Test Bank, Intermediate Accounting , 14th ed.
CHAPTER 15
59
Leases MULTIPLE CHOICE QUESTIONS Theory/Definitiona Q!e"tion"
1 " 4 % ' ( ) + 1 11 1 1" 14 1% 1' 1( 1) 1+ 1 " 4 % ' ( ) + " "1 " #alue
GAAP basis for recognizing some leases as purchases !haracteristics of an operating lease Present #alue criteria for capital lease Accounting for rental pa$ments under operating leases !apital #ersus operating lease&&use of present #alue Lease term criteria for capital lease !apital lease&&recording initial liabilit$ of lessee *epreciation term for leased machine eduction of liabilit$ on lessee-s books Three t$pes of period costs associated /ith lessee and capital lease 0ffect of minimum lease pa$ments on net liabilit$ Treatment of guaranteed residual #alues b$ lessee Amortization of capital lease asset tems included in minimum lease pa$ments Treatment of bargain purchase option !haracteristics of sales&t$pe lease Treatment of initial direct costs b$ lessor Treatment b$ lessee of e2ual monthl$ rental pa$ments !lassification of leases&&capital or operating Treatment of gain on rental !apitalization and amortization of building and land Accounting for residual #alues b$ lessor Treatment of lease /ith no bargain purchase option 3ature of eecutor$ costs Guaranteed residual #alues *efinition of lease term !omposition of minimum lease pa$ment Lease disclosure re2uirements Lease disclosure re2uirements nternational accounting standards for leases Lessee treatment of leases in#ol#ing real estate eal estate lease&&fair market #alue of land g reater than % 5 of total fair
#$
!hapter 1%
"" "4
Leases
eal estate lease&&fair market #alue of land less than %5 of total fair #alue 6ale&leaseback transactions
Co%&!tationa Q!e"tion"
7 "% "' "( ")
!omputation of total present #alue and first $ear interest epense for lease !omputation of lease liabilit$ on noncancelable lease !omputation of interest re#enue of lease !omputation of lease liabilit$ /ith discounted lease pa$ments
"+ 4 41 4 4" 44 4% 4' 4( 4) 4+ % %1 %
!omputation of and intereston income amounts lease !omputation of profit interest epense noncancelable !omputation of capital lease liabilit$ amount !omputation of income from leased e2uipment !omputation of present #alue amount to classif$ asset as capital lease !omputation of deferred re#enue from leaseback !omputation of booked amount for e2uipment lease !omputation of net rental income on lease !omputation of interest epense for capital lease !omputation of income on lease transactions !omputation of amortization epense !omputation of amount of rent epense on lease !omputation of total capital lease liabilit$ !lassification of leases under international accounting standards 7This question requires the use of present value tables to solve .
PRO'LEMS 1 " 4 % ' ( ) + 1 11 1
8ournalize lease transactions for lessee and lessor 8ournalize lease transactions for lease 8ournalize lease transaction, pa$ments, and interest re#enue 8ournalize lease transaction, manufacturer-s profit, interest re#enue 8ournalize lease pa$ments /ith bargain purchase option 8ournalize noncancelable lease *etermine /hether lease should be capital or operating Prepare lease amortization schedule Prepare partial balance sheet for lease 8ournalize sale and leaseback 0conomics of leasing for the lessee 0conomics of leasing for the lessor
Test Bank, Intermediate Accounting , 14th ed.
#1
MULTIPLE CHOICE QUESTIONS a L9
1. Generall$ accepted accounting principles re2uire that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this t$pe a. effecti#el$ con#e$s all of the benefits and risks incident to the o/nership of propert$. b. is an eample of form o#er substance. c. pro#ides the use of the le ased asset to the lessee for a limi ted period of time. d. must be recorded in accordance /ith the concept of cause and effect.
d L9
. :hich of the follo/ing statements characterizes an operating lease; a. The lessee records depreciation and interest. b. The lessee records the lease obligation related to the leased asset. c. The les sor transfers titl e of the leas ed prop ert$ to the les see for the duration of the lease term. d. The lessor records depreciation and lease re#enue.
b
". 9ne of the four general criteria for a capital lease is that the present #alue at the beginning of t he lease term of the minimum lease pa$ments e2uals or eceeds a. the propert$-s fair market #alue. b. + percent of the propert$-s fair market #alue. c. (% percent of the propert$-s fair market #alue. d. % percent of the propert$-s fair market #alue.
L94
d L9%
4. n a lease that is recorded as an operating lease b$ the lessee, the e2ual monthl$ rental pa$ments should be a. allocated bet/een interest epense and depreciation epense. b. allocated bet /een a reduction in the liabilit$ for leased assets and interest epense. c. recorded as a reduction in the l iabilit$ for leased assets. d. recorded as rental epense.
a L94
%. The present #alue of the minimum lease pa$ments should be used b$ the lessee in the determination of a
es 3o b. >es >es c. 3o >es d. 3o 3o
#(
!hapter 1%
c L94
Leases
'. 9ne of t he four general criteria for a c apital lease specifies that the lease term be e2ual to or greater than a. the estimated economic life of the prope rt$. b. + percent of the estimated economic life of the propert$. c. (% percent of the estimated economic life of the propert$. d. % percent of the estimated economic life of the propert$.
c L9%
(. ?or a capital lease, the amount recorded initiall$ b$ the lessee as a liabilit$ should a. eceed the present #alue at the beginning of the lease term of minimum lease pa$ments during the lease term. b. eceed the total of the minimum lease pa$ments during the lease term. c. not eceed the fair #a lue of the le ased propert$ at the i nception of the lease. d. e2ual the total of the minimum lease pa$ments during the lease term.
c
). 8ohnson nstitute le ased a ne / machine ha#ing an e pected useful li fe o f 1 $ears. The n oncancelable le ase t erm is 1 $ ears, a nd 8 ohnson m a$ eercise a purchase opti on at the end of the nonc ancelable term. The machine should be capitalized b$ 8ohnson and depreciated o#er a. + $ears. b. 1 $ears. c. 1 $ears. d. 1 or 1 $ears at 8ohnson@s option.
L9%
d L9%
a L9%
+. The lessee@s balance sheet liabilit$ for a capital lease /ould be periodicall$ reduced b$the a. minimum lease pa$ment. b. minimum lease pa$ment plus the amortization of the related asset. c. minimum lease pa$ment less the amortization of the related asset. d. minimum lease pa$ment less the portion of the minimum lease pa$ment allocable to interest. 1. :hat ar e the th ree t$pes of pe riod co sts tha t a les see eperiences / ith capital leases; a. nterest epense, amortization epense, eecutor$ costs b. Amortization epense, eecutor$ costs, lease epense c. 0ecutor$ costs, interest epense, lease e pense d. Lease epense, eecutor$ costs, initial costs
Test Bank, Intermediate Accounting , 14th ed.
c L9%
#)
11. An eight&$ear capital lease specifies e2ual minimum annual lease pa$ments. Part of this pa$ment represents interest and part represents a reduction in the net lease liabilit$ . The portion of the minimum lease pa$ment in the fourth $ear applicable to the reduction of the net lease liabilit$ should be a. the asthe in the third $ear. b. lesssame than in third $ear. c. less than in the fifth $ear. d. more than in the fifth $ear.
d L9%
1. :hich of the follo/ing statements concerning guaranteed residual #alues is appropriate for the lessee; a. The asset and rela ted liabi lit$ should be incre ased b$ the am ount of the residual #alue. b. The asset and related liabilit$ should be decreased b$ the amount of the residual #alue. c. The asset and rel ated liabilit$ should be decrea sed b$ the pr esent #alue of the residual #alue. d. The asset and rela ted liabi lit$ should be incre ased b$ the pr esent #alue of the residual #alue.
c
1". 8ohntech nc. leased a ne / machine ha#ing an e pected useful life of " $ears from !arbide !o. Terms of the no ncancelable % &$ear le ase /ere that 8ohntech /ould gain title to the propert$ upon pa$ment of a sum e2ual to the fair market #alue of the machine at the termination of the lease. 8ohntech accounted for the lease as a capital lease and recorded an asset and a liabilit$ in the fina ncial records. The asset recorded under thi s lease should properl$ be amortized o#er a. % $ears
L9%
c L9%
14. :hich one of the follo/ing items is not part of the minimum lease pa$ments from the standpoint of the lessee; a. The minimum rental pa$ments called for b$ the lease b. An$ guarantee the les see is re2u ired to make at the end of the lea se term regarding an$ deficienc$ from a specified minimum c. An$ estimated residual #alue at the en d of the le ase term
#*
!hapter 1%
Leases
d. An$ pa$ment the less ee mus t make at the end of the lea se term to purchase the leased propert$ under a bargain purchase option
c L9%
1%. A lease contains a bargain purchase option. n determining the lessee@s capitalizable cost at the beginning of the lease term, the pa$ment called for b$ the bargain purchase option /ould be a. subtracted its present #alue. b. added at itsateercise #alue. c. added at its present #alue. d. subtracted at its eercise price.
c L9'
1'. :hich of the follo/ing statements characterizes a sales&t$pe lease; a. The lessor recognizes onl$ interest re#enue o#er the life of the asset. b. The lessor recognizes onl$ interest re#enue o#er the lease term. c. The les sor reco gnizes a dealer@s prof it at leas e inception and interest re#enue o#er the lease term. d. The lessor recognizes a dealer@s pr ofit at lea se inception and int erest re#enue o#er the asset life.
b
1(. nitial direct costs incurred b$ a lessor in consummating a sales&t$pe lease are a. charged to unearned income in the first period of the lease term. b. charged to cost of sales in the first period of the lease term. c. deferred and allocated o#er the lease term in proportion to the recognition of rent re#enue. d. deferred and allocated o#er the lease term on a straight&line basis.
L9'
d L9%
1). 02ual monthl$ rental pa$ments for a particular lease should be charged to ental 0pense b$ the lessee for /hich of the follo/ing; !apital Leas e 9perating Leas e a. >es 3o b. >es >es c. 3o 3o d. 3o >es
b L94
1+. Lease > does not contain a bargain purchase option, but the lease term is e2ual to + p ercent o f the estimated ec onomic life of t he leased propert$. Lease does not transfer o/nership of the propert$ to the lessee b$ the end of the lease term, but the lease term is e2ual to (% percent of the estimated economic life of the leased proper t$. o/ should the lessee classif$ these leases; Lease> Lease
Test Bank, Intermediate Accounting , 14th ed.
a. b. c. d. c L9+
!apital lease !apital lease 9perating lease 9perating lease
#5
9perating lease !apital lease !apital lease 9perating lease
. C D 8 !onstruction built an office building at a cost of E%,. C D 8 sold this bu ilding to C atson at a m aterial ga in an d th en le ased it b ack from Catson for a stipulated annual rental. This gain should be a. recognized as an item in the $ear transaction. b. recognized ininfullfull as ordinar$ an etraordinar$ item ofinthethe $ear of the transaction. c. deferred and amortized proportionatel$ o#er the life of the lease. d. treated as a reduction in the obligation under the capital lease.
c 1. f a lease in#ol#es both land and buildings and a bargain purchase option is L91 reasonabl$ assured, then a. both /ill be capitalized and amortized. b. buildings are capitalized and amortizedF land is an operating lease. c. buildings are ca pitalized and amor tizedF land is capita lized and left at cost. d. both are operating leases since criteria " and 4 are not me t. d L9'
a L94
. :hich of the follo/ing statements characterizes lessor accounting for residual #alues; a. Guaranteed residual #alues are included in the gross in#estment amount, but unguaranteed residual #alues are ecluded fro m the gross in#estment. b. nguaranteed residual #alues are included in the gross in#e stment amount, but guaranteed residual #alues are ecluded from the gross in#estment. c. Guaranteed residual #alues and unguaranteed residual #alues are ecluded from the gross in#estment. d. Guaranteed residual #alues and unguaranteed residual #alues are included in the gross in#estment. ". *raper !orp. leased a ne / building an d land from Ba$lor Leasing nc. for % $ears. At the inception of the lease the building and land ha#e fair market #alues of E, and E%,, respecti#el$. The building has an epected economic life of " $ears. :hich of the follo/ing sta tements is correct regarding *raper@s treatment of the lease;
##
!hapter 1%
Leases
a. *raper should treat the leas e as a capita l lease e#e n though there is no bargain purchase option and no automatic transfer of o/nership at the termination of the lease. b. *raper should treat the leas e as a capital lea se onl$ if the re is eithe r a bargain purchase option or an automatic transfer of o/nership at the termination of the lease. c. *raper should treat the lease as a capi tal lease pro#ided that the land and building are recorded in separate asset accounts and accounted for separatel$. d. *raper should treat the leas e as a capita l lease onl$ if Ba $lor treats the transaction as a le#eraged lease. d L9"
c L9"
4. :hich of the follo/ing /ould be considered an eecutor$ cost; a. Cinimum lease pa$ments. b. nterest epense incurred. c. Bargain purchase option. d. Caintenance co sts. %. f the residual #alue of a leased asset is greater than the amount guaranteed b$the lessee a. the lessee pa$s the lessor for the difference. b. the lessee recognizes a gai n at the end o f the lease term. c. the lessee has no obligation related to the re sidual #alue. d. the lessee pa$s the lessor for the difference.
b L9"
'. :hich of the follo/ing is true regarding the lease term; a. The lease term does not include all periods co#ered b$ bargain rene/al options. b. The lease term includes all periods for /hich failure to rene/ imposes a penalt$ sufficientl$ high that the lessee probabl$ /ill rene/. c. The lease term ma$ etend be$ond the dat e a bargain purchase option becomes eercisable. d. The lea se term doe s not include all peri ods repr esenting rene /als or etensions of the lease at the lessor@s option.
b L9"
(. ?rom the standpoint of the lessee, the minimum lease pa$ment includes all of the follo/ing ecept a. the guaranteed residual #alue. b. the lessee@s obligation to pa$ ee cutor$ costs. c. the bargain purchase option. d. an$ pa$ment that the lessee must make upon failure to etend or rene/ the lease.
Test Bank, Intermediate Accounting , 14th ed.
#+
d ). :hich of the follo/ing is
+. :hich of the follo/ing is not a re2uired disclosure for lessors; a. Total of mi nimum su blease rentals to be recei#ed in the future under noncancelable subleases. b. nearned interest re#enue; c. nguaranteed residual #alues accruing to the benefit of the lessor. d. A general description of the lessor@s leasing arrangements.
a ". n order for a lease to be considered a finance
#,
!hapter 1%
Leases
c. record the buil ding and lan d separatel$ onl$ if the fai r market #alue of the land e2uals or eceeds % percent of the total fair market #alue of the lease propert$. d. classif$ the bui lding as a capi tal lea se and the land as an ope rating lease. b ". A lease agreement for land and a b uilding does not pro#ide for transfer of title or a bargain purchase option. The fair market #alue of the land is greater than or e2ual to % percent of the fair market #alue of the leased propert$. na. thistreat both thesituation, lessee land an d the building as/ould an ope rating lease. b. allocate a porti on of the mini mum lease pa$ments to the land and the remainder to the building to determine if the present #alue of the lease pa$ments allocated to the building /as + percent of more of the fair #alue of the building at the beginning of the lease. c. treat the land and buil ding as a sing le unit usi ng the bui lding life as the basis for the economic life test. d. al/a$s treat the building as a capital lease and the land as an operating lease. a
"". A le ase agreement does not pro#ide for transfer of title or a bargain purchase option. The additional t/o criteria for lessors relating to the collectibilit$ of lease pa$ments and unreimbursable costs to be incurred b$ the lessor ha#e been met. The fair market #alue of the land is less than % percent of the total fair market of the leased propert$. n this situation, the lessor /ould a. treat the lease of the land and building as an operating lease if neither the economic life test
Test Bank, Intermediate Accounting , 14th ed.
c L9+
#9
"4. 9n 8anuar$ 1, , a seller&lessee sells a /arehouse to a bu$er&lessor. The fair #alue of the /arehouse is greater than the book #alue. There is no transfer of title or bargain purchase option. n conIunction /ith the sale of the /arehouse, the seller&lessee and the fi#e&$ear lease
a L9%
a L9%
"%. 6tate epairs ac 2uires e2 uipment under a noncancelable lease at an annual rental of E4%,, pa$able in ad#ance for fi#e $ears. After fi#e $ears, there is a bargain purchase option of E(%,. The appropriate interest rate is 1 percent. :hat is the total presen t #alue of the lease and the first $ea r@s interest epense; a. E4,"4 and E1,%) b. E4,"4 and E',+) c. E4,((1 and E1,%) d. E4,((1 and E1+,1(" "'. 6tockton, nc. leased machiner$ /ith a fair #alue of E%, from La$ton Cachine !o. on *ecember "1, . The contract is a si &$ear no ncancel& able lease /ith an implicit inter est rate of 1 percent . The lease re2uires annual pa$ments of E%, beginning *ecember "1, . 6tockton appropriatel$ accounted for the lease as a capital lease. 6tockton-s incremental borro/ing rate is 1 percent. Assuming the present #alue of an annuit$ due of 1 for ' $ears at 1 percent is 4.(+) and the present #alue of an annuit$ due of 1 for ' $ears at 1 percent is 4.'4), /hat is the lease liabilit$ that 6tockton should report on the balance sheet at *ecember "1, ; a. E1)+,%4 b. E,
+$
!hapter 1%
Leases
c. E",4 d. E"+,%4
d
"(. Bater !ompan$ leased e2uipment to ?ritz nc. on 8anuar$ 1, . The lease
L9'
is for an eight&$ear period epiring *ecember The of eight e2ual annual pa$ments of E+, /as made"1, on+. 8anuar$ 1, first . Bater had purchased the e2uipment on *ecember +, 1, for E4,),. The lease is appropriatel$ accounted for as a sales&t$pe lease b$ Bater. Assume that the present #alue at 8anuar$ 1, , of all rent pa$ments o#er the lease term discounted at a 1 percent interest rate /as E%,),. :hat amount of interest re#enue should Bater record in "
a
"). 8ordan !o . leased a machine on *e cember "1, . Annual pa$ ments under the l ease are E11,
L9%
Test Bank, Intermediate Accounting , 14th ed.
b L9'
+1
"+. Aerotech nc., a dealer in machiner$ and e2uipment, leased e2uipment to Jualit$ Products on 8ul$ 1, . The lease is appropriatel$ accounted for as a sale b$ Aerotech and as a purchase b$ Jualit$. The lease is for a ten& $ear period
c L9%
4. 9n 8anuar$ 1, , 6hak, nc. signed a noncancelable lease for a sneaker shining ma chine. The machine has an estimated useful l ife of n ine $ears. The term of the lease is a si&$ear term /ith title passing to 6hak at the end of the lease. The agreement called for annual pa$ments of E4, starting at the end of the first $ea r. Assume aggregate lease pa$ments /ere determined to ha#e a present #alue of E,, based on implicit interest of 1 percent. :hat amount of interest epense should 6hak report in its income statement from this lease transaction; a. E b. E1', c. E4, d. E"","""
a L9%
41. 0pson *istributing leased a machine for a period of eight $ears, contracting to pa$ E, at the beginning of the lease term on *ecember "1, , and E, annuall$ on *ecember "1 for each of the net se#en $ears. The present #alue of the eight rent pa$ments o#er the lease term, appropriatel$ discounted at 1 percent, is E1,1(4,. 9n its *ecember "1, ", balance sheet, 0pson should report a liabilit$ under capital lease of a. E)(1,4. b. E)(','. c. E+(4,. d. E1,+1,4.
+(
!hapter 1%
c L9'
Leases
4. 6lice !o mpan$ manufactures e2uipment that the$ se ll or lease. 9n *ecember "1, , 6lice leased e 2uipment to ook !ompan$ for a f i#e&$ear p eriod after /hich o/nership of the leased asset /i ll be transferred to ook. The lease calls for e2ual annual pa$ments of E%,, due on *ecember "1 of each $ear. The first pa$ ment /as made on *ecember "1, . The normal sales price of the e2uipment is E,, and cost is E1(',. ?or the $ear ended *ecember "1, , /hat amount of income should 6lice report from the lease transaction; a. E1, b. E", c. E44, d. E(4,
c L94
d L9+
4". 9n C arch 1, ", 6turd$ !o rp. bec ame th e lessee of ne / e2 uipment under a noncancelable si&$ear l ease. The total estimated economic life of this e2uipment is ten $ears. The fair #alue of this e2uipment on Carch 1, ", /as E1,. The lease does not me et the criteria for classificatio n as a capital lease /ith respect to transfer of o/nership of the leased asset, or bargain purchase option, or lease term. 3e#ertheless, 6turd$ must classif$ this lease as a capital lease if, at inception of the lease, the present #alue of the minimum lease pa$ments
E",
Test Bank, Intermediate Accounting , 14th ed.
b L9%
+)
4%. 9n *ecember "1, ", Gephardt 0nterprises le ased e2 uipment from B D B 02uipment ental. Pertinent lease transaction data are as follo/sK The estimated se#en&$ear useful e2uipment life coincides /ith the lease term. The first of the se#en e2ual annual E, lease pa$ments /as paid on *ecember "1, ". B D B@s implicit interest rate of 1 percent is kno/n to Gephardt. Gephardt@s incremental borro/ing rate is 14 percent. Present #alues of an annuit$ of 1 in ad#ance for se#en periods are %.11 at 1 percent and 4.)+ at 14 percent. •
•
• • •
Gephardt should record the e2uipment on the books at a. E1,4,. b. E1,,. c. E+(),. d. E. b L9'
c L9%
4'. 9n 8a nuar$ 1, , !o llins !ompan$ le ased a /a rehouse to !u thbert under an operating lease for ten $ears at E), per $ear, pa$able the first da$ of each lea se $ea r. !ollins paid E"', to a real esta te brok er as a finder@s fee. The /areh ouse is depreciated at E, per $ear. *uring , !ollins incurred insurance and propert$ ta epense totaling E1%,. !ollins@ net rental income for should be a. E+,. b. E41,4. c. E44,. d. E4%,. 4(. 9n 8anuar$ 1, T/i !ompan$ as lessee signed a ten&$ear noncancelable lease for a machine /ith annual pa$ments of E',. The first pa$ment /as also made on 8anuar$ 1. T/i appropriatel$ treated this transaction as a capital lease. The ten lease pa$ments ha#e a present #alue of E4%, at 8anuar$ 1, based on implicit intere st of 1 percent. ?or the first $ea r, T/i should record interest epense of a. E. b. E',. c. E"4,%. d. E4,%.
+*
!hapter 1%
c L9'
Leases
4). azard nc. manufactures e2uipment that is sold or leased. 9n *ecember "1, , azard l eased e2 uipment to obards for a fi #e&$ear p eriod epiring *ecember "1, (, at /hich date o/nership of the leased asset /ill be transferred to obards. 02ual E4, pa$ments under the lease are due on *ecember "1 of each $ear. The first pa$ment /as made on *ecem ber "1, .and!ollectibilit$ remaicost ninguncert leas eainties. pa$ments reasona bl$ assured, azar d has of nothe material Theisnormal sales price of the e2uipm ent is E1%4 , and cost is E1, . ?or the $ea r ended *ecember "1, , ho/ much income should azard recognize from the lease transaction; a. E4', b. E4, c. E"4, d. E),
c L9%
b L9%
4+. 9n 8anuar$ 1, Gr egor$ !ompan$ signed a ten &$ear non cancelable le ase for a ne/ ma chine, re 2uiring E4, annual pa$ments at th e be ginning of each $ear. The machine has a useful lif e of 1% $ears, /i th no sal#age #alue. Title passes to Gregor$ at the lease epiration date. Gregor$ uses straight&line depreciation for all of its plant assets. Aggregate lease pa$ments ha#e a present #alue on 8anuar$ 1 of E%,, based on an appropriate rate of inter est. ?or the firs t $ear, Gregor$ shoul d record depreciation
Test Bank, Intermediate Accounting , 14th ed.
c L9%
+5
%1. 9n *ecember "1, , !ooke !ompan$ leased a machine under a capital lease for a pe riod of ten $ears, contracting to pa$ E1, on s igning the lease and E1, annuall$ on *ecem ber "1 of the net nine $ears. The present #alue at *ecember "1, , of the ten lease pa$ments o#er the lease term discounted at 1liabilit$ percent !ooke@s total capital lease is /as E'(',. At *ecember "1, ", a. E4)',. b. E%1),. c. E%"",'. d. E'(,+'.
b %. L9)
Lease > does not contain a bargain purchase option, but the lease term is e2ual to + p ercent o f the estimated ec onomic life of t he leased propert$. Lease does not transfer o/nership of the propert$ to the lessee b$ the end of the lease term, but the lease term is e2ual to (% percent of the estimated economic life of the leased proper t$. :hat is the most lik el$ classification of these leases under currentl$ eisting international standards of accounting for leases; Lease> Lease a. !apital lease 9perating lease b. !apital lease !apital lease c. 9perating lease !apital lease d. 9perating lease 9perating lease
PRO'LEMS Problem 1
9n 8ul$ 1, , a/ke$e A#iation leased t/o helicopters from onnicutt Aircraft for an initial period of 1 months /ith a pro#ision for a continuation on a month&to& month basis. The lease is properl$ classified as an operating lease. Lease pa$ments are to be made as follo/sK ?irst t/o months...............................................................E1%, per month 6econd three months....................................................... 1, per month Third three months........................................................... 1, per month Last four months.............................................................. ), per month After the first $ear, the rent continues at E', per month. Pro#ide the entries re2uired to record the lease pa$ments for the first $ear on the books of
+#
!hapter 1%
Leases
<1= a/ke$e A#iation. <= onnicutt Aircraft. Solution 1
L9%, L9' <1= a/ke$e A#iation
4,"""
ent 0pense <
1,''(
!ash.............................................. 6ept., 9ct., 3o#. Prepaid ent...................................... ent 0pense..................................... !ash.............................................. *ec. " 8an., ?eb. " Car., Apr. Ca$, 8une
1,""" 1,''( 1,
ent 0pense..................................... !ash.............................................. Prepaid ent.................................
1,''(
ent 0pense..................................... !ash.............................................. Prepaid ent.................................
1,''(
<= onnicutt Aircraft
1%,
1, ''(
), ,''(
1%, 4,""" 1,''(
!ash................................................... nearnedente#enue.............. ent e#enue...............................
1,
*ec. " 8an., ?eb.
!ash................................................... nearned ent e#enue................... ent e#enue...............................
1, ''(
" Car., Apr.
!ash...................................................
),
1,""" 1,''(
1,''(
Test Bank, Intermediate Accounting , 14th ed.
Ca$, 8une
nearned ent e#enue................... ent e#enue...............................
++
,''( 1,''(
Problem 2
9n 8anuar$ , , the :ilco 6tudios leased si computers for use in the engineering depart ment. The lease period is for 1" $ears and the estimated economic life of the leased prop ert$ is 1% $ears. The lease does not cont ain automatic title transfer or a bargain purchase option. Lease pa$ments are E+, per $ear, pa$able each *ecember "1. The incremental borro/ing rate for :ilco is 1 percent andstraight&line the impli citdepreciation inter est ratefor
L9% PHn
" *ec. "1
Leased 02uipment................................................ 9bligations under !apital Lease.....................
'",+"1
Amortization 0pense
4,+1)
9bligations under !apital Lease.......................... nterest 0pense
,'( ',"+"
Amortization 0pense........................................... Accumulated Amortization...............................
4,+1)
9bligations under !apital Lease.......................... nterest 0pense
,)') ',1"
'",+"1 4,+1)
+,
4,+1)
+, +,
+,
!hapter 1%
Leases
Problem 3
:ashington ?inancing, nc. purchased a packing machine to lease to Pu$allup ?ruits. The lease 2ualifies as a direct financing lease and re2uires lease pa$ments of E%),)' per $ear , pa$able in ad#ance, o#er a ten&$ear period. There is no epected residual #alu e. The fair market #alu e of the packing machine is E"",&&the same amount paid b$ :ashington to purchase the asset. The lease term begins on 8anuar$ 1, . Pro#ide the Iournal entries re2uired on :ashington@s books to <1= record the lease transaction and the first lease pa$ment. <= recognize int erest re# enue at the end of the firs t $ear. :ashington uses a calendar&$ear accounting period. <ound all computations to the neare st dollar.= Solution 3
L9' <1= 8an. 1
<= *ec. "1
Lease Pa$ments ecei#able........................... %)),' 02uipment Purchased for L ease................ nearned nterest e#enue....................... !ash................................................................. Lease Pa$ments ecei#able.....................
%),)'
nearned nterest e#enue............................ nterest e#enue........................................
4",")
"", %),' %),)' 4",")
8ason nc. uses leases as a means of selling its e2uipme nt. 9n 8anuar$ 1, , the compan$ leased a machine to 8erem$ Canufacturing nc. The cost of the machine to 8ason /as E(),4% . The fair market #a lue
<1= Pro#ide the entr ies re2uired on 8ason @s books to reco rd the lease and the fi rst pa$ment. <= !ompute the manufacturer@s profit to be recognized b$ 8ason in the first $ear of the lease. <"= Pro#ide the entr$ re2 uired on 8ason @s books to recog nize interest re# enue at the end of the first $ear. <ound computations to the nearest dollar.= Solution 4
L9' <1= 8an. 1
Lease Pa$ments ecei#able
(),4% ',)1' 11,1)4
!ash................................................................. Lease Pa$ments ecei#able.....................
1",%
1",%
<= 6ales price of machine.................................................... E11,1)4 !ost to manufacture......................................................... (),4% Canufacturer@s profit........................................................ E ,("4 <"= *ec. " 1
nearned n terest e# enue............................ nterest e#enue........................................
),(') ),(')
9n 8anuar$ 1, , ?ranklin ndustries leased e2uipment on an eight&$ear term at E1%, annual rental pa$ments, paid in ad#ance. There is a bargain purchase option on *ecember "1, +
and interest entries ha#e been made.
8an. 1
*ec. "1
<= + *ec. "1
Leased 02uipment........................................... 9bligations under !apital Lease...............
+",1%1
9bligations unde r !apital Leas e..................... !ash.. .........................................................
1%,
Amortization 0pense
',1
nterest 0pense
+,"() %,'
Loss from ?ailure to 0ercise Bargain Purchase 9ption.............................................. 9bligations unde r !apital Leas e..................... Accumulated Amortization
+",1%1
1%, ',1
1%,
1+,4(1 4, 4+,') +",1%1
Problem 6
?are/ell nc. leases e2uipmen t to its customers und er noncancelable leases. 9n 8anuar$ 1, , ?are/ell leased e2uipment costing E4, to 3orman !o., for nine $ears. The rental cost /as E44, pa$able in ad#ance semi annuall$ <8anuar$ 1 and 8ul$ 1=, plus E, semi annuall$ for eecutor$ cost s. The e2uipment had an estimated life of 1% $ears and sold for E%"",% /ith an estimated unguaranteed residual #alue of E), . The implicit interest rat e is 1 percent. Prepare all Iournal entri es for on ?are/ell@s and 3or man@s books. ound all calculations to the nearest dollar. se straight&line depreciation.
Solution 6
L9%, L9' ?are/ell@s Books
Lease Pa$ments ecei#able
4, ""),+(% %%,1
E44, 11.4((" E%%,1 E), ."%" ),4 E%"",%
8ul$ 1
8ul$ 1 *ec. "1
!ash................................................................. Lease Pa$ments ecei#able..................... 0ecutor$! osts.........................................
4',
!ash................................................................. Lease Pa$ments ecei#able..................... 0ecutor$! osts.........................................
4',
nearned nterest e#enue............................ nterest e#enue
+,"4
44, , 44, , +,"4
nearned n terest e #enue............................ ),4' nterest e#enue
),4'
3orman@s Books
8ul$ 1
Leased 02uipment........................................... %%,1 9bligations u nder !apital L eases.............. Lease 0pense................................................ 9bligations und er !api tal Leas es................... !ash...........................................................
, 44,
nterest 0pense
(,'' 1',"4 ,
%%,1
4',
4',
*ec. "1
Amortization 0pense...................................... Accumulated Amortization
%',111 %',111 ',') ',')
Problem 7
enri eta il 6tores is negotiating three lease s for store locations. enri@s incremental borro/ing rate is 1 percent. 0ach store /ill ha#e an economic useful life of " $ears. Lease pa$ ments /ill be made at the end of each $ear . Based on the data belo/, properl$ classif$ each of the leases as an operating lease or a capital lease. The purchase price for each prope rt$ is listed as an altern ati#e to leasing. LocationA LocationB Location!
Location Lease Term '$ears $ears $ears
Lease Pa$ment E1,%, 1,", 1,4,
Purchase Price E1,, 1,, 1%,,
*etermine /hether each of the leases should be classified b$ enri as an operating lease or a capital lease. 6ho/ computations and reasons to suppo rt $our ans/ers. <1= Location A <= Location B <"= Location ! Solution 7
L9% <1= Location AK
!apital lease
!omputationsK ' $earsO" $ears )'.(5 of useful life, so the third criterion <(%5 of useful life= is met. •
•
E1,%, pa$ment (.)+%( E11,)4",%%
<= Location BK !apital lease !omputationsK $earsO" $ears ''.(5 of useful life, so the third criterion <(%5 of useful life= is not met. •
•
E1,", pa$ment (.4'+4 E+,(1,
<"= Location !K 9perating lease !omputationsK $earsO" $ears ''.(5 of useful life, so the third criterion <(%5 of useful life= is not met. •
•
E1,4, pa$ment (.4'+4 E1,4%(,1'
Problem 8
6tandard *istributing entered into a leasing agreem ent /ith D * ental. The lease 2ualifies as a capital lease and calls for pa$ments of E%, for % $ears /ith the first pa$ment being mad e on 8anuar$ 1, , and subse 2uent pa$ments being made on *ecember "1 of each $ear. 6tandard@s incremental borro/ing rate is 1 percent. Prepare a schedule amortizing 6tandard@s lease obligation. Solution 8
L9% *ate Pa$ment 1O1O 1O1O E%, 1O"1O %, 1O"1O" %, 1O"1O4 %, 1O"1O% %, 7
E%, 4."(" E,1)(
nterest 0pense E1,) 1,441 1,14 %"'
Principal E%, ",1() ",%%+ ",+)' 4,4'4
Lease 9bligation E,1)( 7 1%,1)( 1,+ ),4% 4,4'4
Problem 9
8ohnson Canufacturing entered into a noncancelable lease for an office building on 8anuar$ 1, . The lease calls for pa$ ments of E4, a $ear for eight $ears. The first pa$ment is due on 8anuar$ 1, , / ith the other pa$ments due on *ecember "1 of each $ear. 8ohnson has an incre mental borro/ing rate of ) percent. The building is amort ized b$ 8ohnson o#er eight $ ears using the straight& line method and assuming no sal#age #alue. Prepare a partial balance sheet for 8ohnson for the $ear ending *ecember "1, , disclosing the asset and the liabilit$ related to the leased building. Solution 9
L9( AssetK !ostK E4, '.'4 E14),+%4 Annual amortizationK E14),+%4 O ) $ears E1),'1+ Liabilit$K
E
E 1",""% !urrent liabilitiesK 9bligations und er ca pital lea se&¤t portion............................. 3oncurrent liabilitiesK 9bligations under capital lease&&eclusi#e of amount included in current liabilities..................................................
1%,14 +%,)'
Problem 10
9n 8anuar$ 1, , :ashington !ompan$ sold machiner$ costing E411,(%, at the fair market #alue and then immediatel$ leased the machiner$ back for E, $earl$, pa$able in ad#ance. The life of the machiner$ and the lease /as fi#e $ears. The implicit rate is 1 percent. ecord all entries for on :ashin gton@s books. The fair market #alue and the present #alue of the lease pa$ments are e2ual. Solution 10
L9+ 8an. 1
8an 1
*ec. "1
*ec. "1
!ash
411,(% "+%,(1
Leased Ca chiner$........................................... )(,4' 9bligations u nder !apital L eases.............. !ash...........................................................
'(,4' ,
Amortization 0pense...................................... 1'1,4+ Accumulated Amortization
(+,14
1'1,4+ , (+,14
Problem 11
George armon is the president of the t ah :estern ailroad !o mpan$. The tah :estern is a bridge line that recei#es traffic from the nion Pacific ailroad and the Burlington 3orthern railroads at 6alt Lake !it$, tah, and hauls the freight to *en#er, !olorado, for connec tions /ith other lines to points east. ecentl$, traffic on the tah :estern has increased dramaticall$ and the railroad is in need of additional locomoti#es to haul its trains. Accordingl$, George is considering leasing locomoti#es to meet the demands of this increase in traffic until ne/ engines can be ordered if the surge subsides. As the controller of the railroad, George has aske d $ou to ad#ise him as to the disad#antages associated /ith leasing generall$.
Solution 11
L91 *isad#antages of leasing for a lessee include the follo/ingK
,#
!hapter 1%
Leases
1. Leases allo/ a lessee to obtain 15 financing at fied interest rates. The larger amount financed means that the compan$ /ill pa$ higher interest in terms of the total dollar outla$. . Leasing read$&to&use e2uipment rather than cust om built e2uipment ma$ result in lo/er 2ualit$ product or ser#ices, /hich ma$ result in lost sales for the lessee. n the case of the railroad, the compan$ ma$ /ish to lease si&ale, ", horsepo/er locomoti#es /ith the po/er anda#ailable. speed needed to meet eisting customer schedules /hen such e2uipment is not Another possibilit$ is that onl$ older units ma$ be a#ailable and older e2uipment ma$ be subIect to more do/ntime from breakdo/ns. eplacement parts for the older units ma$ need to be purchased if the railroad does not carr$ an$thing comparable in its parts in#entor$. ". 3o guarantee eists that the e2uipment the compan$
6hort&term leas ing rates are generall$ higher than long&term rates in order to protect the lessor from obsolescence.
%. Ta benefits associated /ith leases are subIect t o changes in the ta la/ and th us could be reduced or eliminated. Problem 12
Business leasing has become a large market. Banks, other lending institutions, and commercial leasing companies represent the largest share of the business leasing market /ith the remainder consisting of manufacturers, dealers, and distributors. dentif$ the ad#antages and disad#antages to lessors of leasing rather than selling propert$.
Test Bank, Intermediate Accounting , 14th ed.
,+
Solution 12
L91 Leasing has se#eral ad#antages o#er sales for lessors. !ustomers ma$ be un/illing or unable to purchase propert$. The use of leasing offers the lessor a means of ser#icing these customers and thus preser#ing a sale that other/ ise might be lost. The lessor sees leasing as one component of a full&ser#ice, selling strateg$. Leasing also/ith ma$the afford the lessor the opportunit$ of maintaining a business relationship lessee. n a /ith purchase, the relationship bet/een the bu$er and seller ma$ be limited to the time of the negotiation and consummation of the sale. A leasing transaction, on the other hand, ma$ result in the lessee and lessor maintaining contact o#er an etended period of time. 6uch contracts ma$ de#elop into long&term business relationships that pro#e useful both to the lessee and the lessor. Can$ lease agreements are structured such that the title to the leased propert$ remains /ith the lessor. The lessor thus stands to benefit from the residual #alue of the asset at the end of the lease term. The asset ma$ be leased to another lessee or sold. Large increases in residual #alues can result in significant gains to lessors /hen the assets are sold. This can be a t/o&edged s/ord, ho/e#er. The lessor also can be saddled / ith an obsolete asset if he or she is not astute in structuring lease rates to encourage maimum use of the asset prior to its becoming obsolete. This accomplished b$ charging higher leasing rates for short&term leases o#er long&term leases in order to compensate the lessor for assuming the risk of obsolescence. A maIor disad#antage of leasing to lessors results from fied rates on long&term leases. 6uch fied rates epose the lessor to the risk of opportunit$ losses if interest rates ad#ance.
CHAPTER 15 -- QUI. A 3ame RRRRRRRRRRRRRRRRRRRRRRRRR 6ection RRRRRRRRRRRRRRRRRRRRRRRR T ?
1. 3oncancelable leases are contracts /ith cancellation pro#isions and penalties that are so costl$ for the lessee to in#oke that in all likelihood, cancellation /ill not occur.
T ?
. Both cancelable and n oncancelable leases are subIect to capitalization.
T ?
". The inception of the lease is defined as the date of the lease agreement, or the date of an earlier /ritten commitment.
T ?
4. The beginning of t he l ease term is d efined a s the date on / hich the leased propert$ is actuall$ transferred to the lessee.
T ?
%. ental pa $ments, in cluding an$ eecutor$ co sts, ar e part of th e minimum lease pa$ments.
T ?
'. Cinimum lease pa$ments include an$ amount to be paid for purchase options and residual #alues.
T ?
(. The lessor uses the implicit interest rate in determining the present #alue of the minimum lease pa$ments.
T ?
). The les see al/ a$s uses it s inc remental bo rro/ing rate in de termining th e present #alue of the minimum lease pa$ments.
T ?
+. f a lease transfers o/nership of the propert$ to the lessee b$ the end of the lease term, it /ill be classified as a capital lease b$ the lessee.
T ? 1. An$ lea se th at co ntains a bargain purchase op tion must be treated as a capital lease b$ both the lessee and lessor.
))
CHAPTER 15 -- QUI. ' 3ame RRRRRRRRRRRRRRRRRRRRRRRRR 6ection RRRRRRRRRRRRRRRRRRRRRRRR T ?
1. :hen rental pa$ments #ar$ o#er the term of an operating lease, the lessee should recognize rental epense on a straight&line basis.
T ?
. n a capital lease, the lessee records the ac2uisition of the asset at the lo/er of the present #alue of the minimum lease pa$ments or the fair market #alue of the asset.
T ?
". nitial direct costs are immediatel$ recognized as an epense b$ the lessor /hen the costs are incurred in conIunction /ith an operating lease.
T ?
4. nitial di rect co sts in a sal es&t$pe le ase are im mediatel$ rec ognized as a reduction in manufacturer@s profit.
T ?
%. nitial di rect co sts inc urred in connection /i th a dir ect fi nancing lease are recognized o#er the lease term through reduced interest re#enue.
T ?
'. An$ adIustment for a p ermanent decline in a n unguaranteed residual #alue during the lease term should be accounted for as a change in estimate.
T ?
(. A direct financing le ase results in the re cognition of t /o dif ferent t$pes of re#enue.
T ?
). Losses incurred b$ the lessee in the sale portion of a sale&leaseback should be deferred.
T ?
+. Leases o f land sh ould be e# aluated usi ng t he f our cri teria est ablished in ?A6B 6tatement 3o. 1".
T ? 1. nder GAAP, it is impossible for a lease to be classified as a capital lease b$ the lessor and an operating lease b$ the lessee.
)+
CHAPTER 15 -- QUI. C 3ame RRRRRRRRRRRRRRRRRRRRRRRRR 6ection RRRRRRRRRRRRRRRRRRRRRRRR A. B. !. *. 0.
Bargain purchase option Bargain rene/al option !apital lease *irect financing lease 0ecutor$ co sts
8. S. L. C. 3.
?. Guaranteed residual G. mplicit interest rate #alue . ncremental borro/ing rate . nitial di rect costs
Lease term Lessee Lessor Cinimum lease pa$ments 3et lease in#estment
9. esidual 9perating#alue lease P. J. 6ales&t$pe lease . nguaranteed residual #alue
6elect the term that best fits each of the follo/ing definitions and descriptions. ndicate $our ans/er b$ placing the appropriate letter in the space pro#ided. RRRR 1. ate that discounts minimum lease pa$ments to the fair market #alue of the leased asset at the inception of the lease. RRRR . !osts such as commissions, legal fees, and document preparation that are incurred in negotiating and completing a lease transaction. RRRR ". A lease entered into b$ a lessor /ho is primaril$ engaged in pro#iding financial ser#ices. RRRR 4. The #alue of leased propert$ that remains /ith the lessor at the end of the lease termF market factors and asset condition determine the asset #alue remaining. RRRR %. The rental pa$ments re2uired o#er the lease term plus an$ amount to be paid b$ the lessee under a bargain purchase option or guaranteed residual #alue pro#ision. RRRR '. A lease pro#ision allo/ing the lessee to ac2uire o/nership of a leased asset in the future at a price that is epected to be substantiall$ less than market #alue at the time of ac2uisition. RRRR (. A lease arrangement used b$ manufacturers or dealers to facilitate the marketing of their products. RRRR ). A lease agreement that is in substance a purchase and sale of propert$. RRRR +. The time period from the beginning to the end of a lease. RRRR 1. An entit$ that o/ns propert$ and transfers the right to use that propert$ to another entit$.
+
CHAPTER 15 -- QUI. SOLUTIONS Juiz A 1. . ". 4. %.
T ? T T ?
'. (. ). +. 1.
T T ? T ?
. ". 4. %. '. (. ).
T ? T T T ? ?
+. ? ? 1.
Juiz ! Juiz B 1. T
1. . ". 4.
G *
%. '. (. ). +. 1.
C A J ! 8 L
Thi" &a0e i" eft an2 intentionay34