Lesse 2 types of leases
1 Operating lease
2 Capital Lease
Criteria for a Capital Lease
1 Transfer of Ownership at the end of lease
2 BPO
3 Lease term is 75% of economic life
4 PV of lease payments is 90% of FV
*meet at least one
Which IR do you use for calculating PV of min lease payment?
lower of implicit or intrinsic rate
what goes into minimum lease payment
1 rental payment
2 guaranteed RV
3 BPO
Capital lease je
Debit: Leased Equipment under CL (lower of PV Min lease pmt or FMV)
Credit: LP
Record Interest for a Capital Lease
Debit: Interest Expense
Debit: Lease Payable
Credit: Cash
Capital Lease Calculating deprection
Cost (amt capitalized lower of PV min lease payment or FMV)/ lease term (if we return) or if we keep it (economic life
Capital Lease end of lease JE (keep it)
equipment
Credit: Leased Equipment
Capital Lease end of lease JE (give back)
Debit: Acc Dep
Credit: leased equip
3 types of leases for lessor
1 operating lease
2 direct financing lease
3 sales type lease
guaranteed residual value, who guarantees it?
by the lessee (person borrowing)
Direct Financing Lease Criteria
Group 1 criteria
1 Transfer of Ownership at the end of lease
2 BPO
3 Lease term is 75% of economic life
4 PV of lease payments is 90% of FV
Group 2 criteria (no profit or loss)
1) min lease pmt collectibility is reasonably assured
2) no important uncertai
Sales Type Lease Criteria
Group 1 criteria
1 Transfer of Ownership at the end of lease
2 BPO
3 Lease term is 75% of economic life
4 PV of lease payments is 90% of FV
Group 2 criteria (has profit or loss)
1) min lease pmt collectibility is reasonably assured
2) no important uncerta
for operating lease what do you record?
just rent exp
operating lease from lessor POV
Debit: Cash
Credit: Rental Rev
Also depreciate
Operating Lease (lessee POV) JE
rent exp
Credit: cash
Advantages of leases for lessee
100% financing at fixed rates-helps lessee conserve $, fixed rates helps lessee not deal with inflation
protection against obsolescence-don't have to worry about this for lessee
flexibility
leasing affordable
tax advantage-don't report an asset/liab
off b
advantages of leases for lessor
tax advantage
interest rev
high residual value
21 Major reasons why a company may become involved in leasing to other companies is (are)
a. interest revenue.
b. high residual values.
c. tax incentives.
d. all of these.
d. all of these.
22 Which of the following is an advantage of leasing?
a. Off-balance-sheet financing
b. Less costly financing
c. 100% financing at fixed rates
d. All of these
d. All of these
23 Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.
b. Leases similar to installment purchases are capitalized.
24 While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that
a. all leases are generally for the
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
S25. An essential element of a lease conveyance is that the
a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement
a. lessor conveys less than his or her total interest in the property.
S26. What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?
a. No impact as the option does not enter into the transaction until the end of the lease term.
b. The lessee must increase the
b. The lessee must increase the present value of the minimum lease payments by the present value of the option price.
P27. The amount to be recorded as the cost of an asset under capital lease is equal to the
a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset, whichever is lower.
c. present value
b. present value of the minimum lease payments or the fair value of the asset, whichever is lower.
28 The methods of accounting for a lease by the lessee are
a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.
a. operating and capital lease methods.
29 Which of the following is a correct statement of one of the capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimate
c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
30 Minimum lease payments may include a
a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.
d. any of these.
31 Executory costs include
a. maintenance.
b. property taxes.
c. insurance.
d. all of these.
d. all of these.
32 In computing the present value of the minimum lease payments, the lessee should
a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the
c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
33 In computing depreciation of a leased asset, the lessee should subtract
a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual valu
a. a guaranteed residual value and depreciate over the term of the lease.
34 In the earlier years of a lease, from the lessee's perspective, the use of the
a. capital method will enable the lessee to report higher income, compared to the operating method.
b. capital method will cause debt to increase, compared to the operating
b. capital method will cause debt to increase, compared to the operating method.
P35. A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the
a. asset's remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of t
a. asset's remaining economic life.
36 Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?
Transfers Contains Collectibility Any
Ownership Bargain of Lease Impt
By End of Purchase Payments Uncerta
a. No Yes Yes No
37 Which of the following would not be included in the Lease Receivable account?
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included
d. All would be included
38 In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income
a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the
a. should be amortized over the period of the lease using the effective interest method.
S39. In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as
a. the amount of funds the lessor has tied up in the asset which
c. the present value of minimum lease payments.
S40. If the residual value of a leased asset is guaranteed by a third party
a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the lessee.
c. the net investment to be recovered by the
d. it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.
41 When lessors account for residual values related to leased assets, they
a. always include the residual value because they always assume the residual value will be realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more
a. always include the residual value because they always assume the residual value will be realized.
42 The initial direct costs of leasing
a. are generally borne by the lessee.
b. include incremental costs related to internal activities of leasing, and internal costs related to costs paid to external third parties for originating a lease arrangement.
c.
c. are expensed in the period of the sale under a sales-type lease.
S43. The primary difference between a direct-financing lease and a sales-type lease is the
a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer
c. recognition of the manufacturer's or dealer's profit at the inception of the lease.
P44. A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?
a. The minimum lease p
b. The present value of the minimum lease payments.
45 For a sales-type lease,
a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
c. the gross profit will be the same whethe
c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
46 Which of the following statements is correct?
a. In a direct-financing lease, initial direct costs are added to the net investment in the lease.
b. In a sales-type lease, initial direct costs are expensed in the year of incurrence.
c. For operating lea
d. All of these.
47 The Lease Liability account should be disclosed as
a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
48 To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?
a. Lessee uses a higher interest rate than that us
c. Write in a bargain purchase option.
*49. If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is therefore accounted for as a capital lease, who records the asset on its books and which party records interest expense during the lease period?
Party recordin
d. Seller-lessee Seller-lessee
*50. In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?
a. The seller-lessee removes the asset from its books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the le
b. The purchaser-lessor records a gain.
*51. When a company sells property and then leases it back, any gain on the sale should usually be
a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income o
d. deferred and recognized as income over the term of the lease.