Exam 20: Accounting for Leases

The existence and term of renewal or purchase options and escalation clauses are disclosed for capital leases only

On January 1, 2014, Stacie signed a lease agreement with Amy. Amy will use the equipment and make ten annual payments of $15,000 beginning December 31, 2014. The lease is considered to be a sales-type lease. When reading the Stacie income statement, you would expect to find which of the following accounts?

When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?

Rock Hall Financing leased some equipment to Cherry Hill Company on January 1, 2014. The lease required six annual payments with the first payment due on December 31, 2014. The cost, and also fair value, of the equipment was $100,000. The equipment had an estimated residual value of $10,000 at the end of the six-year period. The residual value was guaranteed by the lessee. The lease was a direct financing lease and qualifies as a capital lease for Cherry Hill. Rock Hall's desired rate of return is 8%. Required: (For all answers, round to the nearest dollar.) a.Compute the amount of the equal annual payments. b.Prepare all December 31, 2014 journal entries on Cherry Hill's books. c.Use the same information, but assume that the payments are due on January 1 of each year with the first payment due January 1, 2014. Determine the amount of the equal annual payments and determine the amount of interest revenue Rock Hall would recognize for the year ended December 31, 2014.

The account Unearned Interest: Leases should be reported on the lessor's financial statements as

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. What is the correct interest expense for the year ending December 31, 2015, for the lease obligation? (Round answers to the nearest dollar.)

The following are indicators in the terms of a lease that cause it to be treated as a capital lease. The indicators are: These indicators are criteria that trigger lease capitalization under

The Boulder Company leased office equipment to the Boulder Corporation on January 1, 2014. Information regarding the lease agreement is as follows: The lease qualifies as a direct financing lease. The term of the lease is eight years, with annual rentals of $7,000 to be paid at the beginning of each year. There is no bargain purchase option. The estimated unguaranteed residual value of the equipment at the end of the lease term is $5,000. The Boulder Corporation will pay the executory costs of $5,000. The present value of the minimum lease payments, yielding a return of 11%, is $39,985.40 The factor for the present value of $1 for eight years at 11% is 0.43393. Required: Prepare the Boulder Company's 2014 journal entries regarding the lease.

Davis Co., a lessor, signed a direct financing lease on January 1. The cost and fair value of the machine that was leased was $60,000. The implicit interest rate was 6%. The lease period was seven years, with the first payment due immediately. Actuarial information for 6% follows: What is the annual lease payment to be collected by Davis?

Which of the following is a required disclosure by a lessor of an operating lease?

Lessees may try to avoid having a lease be classified as a capital lease. Explain why a lessee might want to avoid a capital lease and how the FASB rules may be overcome to allow classification as an operating lease.

Minimum lease payments do not include

If a lessee classifies a lease as a capital lease and uses the straight-line method of depreciation, the amount to be amortized over the lease term is

What three classifications can lessor's categorize their leases?

Exhibit 20-5 The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2014. Baltimore, the lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first payment will be made on January 1, 2014. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2018. The lessee pays all executory costs. The cost of the leased property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease. Present value factors for a 7% interest rate are as follows: -Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, how much gross profit will Baltimore record at the inception of the lease?

Addison Company signs a lease agreement dated January 1, 2014 for equipment from Luke Rental Company beginning January 1, 2014. The following information relates to the capital lease: 1) The lease term is 5 years, the lease is noncancelable and requires annual payments of $25,000 to be paid in the beginning of each year. 2) The cost and fair value of the equipment is $102,561. The equipment has an estimated life of 5 years and zero residual value. 3) Addison agrees to pay all executory costs. 4) There is no renewal or bargain options 5) Luke's interest rate is implicit to the lease at 11%. Addison is aware of this rate, which is equal to its borrowing rate. 6) Addison uses the straight line method to record depreciation. 7) Executory costs paid at the end of year by Addison are: *rounded Required: Prepare the journal entries for Addison for the years 2014 and 2015.

Exhibit 20-4 On January 1, 2014, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2014. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows: Refer to Exhibit 20-4. What is the amount of the credit to Unearned Interest: Leases to be recorded by Average Leasing on January 1, 2014? (Round the answer to the nearest dollar.)

Depreciation expense will be recorded in the accounts of the lessee and lessor for which type of leases?

If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified as a(n)

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. If the Mary Company uses the straight-line method of depreciation for its assets, the depreciation expense for the leased equipment for the year ending December 31, 2014, is