Question 1

Company X leased an asset to Y on December 31 2014 with the first payment occurring on that date.The lease was a sales-type lease (it met all the conditions).The cash payment on December 31, 2014 was $1,582 representing 1/5th of the lease arrangement.Assuming that the profit on the sales amounted to 11% of the total lease receivable and the unearned finance revenue was 1.57 times the profit on the sale, prepare the journal entry at the inception of the lease (use the gross profit method).

Accepted Answer

Total lease receivable: 1,582 5 = 7,910
Profit on sales = 7,910 11% = 870
Unearned finance revenue = 870 1.58 = 1,375

Question 2

LOR leased a computer to LES which cost the lessor $8,000.The terms of the lease specify four years, an annual interest rate of 15 percent, and four year-end rental payments.The lease qualifies as a finance lease (direct financing).The lessor will get the computer after the fourth year and its residual value at that time is estimated to be $1,000.The amount of each rental payment is (round to the nearest dollar):

Accepted Answer

A)  $2,000
B)  $2,501
C)  $2,602
D)  $2,335 C

Question 3

Which of the following are the required operating lease note disclosure requirements for the lessee? 1.Minimum lease payments
2)Contingent Rents
3)Scheduled lease payments for the next year
4)Scheduled lease payments in total for the next remaining years
5)Scheduled lease payments in total for all years.

Accepted Answer

A)  1, 2 & 3.
B)  1, 2, 3, 4, & 5.
C)  1& 2.
D)  1, 2, 3 & 4.
E)  1, 2, & 5. B

Question 4

On December 1, 2014, XYZ leased office space for its own use for 10 years at a monthly rental of $15,000.On December 31, 2014, XYZ paid the lessor the following amounts:  The entire amount of $146,000 was reported as rent expense in 2014 because it is an operating lease.What amount should XYZ have reported as expense for the year ended December 31, 2014?

Accepted Answer

A)  $30,800
B)  $15,000
C)  $15,800
D)  $96,000

Question 5

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms).
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
Assuming that this qualifies as a finance lease, 
-what would be the amount of DEF Inc's annual depreciation as per ASPE (rounded)?

Accepted Answer

A)  $9,901
B)  $5,000
C)  $10,000
D)  $10,076

Question 6

The lessee measures the cost of a leased asset, and the corresponding lease liability of a finance lease, as the:

Accepted Answer

A)  present value of the periodic rental payments.
B)  future value of the periodic rental payments.
C)  sum of the annual cash payments to be made during term of the lease.
D)  fair market value of the leased asset.

Question 7

For a finance lease, an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term, excluding that portion of the payments representing executory costs such as insurance, maintenance, and property taxes to be paid by the lessor, together with any profit thereon, should be recorded by the lessee as a(n):

Accepted Answer

A)  asset but not a liability.
B)  expense.
C)  liability but not an asset.
D)  asset and a liability.

Question 8

The lessee should use the lessor's borrowing rate (if known)to account for a finance lease, even if this provides a present value of lease payments that is higher than the fair value of the asset at the inception of the lease.

Accepted Answer

A) True 
 B)False

Question 9

If the lessor records unearned rent at the inception of a lease, then the lease must:

Accepted Answer

A)  be a direct financing lease.
B)  be an operating lease.
C)  contain a bargain purchase option.
D)  be an annuity due.

Question 10

Ryan Corp.enters into a finance lease agreement with a 5-year term and a bargain renewal option of 3 years.Over what period should the asset be amortized?

Accepted Answer

The answer of Ryan Corp.enters into a finance lease agreement...

Question 11

RST entered into a sales-type lease with EFG to rent special equipment for six years.The equipment cost $40,000 and RST will earn a $4,000 dealer's profit and 12 percent interest revenue.Therefore, RST will receive year-end lease payments of:

Accepted Answer

A)  $10,702
B)  $8,213
C)  $7,333
D)  $12,090

Question 12

The same lease may be classified differently by the lessor as compared to the classification used by the lessee.

Accepted Answer

A) True 
 B)False

Question 13

LAS owns a building in North Bay.LAS enters into an agreement with BH as follows: LAS sells the building to BH on 1/1/2014 for $1,900,000 (the building's fair value on that date was $1,800,000)and immediately leases it back for $500,000 per year for 10 years.The remaining life of the building is estimated at 20 years.The historical cost of the building was $9,000,000 and accumulated amortization amounted to $7,000,000.Assuming that ASPE applies, and that the lease qualifies as a finance lease, the net effect of this transaction on the statement of comprehensive income in the year of sale would be:

Accepted Answer

A)  a reduction to net income of $490,000.
B)  a reduction to net income of $510,000.
C)  a reduction to net income of $495,000.
D)  a reduction to net income of $505,000.

Question 14

When the lessee guarantees the residual value at the end of the lease term, for accounting purposes, the:

Accepted Answer

A)  annual rentals will always be less than they would have been if the residual value was not guaranteed.
B)  annual rentals will always be more than they would have been if the residual value was not guaranteed.
C)  guaranteed residual value does not affect the annual rentals because it is a cash flow at the end of the lease term.
D)  annual rentals will be the same as they would have been if the residual value was not guaranteed.

Question 15

Explain what is meant by off-balance sheet financing?

Accepted Answer

The answer of Explain what is meant by off-balance sheet...

Question 16

The lease expense amount recorded on a lessee's income statement will always be deductible for income tax purposes.

Accepted Answer

A) True 
 B)False

Question 17

What guidelines are used under IFRS to determine whether a lease is an operating lease?

Accepted Answer

The answer of What guidelines are used under IFRS to...

Question 18

ABC Inc.leased a jet from JKL Inc., a company that leases jet aircraft, on January 1st, Year 1.Terms of the lease are as follows: 6 annual payments of $8,000,000 to be made every January 1st, starting on January 1st, Year 1.
ABC's incremental borrowing rate is 12%.ABC Inc.has not been made aware of JKL's borrowing rate.
Both companies follow IFRS.
The jet has a fair value of $38,000,000 at the start of the lease.JKL estimates that the jet will be worthless at the end of the lease term.
There are no executory costs, however JKL, will incur $2 million in direct costs at the sta of the lease.
ABC Inc.depreciates all assets on a straight line basis.
Both companies have determined that their respective leases qualify as finance leases.
As a result of the information provided above, ABC would show total expenses of which of these following amounts for Year 2?

Accepted Answer

A)  $9,084,963
B)  $9,582,522
C)  $10,046,510
D)  $9,055,557

Question 19

Company A enters into a lease agreement with Company B.The going lease payment for a similar agreement is $90,000 per year.Company A negotiates a lease whereby they pay $40,000 per year and 6% of annual sales revenues.This is an example of what method?

Accepted Answer

The answer of Company A enters into a lease agreement...

Question 20

Assume the following facts relating to a lease: Leased asset, new at inception of lease term.Estimated useful life, 14 years.
Lease term, 8 years; asset returns to lessor.
Interest rate implicit in the lease, 10 percent (known by lessee).Lessee's marginal borrowing rate, 12 percent.
Amount of each lease payment, $2,000.Lessor's cost of the leased asset, $15,164.
Market value of leased asset at inception of the lease term, $15,164 Lease payments are due at the end of each period.
From the perspective of the lessee, this lease should be classified as a(n):

Accepted Answer

A)  operating lease.
B)  finance lease.
C)  sales-type lease.
D)  direct financing lease.

Exam 18: Leases

The lessee measures the cost of a leased asset, and the corresponding lease liability of a finance lease, as the:

The lessee should use the lessor's borrowing rate (if known)to account for a finance lease, even if this provides a present value of lease payments that is higher than the fair value of the asset at the inception of the lease.

If the lessor records unearned rent at the inception of a lease, then the lease must:

Ryan Corp.enters into a finance lease agreement with a 5-year term and a bargain renewal option of 3 years.Over what period should the asset be amortized?

RST entered into a sales-type lease with EFG to rent special equipment for six years.The equipment cost $40,000 and RST will earn a $4,000 dealer's profit and 12 percent interest revenue.Therefore, RST will receive year-end lease payments of:

The same lease may be classified differently by the lessor as compared to the classification used by the lessee.

When the lessee guarantees the residual value at the end of the lease term, for accounting purposes, the:

Explain what is meant by off-balance sheet financing?

The lease expense amount recorded on a lessee's income statement will always be deductible for income tax purposes.

What guidelines are used under IFRS to determine whether a lease is an operating lease?

Company A enters into a lease agreement with Company B.The going lease payment for a similar agreement is $90,000 per year.Company A negotiates a lease whereby they pay $40,000 per year and 6% of annual sales revenues.This is an example of what method?