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Exam 15: Leases

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Question 21

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From the perspective of the lessor,leases may be classified as either:

A) Direct financing or sales-type.
B) Operating,capital,or direct financing.
C) Operating,sales-type,indirect financing.
D) Operating,direct financing,or sales-type.

E) C) and D)
F) A) and B)

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Question 22

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On October 1,2016,Justine Company purchased equipment from Napa Inc.in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000,beginning Oct 1,2017.Similar borrowings have carried an 11% interest rate.The equipment would be recorded at:

A) $2,500,000.
B) $2,225,000.
C) $1,847,950.
D) $2,115,270.

E) A) and D)
F) A) and C)

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Question 23

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On September 1,2016,Custom Shirts Inc.entered into a lease agreement appropriately classified as an operating lease.The lease term is three years.The annual payments are (a) $20,000 for year 1, (b) $24,000 for year 2,and (c) $28,000 for year 3.How much rent expense will Custom Shirts recognize for 2016?

On January 1,2016,Green Co.recorded a right-of-use asset of $270,360 in a Type B lease.The lease calls for ten annual payments of $40,000 at the beginning of each year.The interest rate charged by the lessor was 10%.The balance in the right-of-use asset at December 31,2016,will be:

On January 1,2016,Salvatore Company leased several machines from Nola Corporation under a three-year operating lease agreement.The lease calls for semiannual payments of $15,000 each,payable on June 30 and December 31 of each year.The machines were acquired by Nola at a cost of $90,000 and are expected to have a useful life of five years with no expected residual value. Required: Prepare the appropriate journal entries for the lessor from the inception of the lease through the end of 2016.

If the lessee is expected to take ownership of a leased asset at the end of the lease term,the lessor must use an estimated residual value when calculating the lease payments necessary to achieve a desired rate of return.

In addition to the criteria that must be met by the lessee,the lessor must meet additional conditions for classification as a capital lease to satisfy revenue recognition criteria.

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs.Initial direct costs are expensed at the inception of the lease in:

Each of the four independent situations below describes a lease requiring annual lease payments of $30,000. Required: For each situation,determine the appropriate lease classification by the lessee and indicate why.

For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option,the depreciation period used by the lessee must be:

Under the new ASU,what amount of interest revenue from the lease should SmithCo report in its December 31,2016,income statement?

P Corp.leased an asset to L Corp.using an operating lease in February.P Corp.'s December 31 statement of cash flows will report:

C Corp.has a rate of return on assets of 10%.Not including any indirect effects on earnings,the rate of return on assets is immediately increased when C records:

How do U.S.GAAP and International Financial Reporting Standards (IFRS)differ with respect to classifying a lease as a capital lease?

Use the following to answer questions Refer to the following lease amortization schedule.The five payments are made annually starting with the inception of the lease.A $2,000 bargain purchase option is exercisable at the end of the five-year lease.The asset has an expected economic life of eight years. -What would be the amount of interest expense recorded with payment 5?

Describe the use of depreciation for an asset leased under a capital lease.Include a discussion of the depreciation period.

When a lease qualifies as a capital lease,what is the cost basis of the asset acquired?

Under both U.S.GAAP and IFRS,a lease is a capital lease (called a finance lease under IFRS) if substantially all risks and rewards of ownership are transferred.In making this determination,more judgment,and less specificity,is applied using:

On December 31,2016,Perry Corporation leased equipment to Admiral Company for a five-year period.The annual lease payment,excluding executory costs,is $40,000.The interest rate for this lease is 10%.The payments are due on December 31 of each year.The first payment was made on December 31,2016.The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000.For the year ended December 31,2016,by what amount will Perry's pretax earnings increase due to this lease?

At the inception of a lease agreement,the company's debt to equity ratio and rate of return on assets are both affected whether the lease is classified as a capital lease or as an operating lease.