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Exam 20: Accounting for Leases

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Question 41

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On January 3, 2014, the Walters Corporation signed a 10-year non-cancelable lease for manufacturing equipment. The fair value of the equipment at that time was $550,000. At the end of the lease period, the equipment, which has an estimated life of 15 years, will be returned to the lessor. Additional information is below: Walters should

A) capitalize the equipment at $550,000
B) capitalize the equipment at $491,565
C) capitalize the equipment at $452,018
D) not capitalize the equipment

E) A) and D)
F) A) and C)

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Question 42

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When a lessee makes periodic cash payments for an operating lease, which of the following accounts is increased?

A) Rent Expense
B) Leased Equipment
C) Capital Lease Obligation
D) Interest Expense

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

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Question 43

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San Juan Corp. leased some equipment to Glendale, Inc. on January 1, 2014. The lease required six annual payments, with the first payment due on December 31, 2014. The cost, and also fair value, of the equipment was $140,000, and there was no estimated residual value at the end of the six-year period. The lease was a direct financing lease and does qualify as a capital lease for San Juan . San Juan 's desired rate of return is 11%. Use the following factors for 6 periods: Required: (For all answers, round to the nearest dollar.) (For all answers, round to the nearest dollar.) a.Compute the amount of equal annual payments. b.Prepare San Juan 's 1/1/2014 entry. c.Prepare all December 31, 2014 entries on San Juan 's books. d.Assume the same information, except that payments are due on January 1 of each year and the first payment was due on January 1, 2014. Determine the amount of the equal annual payments and determine the amount of interest revenue San Juan should recognize for the year 2014.

The lease term includes the fixed non-cancelable term of the lease plus

Motor City, Inc. leased some equipment from Des Moines Company on January 1, 2014. Annual December 31 payments of $15,000 were required. The present value of these payments, discounted at 9% for nine years, is $89,929 (rounded). The lease is a direct financing lease. Required: Prepare all December 31, 2014, entries for Des Moines.

Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be

South Bend Corporation purchased equipment in December 2013 for $150,000. South Bend leased the equipment to the Kansas Company on January 1, 2014. Lease payments of $43,000 are to be made at the end of each year for six years. The present value of the minimum lease payments at 14% interest is $167,212.72 at the time of the lease. At the end of the lease term, ownership of the equipment will be transferred to Kansas. The collectibility of the lease payments is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Required: a.Classify the lease from the South Bend Corporation's standpoint. b.Prepare the 2014 journal entries regarding the lease for the South Bend Corporation.

Because the risks and benefits of ownership transfer to the lessor with a capital lease, the executed costs incurred do not get included when determining the present value of the minimum lease payments.

An advantage of an operating lease is that is does not add a liability or an asset to the lessee's balance sheet, thereby not affecting certain liquidity and financial leverage ratio's.

On January 1, 2014, the Millwork Company signed a four-year non-cancelable lease of equipment from the Midford Company. The annual lease payments of $35,000 are to be paid on January 1 of each year. The first payment is due on January 1, 2014. The lease contains a bargain purchase option price of $15,000. The equipment's fair value is expected to be $30,000 on December 31, 2017. The estimated economic life of the equipment is six years, and the estimated residual value at the end of six years is $5,000. Millwork's incremental borrowing rate is 12%, and the implicit interest rate used in the lease agreement is 10%, which is known by Millwork. Present value factors for interest rates of 10% and 12% are as follows: Millwork Company uses the straight-line method to depreciate its plant assets. Required: a.Compute the present value of the minimum lease payments. (Show all computations and round amounts to the nearest dollar.) b.Classify the lease from the standpoint of the lessee, stating the reason for the classification. c.Prepare a lease amortization schedule for the four-year term for Millwork Company. (Round amounts to the nearest dollar.) d.What is the depreciation expense for 2014?

Maher has entered into a lease agreement with Johanson Company on January 1, 2014. 1) The lease reverts back to Johanson Company at the end of the lease. Johanson does not offer a bargain purchase option. 2) The term of the lease is 6 years and requires annual payments of $12,000 at the end of the year. 3) The present value of the lease payments is $52,263 using an incremental rate of 10%, the equipment's fair value at lease inception is $62,500. 4) The equipment has an estimated life of asset is 12 years. Required: 1) Using the four classification criteria determine whether the lease qualifies as an operating or capital lease for Maher. 2) Prepare the journal entries that Maher would make for 2014 and 2015.

On January 1, 2014, Donna Company leased equipment by signing a five-year lease that required five payments of $30,000 due on December 31 of each year. The equipment remains the property of the lessor at the end of the lease, and Donna does not guarantee any residual value. Using a rate of 8%, Donna capitalized the lease on January 1, 2014, in the amount of $119,781. What is the amount of interest expense Donna should report on its 2015 income statement?

Which of the following is not a required disclosure by a lessee of an operating lease?

Exhibit 20-2 On January 1, 2014, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first payment will be made at December 31, 2014. In addition, Mary guarantees the residual value to be $8,000 at the end of the lease term. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows: - Refer to Exhibit 20-2. What would be the debit to Leased Equipment under Capital Leases on January 1, 2014? (Round amounts to the nearest dollar.)

On January 1, 2014, Stephen Corp., a lessor, signed a direct financing lease. Stephen was to receive annual year-end payments of $10,000 for ten years, after which there was a guaranteed residual value of $8,000. The implicit interest rate was 8%. Actuarial information for 8%, ten periods follows: (round to the nearest whole dollar) On January 1, 2014, Stephen should record a debit to Lease Receivable for

Exhibit 20-1 On January 1, 2014, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2014. The lease qualifies as a capital lease. Pearson's incremental borrowing rate was 9% and the lessor's implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.48592 and 4.35526, respectively. -Refer to Exhibit 20-1. The balance of the lease obligation on January 1, 2015, for financial reporting purposes after the lease payment would be (round answers to the nearest dollar)

Which of the following correctly states a lessee criterion for classifying a lease as a capital lease?

As a generalized statement regarding lease accounting, which statement best describes U.S. versus international accounting principles?

Related to direct financing leases

Exhibit 20-4 On January 1, 2014, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2014. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows: -Refer to Exhibit 20-4. The cost of the leased property to Average is (round the answer to the nearest dollar)