why sales might increase if customers are permitted to lease the equipment.

A direct financing capital lease results in a manufacturers or dealers profit or loss and meets one or more of the capitalization criteria and both of the recognition criteria.

Exhibit 20-3 On January 1, 2014, Quinn Company enters into a five-year sales-type lease with Andy Company. The lease requires Andy to make five annual payments at the beginning of the year, with the first payment due January 1, 2014. The lease includes a bargain purchase price of $10,000. Quinn requires a 10% rate of return. The cost to Quinn of the property is $100,000, and it has a fair value of $150,000. Present value factors for a 10% interest rate are as follows: -Refer to Exhibit 20-3. The annual lease payment Quinn would require is (round the answer to the nearest dollar)

Which of the following correctly states a lease capitalization criterion from the point of view of the lessee?

On January 1, 2014, Rhyme Co. leased equipment by signing a six-year lease that required six payments of $30,000 due on January 1 of each year with the first payment due January 1, 2014. The equipment remains the property of the lessor at the end of the lease, and Rhyme does not guarantee any residual value. Using an 8% cost of capital, Rhyme capitalized the lease on January 1, 2014, in the amount of $149,781. What is the total amount of lease liability (including interest) Rhyme should report as of December 31, 2015?

Which of the following is a required disclosure by a lessee of a capital lease?

Which of the following is not a required disclosure by a lessor of a sales-type lease?

What three criteria must be met for the lessor to account for the lease of land as a sales-type lease?

A lessor acquires the right to use the leased asset in exchange for making future lease payments.

Exhibit 20-2 On January 1, 2014, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first payment will be made at December 31, 2014. In addition, Mary guarantees the residual value to be $8,000 at the end of the lease term. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows: -Refer to Exhibit 20-2. The interest expense associated with the leased equipment for the year ending December 31, 2014, is

The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as

From the lessor's standpoint, all of the following statements are true regarding leasing except that

Which of the following criteria would not apply in determining if a lease is a capital lease if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased asset?

On January 1, 2014, Christopher Properties sold a building to another company and immediately leased it back again. The Christopher' book value for the building was $15,480. The lease was for five years with $5,000 payable at the end of each year. The payments, discounted at 11%, equaled $18,480. Which entry would Christopher Properties not make in 2014?

According to current GAAP, leased property could be reported as an asset on the balance sheet of the lessee and the lessor as follows:

Exhibit 20-1 On January 1, 2014, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2014. The lease qualifies as a capital lease. Pearson's incremental borrowing rate was 9% and the lessor's implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.48592 and 4.35526, respectively. -Refer to Exhibit 20-1. The balance of the lease obligation for financial reporting purposes on December 31, 2015, after the lease payment would be (round answers to the nearest dollar)

Which of the following indicators relating to lease capitalization is an example of IFRS criteria being more principles-based than GAAP with respect to lease accounting?

On January 1, 2014, Luke, Inc. leased equipment, signing a five-year lease that requires five payments of $40,000 due on January 1 of each year with the first payment due January 1, 2014. Luke accounted for the lease as a capital lease. Using a rate of 9%, Luke determined the present value on January 1, 2014, to be $169,589. What is the amount of the long-term lease obligation that Luke should report on its December 31, 2015 balance sheet?

What are the disclosure requirements for lessee's of operating leases and what two disclosures are required for all leases?

One of the distinguishing characteristics of a direct financing lease is that