Exam 20: Accounting for Leases

What are the disclosure requirements of direct financing and sales-type leases?

On January 1, 2014, Watson Company signed a four-year lease requiring annual payments of $45,000, with the first payment due on January 1, 2014. Watson's incremental borrowing rate was 7%. Actuarial information for 7% follows: Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2014 (rounded to the nearest dollar)?

What are the five capitalization criteria under IFRS?

A sales type lease is similar to a direct financing lease, but the lessor sells the asset and records a receivable. It differs in that its cost or carrying value is less than the fair value of the asset which results in a profit or loss for the manufacturer or dealer.

If a lease is classified as a capital lease because the present value of the minimum lease payments is equal to 90% or more of the fair value of the leased property, the time period to be used by the lessee to amortize the leased property is the

(This problem requires use of present value tables.) Cambridge Company leased equipment from Amherst Company on January 1, 2014. Information about the lease is as follows: Required: a.Compute the present value of the minimum lease payments. b.Classify the lease from the viewpoint of Cambridge Company, giving reasons. c.Prepare Cambridge's journal entry or entries for the lease for 2014.

If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is

A capital lease is a lease where by risks and benefits of ownership is in economic substance a purchase by the lessee and a sale or financing arrangement by the lessor.

Timothy Company signs a lease agreement dated January 1, 2014 with Jasper Company for equipment. The lease terms, provisions, and related events are as follows: 1) Timothy agrees to pay all executory costs. 2) The lease does not contain any renewal or bargain purchase options. 3) The lease term is 6 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. 4) The equipment has an estimated useful life of 7 years, fair value of $225,000, and does not have a residual value. 5) The annual payment is set by Jasper at $51,661.67 to earn a rate of return of 10%. Timothy is aware of the rate and it is equal to its borrowing rate. 6) Timothy uses the straight line method of depreciation on all of its equipment. Required: 1) Using the four criteria required for capitalization determine whether the lease is an operating lease or a capital lease. 2) Calculate the amount of the asset and liability of Timothy at the inception of the lease. 3) Prepare the amortization table for the lease and interest expense. 4) Prepare the journal entries for Timothy for 2014.