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Exam 15: Leases

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Question 21

True/False

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A bargain purchase option is defined as the option of purchasing leased property at a price that is equal to the expected fair value of a leased asset.

A) True
B) False

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Question 22

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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 recorded as assets and amortized over the term of the lease in

A) an operating lease.
B) a capital lease.
C) a direct financing lease.
D) a sales-type lease.

E) All of the above
F) C) and D)

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Question 23

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In a lease transaction, what are initial direct costs? How do we account for initial direct costs in an operating lease, a direct financing lease, and a sales-type lease?

What is the effective annual interest rate?

What is the carrying value of the lease liability on Reagan's December 31, 2010 balance sheet (after the third lease payment is made) ?

A sales-type lease differs from a direct financing lease in one respect:

Of the four criteria for a capital lease, which two are not applied if the lease begins during the final quarter of the asset's useful life?

Additional lessor conditions for classification as a nonoperating lease are consistent with the criteria of the:

In its 2009 annual report to shareholders, Douglas-Roberts International Corporation disclosed the following: In 2009, the company entered into three sale-leaseback arrangements with various financial institutions. Under the first arrangement, truck cab assembly machinery with a net book value of $58 million, was sold for $60 million and leased back under an 8-year operating lease agreement. Under the second arrangement, tooling and related engine manufacturing equipment with a net book value of $261 million, was sold for $260 million and leased back under an 11.5-year operating lease agreement. The third arrangement consisted of additional engine manufacturing equipment with a net book value of $62 million that was sold for $65 million and leased back under a 10-year operating lease agreement. The gain on these transactions was deferred and is being amortized over the terms of the lease agreements. Discuss the most likely reasons for these three transactions, and explain the basis for the last sentence of the disclosure.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably assured is called a:

On January 1, 2009, Holbrook Company leased a building under a 3-year operating lease. The annual rental payments are $40,000 on January 1, 2009, $30,000 on January 1, 2010, and $20,000 on January 1, 2011. Required: Prepare the appropriate journal entries for Holbrook Company from the inception of the lease through the end of 2011.

Recording a sales-type lease is similar to recording:

Southwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009. Hi-Tech manufactured the equipment at a cost of $90,000. There is no expected residual value. Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2009. Assume a December 31 year-end. $\begin{array}{l}\text { Other information: }\\\begin{array} { l l } \text { Lease term } & 3 \text { years } \\\text { Annual payments } & \$ 40,000 \text { on January } 1 \text { each year } \\\text { Life of asset } & 3 \text { years } \\\text { Fair value of asset } & \$ 111,332 \\\text { Implicit interest rate } & 8 \% \\\text { Incremental rate } & 8 \%\end{array}\end{array}$

If the lessee expects to obtain title to leased property due to a bargain purchase option or passage of title at the end of the lease term:

L Corp. recorded a capital lease in February. The company's December 31 statement of cash flows using the indirect method will report

On December 31, 2009, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B's December 31, 2009, balance sheet, the deferred revenue from the sale of this machine should be

The lessee normally measures the lease liability to be recorded as the:

What is the outstanding balance after payment #5?

J Corp. acquired an asset using an operating lease in February. The company's December 31 statement of cash flows will report