Exam 20: Accounting for Leases

When a lessor receives cash on an operating lease, which of the following accounts is increased?

On January 1, 2014, Kathy Corp. leased equipment by signing a five-year lease that required five payments of $60,000 due on December 31 of each year. Kathy has a 9% cost of capital and capitalized the lease on January 1, 2014, in the amount of $233,379. As of December 31, 2014, what amount is reported as the current portion of the lease obligation?

On January 1, 2014, Stacie signed a lease agreement with Amy. Amy will use the equipment and make ten annual payments of $25,000 beginning December 31, 2014. The lease is considered to be a capital lease. When reading the Amy income statement, you would expect to find which of the following accounts?

The lessee should report capital lease obligations on the balance sheet as

For a sale-leaseback transaction for which the lease qualifies as a capital lease, the seller-lessee should account for any gain on the sale of the asset as

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, what is the correct amount of interest revenue to be recognized by Baltimore for 2014? (Round the answer to the nearest dollar.)

What is included in the calculation of the minimum lease payment?

If a lease is structured so that the lessee pays a set rental payment each period plus an additional amount based upon usage or determined by a change in an index, these are contingent rental payments which if included in the lease agreement the rental payments should be expensed when the contingency is likely to be met.

Which statement is not true?

A capital lease should be recorded in the lessee's accounts at the inception of the lease in an amount equal to

When is it appropriate for the lessee to use the lessor's implicit rate to discount the minimum lease payments?

Flagstaff, a lessor, entered into a sales-type lease with another company on January 1, 2014. The lease was for four years with $40,000 payments due at the end of each year. The cost of the equipment on Flagstaff's books was $120,000. Actuarial information for 7%, the implicit rate, follows: Required: a.Prepare all journal entries for Flagstaff for the year 2014. b.Use the same information as above, but assume that there is an unguaranteed residual value of $8,000. Answer the following questions: (1) What would be the charge to Cost of Asset Leased? (2)What would be the charge to the initial gross receivable? (3)What would be the credit to Sales?

Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

When a lessee makes periodic cash payments for a capital lease, which of the following accounts is increased?

If a lease qualifies as a capital lease, which of the following combinations of payments would be included?

Presentation of the lease on the lessor's cash flow statement is dependent upon the classification of the lease.

Which of the following facts would preclude a lessor from classifying a lease as a sales-type or direct financing lease?

Shown below is a list of key terms (a-j) related to leasing, followed by a series of definitions (1-10): Required: Match each term to its definition by placing the appropriate letter in the space provided.

On January 1, 2014, New Port News Company leased equipment from Scanner Company. The lease had a non-cancelable ten-year term and required annual lease payments of $19,000 to be paid on January 1 of each year with the first payment due January 1, 2014. The annual payment includes $1,000 for executory costs. New Port News guarantees a $15,000 residual value at the end of the lease term. The estimated economic life of the equipment is 12 years. The fair value of the equipment on January 1, 2014 is $140,000. New Port News's incremental borrowing rate is 10%, and Scanner's implicit interest rate is 9%, which is known by New Port News. Present value factors for interest rates of 9% and 10% are as follows: New Port News uses straight-line depreciation for its plant assets. Required: a.Compute the present value of the minimum lease payments. (Show computations and round all amounts to the nearest dollar.) b.Classify the lease from the standpoint of the lessee, stating the reason for the classification. c.Prepare each of the following journal entries on the lessee's books. (Show computations and round all amounts to the nearest dollar.) (1)Record the lease agreement on January 1, 2014. (2)Record the payment on January 1, 2014. (3)Record any adjusting entries on December 31, 2014, in connection with the lease agreement.

On January 1, 2014, Fiona sold some land to another company and immediately leased it back again. The sale price was $13,420, and the leaseback requires $2,000 payments at the end of each of the next ten years. An interest rate of 8% was used. The cost of the land on Fiona's books was $10,000. The title to the land will be transferred back to Fiona at the end of the lease. Required: Prepare all 2014 journal entries on the books of Fiona.