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Exam 15: Leases

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Question 91

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Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: • Lease payments: $2,466,754 semiannually; first payment at January 1, 2018; remaining payments at June 30 and December 31 each year through June 30, 2022. • Lease term: five years (10 semiannual payments) . • No residual value; no purchase option. • Economic life of equipment: five years. • Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. • Fair value of the computers at January 1, 2018: $20 million. -Lone Star Company would account for this as:

A) A finance lease.
B) A sales type lease without selling profit.
C) A sales type lease with selling profit.
D) An operating lease.

E) None of the above
F) B) and C)

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Question 92

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Differentiate between guaranteed and unguaranteed residual value of leased property. Does the difference affect the lessor's accounting for the lease?

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If a lease contains a guaranteed residua...

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Question 93

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What are the three types of expenses that a lessee experiences with a finance lease?

BBB Leasing purchased a machine for $250,000 and leased it to Jack Tupp Auto Repair on January 1, 2018. What is the balance in the lease payable account after the April 1, 2018, lease payment?

Rumsfeld Corporation leased a machine on December 31, 2018, for a three-year period. The lease agreement calls for annual payments in the amount of $16,000 on December 31 of each year beginning on December 31, 2018. Rumsfeld has the option to purchase the machine on December 31, 2021, for $20,000 when its fair value is expected to be $40,000. The machine's estimated useful life is expected to be five years with no residual value. The appropriate interest rate for this lease is 12%. $\begin{array} { l r r r } \text { n, i } & \text { PV of \$1 } & \text { PV, ordinary annuity } & \text { PV, annuity due } \\\text { 1 period, 12\% } & 0.89286 & 0.89286 & 1.00000 \\\text { 2 periods, 12\% } & 0.79719 & 1.69005 & 1.89286 \\\text { 3 periods, 12\% } & 0.71178 & 2.40183 & 2.69005\end{array}$ -Required: Round your answers to the nearest whole dollar amounts. 1. Calculate the amount to be recorded as a right-of-use asset and the associated lease payable. 2. Prepare Rumsfeld's journal entries for this lease for 2018 and 2019.

Leasehold improvements usually are classified in a balance sheet as:

For the lessee to account for a lease as a finance lease, the lease must meet:

What is selling profit in a sales-type lease? How does the lessor account for selling profit in a sales-type lease with a selling profit?

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs are expensed at the beginning of the lease in:

Use the information below to answer the following questions. On December 31, 2017, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2023. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: -In this situation, Reagan:

What situations cause a lessee to remeasure a lease liability (and right-of-use asset)? How is that accomplished?

Wainwright Ropes leased high-tech electronic equipment from Wacha Leasing on January 1, 2018. Wacha purchased the equipment from Red Bird Machines at a cost of $215,732. The equipment has an estimated useful life of six years and possession of the equipment will revert back to Wacha at the end of the lease. $\begin{array}{ll}\text { Related information: }\\\text { Lease term } & 3 \text { years (12 quarterly periods) } \\\text { Quarterly rental payments } & \$ 20,000 \text { at the beginning of each period } \\\text { Economic life of asset } & 3 \text { years } \\\text { Fair value of asset } & \$ 215,732 \\\text { Implicit interest rate } & 8 \%\end{array}$ Required: Prepare appropriate entries for Wainwright from the beginning of the lease through March 31, 2018. December 31 is the fiscal year end for Wainright. Appropriate adjusting entries are recorded at the end of each quarter. Round your answers to the nearest whole dollar amounts.

Use the information below to answer the following questions. On December 31, 2017, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2023. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: -At what amount would Reagan record the right-of-use asset at the beginning of the agreement?

In connection with a lease transaction, the lessor would not record:

Use the information below to answer the following questions. On December 31, 2017, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2023. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: -What is the amount of residual value guaranteed by Reagan to the lessor?

The Bobo Company leased equipment from Bolinger Industries on January 1, 2018. Bolinger purchased the equipment at a cost of $270,000. Other information: Required: Round your answers to the nearest whole dollar amounts. 1. Calculate the amount of selling profit that Bolinger would recognize in this sales-type lease. Round to nearest dollar. Show calculations. 2. Prepare the appropriate journal entries for Bolinger on January 1, 2018. Round to nearest dollar. Show calculations. 3. Prepare the appropriate journal entry for Bolinger on December 31, 2018. Round to nearest dollar.

Which of the following statements characterizes an operating lease?

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. -For a right-of-use asset under a lease that qualifies as a finance lease because the lease contains a purchase option and the option is reasonably certain to be exercised, the amortization period used by the lessee must be:

When a company sells an asset and simultaneously leases it back, what criteria must be met to apply sale-leaseback accounting rather than accounting for the transaction as a loan?

Bird leased equipment that had a retail cash selling price of $1,200,000 and a useful life of five years with no residual value. The lessor paid $1,060,000 to acquire the equipment and used an implicit rate of 8% when calculating annual lease payments of $278,284 beginning January 1, at the beginning of the lease. Incremental costs of negotiating and consummating the completed lease transaction incurred by the lessor were $30,000. What is the effect of the lease on the lessor's earnings during the first year (ignore taxes) ? (Round your answer to the nearest whole dollar amount.)