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Exam 15: Leases

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Question 71

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Which of the following statements characterizes a leveraged lease?

A) The lessor borrows part of the acquisition price of the leased asset from a third party lender.
B) The lessor treats the lease as an operating lease.
C) The lessee makes lease payments to the lessor's lender.
D) The lessor's interest rate is always higher because the lease is leveraged.

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

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Question 72

Multiple Choice

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What is the outstanding balance after payment 9?

A) $8,929.
B) $13,463.
C) $5,000.
D) $5,537.

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

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Question 73

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What would the lessee record as annual depreciation on the asset using the straight-line method?

What is the carrying value of the lease liability on Reagan's December 31, 2014, balance sheet (after the third lease payment is made) ?

On September 1, 2013, 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 2013?

On February 1, 2013, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Under the new ASU, what amount of interest revenue from the lease should SmithCo report in its December 31, 2013, income statement?

Lone Star Company would account for this as:

On June 30, 2013, Blue, Inc., leased equipment from Big Leasing Corporation. The lease agreement qualifies as a direct financing lease and calls for Blue to make semiannual lease payments of $281,453 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2013. Blue's incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Required: 1. What would be the pretax amounts related to the lease that Big would report in its balance sheet at December 31, 2013? (Round PV to the nearest $000.) 2. What would be the pretax amounts related to the lease that Big would report in its income statement for the year ended December 31, 2013?

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Under the new ASU, what amount of profit did SmithCo record at the commencement of the lease?

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

Nickle leased equipment to Back Company on July 1, 2013. The present value of the lease payments discounted at 10% was $120,000. Ten lease payments of $18,000 are due at the beginning of each fiscal year beginning July 1, 2013. Nickle had constructed the equipment recently for $99,000 and its retail fair value was $150,000. Required: Following the guidance of the new ASU, prepare the journal entries to record the lease by Nickle (lessor) at its commencement and at December 31, 2013.

A direct financing lease is classified in the lessor's balance sheet as:

What is the amount of residual value guaranteed by Reagan to the lessor?

On January 1, 2013, Holbrook Company leased a building under a three-year operating lease. The annual rental payments are $68,000 on January 1, 2013, the inception of the lease, and $50,000 January 1 of 2014 and 2015. Holbrook made structural modifications to the building costing $90,000 before occupying the building. The useful life of the building and the modifications is 30 years with no expected residual value. Required: Prepare the appropriate journal entries for Holbrook Company for 2013. Holbrook's fiscal year is the calendar year, and the company uses straight-line depreciation.

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:

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Following the guidance of the new ASU, the total increase in earnings (pretax) in SmithCo's December 31, 2013 income statement would be:

ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $120,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $2,000 at the end of 10 years. Using the straight-line method, what would Best record as annual depreciation?

What lease disclosures are required of the lessor and lessee?

Red Co. recorded a residual asset of $100,000 in a 10-year lease under which no profit was recorded at commencement by the lessor. The interest rate charged the lessee was 10%. Under the new ASU, the balance in the residual asset after two years will be: