Chp 21 Accounting for Leases

CHAPTER 21ACCOUNTING FOR LEASES TRUE-FALSE—Conceptual Answer T F F T F F T F F T F F T F T F T F T T No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Description Benefits of leasing. Accounting for long-term leases. Classifying lease containing purchase option. Accounting for executory costs. Depreciating a capitalized asset. Lessee recording of interest expense. Benefit of leasing to lessor. Distinction between direct-financing and sales-type leases. Lessors’ classification of leases. Direct-financing leases. Accounting for operating lease. Computing annual lease payments. Guaranteed residual value definition. Guaranteed vs. unguaranteed residual value. Unguaranteed residual value and minimum lease payments. Net investment and guaranteed/unguaranteed residual value. Difference between direct-financing and sales-type leases. Gross profit in sales-type lease. Review of estimated unguaranteed residual value. FASB required lease disclosures. MULTIPLE CHOICE—Conceptual Answer d d b c a b b a c d d c a b a a d a No. 21. 22. 23. 24. S 25. S 26. P 27. 28. 29. 30. 31. 32. 33. 34. P 35. 36. 37. 38. Description Advantages of leasing. Advantages of leasing. Basic principle of lease accounting. Conceptual support for treating all leases as a sale/purchase. Essential element of a lease. Bargain purchase option and minimum lease payments. Cost amount for a capital lease. Lease accounting by lessee. Knowledge of the capitalization criteria. Components of minimum lease payments. Identification of executory costs. Discount rate used by lessee. Depreciation of a leased asset by lessee. Effect of a capital lease on lessee's debt. Depreciation of a capital lease. Identification of lease type for lessor. Elements of lease receivable by lessor. Recognition of unearned lease income. 21 - 2 c Test Bank for Intermediate Accounting, Twelfth Edition S 39. Direct-financing lease receivable. MULTIPLE CHOICE—Conceptual (cont.) Answer d c b c d c d P S No. S Description Third party guarantee of residual value. Difference between direct financing and sales-type lease. Amount of revenue in sales-type lease. Accounting for a sales-type lease. Accounting for initial direct costs. Disclosing obligations under capital leases. Gain/loss recognition in a sale-leaseback. 40. S 41. P 42. 43. 44. 45. *46. These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter. MULTIPLE CHOICE—Computational Answer b c c d a c c d c c a b d c c d b b c a c d a d a b c c c a b c No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. Description Operating lease expense for year. Calculate interest expense and depreciation expense for lessee. Calculate minimum annual lease payment. Calculate total annual lease payment. Identification of lease type for lessor. Identification of lease type for lessee. Calculate depreciation expense for lessee. Identification of lease type for lessee. Calculate leased asset amount. Calculate total lease obligation. Compute interest expense for year. Compute interest expense for year. Calculate lease liability amount. Compute interest expense and depreciation expense for year. Compute interest expense and depreciation expense for year. Compute depreciation expense for lease with transfer of title. Identification of lease type for lessee. Expense recorded by lessee/operating lease. Calculate reduction of lease obligation for lessee. Identification of lease type for lessor. Calculate lease receivable. Revenues and expenses recorded by lessor/operating lease. Operating lease expense for year. Calculate expense of an operating lease. Calculate income from operating lease. Calculate lease payments. Calculate loss on guaranteed residual value lease. Calculate interest revenue in sales-type lease. Determine gross profit and interest revenue. Calculate interest expense and depreciation expense for lessee. Calculate profit and interest income for lessor/sales-type lease. Calculate profit on sales-type lease and interest income. Accounting for Leases c 79. Identification of lease type for lessor. 21 - 3 MULTIPLE CHOICE—Computational (cont.) Answer b d d b b No. 80. 81. 82. *83. *84. Description Determine discount rate implicit in lease payments. Lease-related expenses recognized by lessee. Determine long-term lease obligation for lessee. Gain recognized by lessee in a sale-leaseback. Sale-leaseback/operating lease. MULTIPLE CHOICE—CPA Adapted Answer c a d a d d c a d d No. 85. 86. 87. 88. 89. 90. 91. 92. *93. *94. Description Identification of lease type for lessee. Calculate the lease liability of a lessee. Calculate the lease liability of a lessee. Determine reduction of lease obligation for lessee. Calculate interest expense for lessee. Calculate depreciation expense for lessee. Recognition of interest revenue in a sales-type lease. Calculate income realized by lessor/sales-type lease. Reporting gain on a sale-leaseback. Accounting for the gain on a sale-leaseback. EXERCISES Item E21-95 E21-96 E21-97 E21-98 E21-99 E21-100 *E21-101 *E21-102 Description Capital lease (essay). Capital lease amortization and journal entries. Operating lease. Lease criteria for classification by lessor. Direct-financing lease (essay). Lessor accounting—sales-type lease. Lessee and lessor accounting (sale-leaseback). Sale-leaseback. PROBLEMS Item P21-103 P21-104 P21-105 Description Lessee accounting—capital lease. Lessee accounting—capital lease. Lessor accounting—direct-financing lease. List the disclosure requirements for leases. Describe the effect of residual values. *10 . . 4. Describe the lessor's accounting for sales-type leases. *11. 2. 7.4 Test Bank for Intermediate Accounting. Twelfth Edition CHAPTER LEARNING OBJECTIVES 1. economic substance.21 . 3. 5. 9. on lease accounting. guaranteed and unguaranteed. Describe the accounting criteria and procedures for capitalizing leases by the lessee. Describe the lessee's accounting for sale-leaseback transactions. Understand and apply lease accounting concepts to various lease arrangements. Identify the classifications of leases for the lessor. and advantages of lease transactions. Explain the nature. 6. Describe the lessor's accounting for direct-financing leases. Identify special features of lease arrangements that cause unique accounting problems. 8. Contrast the operating and capitalization methods of recording leases. 4. 67. MC 69. 70. P Learning Objective 7 S TF 40. 100. 66. 43. Learning Objective 2 MC 55. 32. 83. 18. 6. 103. 97. 9. MC 98. MC 92. 45. MC 64. Learning Objective 8 MC 77. MC 101. 13. 49. MC 56. MC 76. MC 57. MC 73. MC 58. 86. 12. 36. MC 98. S 26. Learning Objective 3 P MC 35. 42. MC 60. MC MC MC MC MC MC MC MC S 25. 96. MC 91. 3. 38. P E 84. S P TF MC MC MC MC MC MC TF MC MC MC MC TF TF MC MC MC MC MC 21. 52. 5. 68. 50. 14. 90. E P MC MC MC E 105. 15. 95. MC 79. MC 61. Note: TF TF TF TF MC MC MC TF TF TF TF TF TF TF TF TF TF TF MC 2. 85. MC MC MC E E P P E 89. 19. 51. MC 94. MC 59. Learning Objective 6 MC 104. 30. 87. 82. MC 101. 11. MC 65. Learning Objective 4 MC 71. MC 99.5 SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Ite Ty Ite Ty Ite Ty Ite Ty Ite Ty Ite Ty Ite Typ 1. Learning Objective 9 Learning Objective 11* MC 93. MC Learning Objective 5 MC 80. 16. MC 23. 20. 7. 28. 75. 8. 46. 54. 81. 53. 72. E 105. MC 63. MC 78. 88. 33. 48. 39. MC 90. P 27. Learning Objective 1 MC 22. 29. 47. 34. 37. 10. 44. E TF = True-False MC = Multiple Choice E = Exercise P = Problem .Accounting for Leases 21 . 17. S 41. E 102. 104. MC MC MC MC MC MC MC MC E 24. 74. MC 62. 31. 2. Leasing equipment reduces the risk of obsolescence to the lessee. 14. 4. Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments. 8. Twelfth Edition TRUE-FALSE—Conceptual 1. 9. The primary difference between a direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s gross profit. 10. 16. that stated amount is the guaranteed residual value. Under the operating method. A capitalized leased asset is always depreciated over the term of the lease by the lessee. 7. 6. 13.21 . Direct-financing leases are in substance the financing of an asset purchase by the lessee. 15. A lessee records interest expense in both a capital lease and an operating lease. A benefit of leasing to the lessor is the return of the leased property at the end of the lease term. Lessors classify and account for all leases that don’t qualify as sales-type leases as operating leases. an unguaranteed residual value is the same as no residual value in terms of computing the minimum lease payments. the lessor deducts only a guaranteed residual value from the fair market value of a leased asset. Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of amounts capitalized as a leased asset. 18. A lease that contains a purchase option must be capitalized by the lessee. In computing the annual lease payments. The FASB agrees with the capitalization approach and requires companies to capitalize all long-term leases. 12. the lessor records each rental receipt as part interest revenue and part rental revenue. The gross profit amount in a sales-type lease is greater when a guaranteed residual value exists. 11. 17. When the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value. The lessor will recover a greater net investment if the residual value is guaranteed instead of unguaranteed. 3. The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title. . and passes the risk of residual value to the lessor. 5. From the lessee’s viewpoint.6 Test Bank for Intermediate Accounting. Off-balance-sheet financing b. 20. Which of the following is an advantage of leasing? a. Ans. Leases are not capitalized. While only certain leases are currently accounted for as a sale or purchase. 5. 12. True-False Answers—Conceptual Item 1. F F T F T Item 16. 9. c. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee. All leases are capitalized. 2. 19. 20. 8. 13. b. b. All of these Which of the following best describes current practice in accounting for leases? a.Accounting for Leases 19. at the end of the lease the property usually can be purchased by the lessee. F T F T T MULTIPLE CHOICE—Conceptual 21. The FASB requires lessees and lessors to disclose certain information about leases in their financial statements or in the notes. 4. T F F T F Item 6. a lease reflects the purchase or sale of a quantifiable right to the use of property. c. 21 . d. interest revenue. Leases similar to installment purchases are capitalized. 15. All long-term leases are capitalized. 10. . 14. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal. Major reasons why a company may become involved in leasing to other companies is (are) a. The principal reason that supports this idea is that a. F T F F T Item 11. 22. Ans. 100% financing at fixed rates d.7 Companies must periodically review the estimated unguaranteed residual value in a sales-type lease. c. Ans. 7. Less costly financing c. 17. 3. Ans. 18. 24. b. there is theoretic justification for considering all leases to be sales or purchases. d. tax incentives. 23. all of these. high residual values. d. present value of the minimum lease payments. operating. 28. The lessee must increase the present value of the minimum lease payments by the present value of the option price. b. none of these. The lease transfers ownership of the property to the lessor. it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.8 S Test Bank for Intermediate Accounting. operating and leveraged lease methods. c. b. The lease contains a purchase option. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement. maintenance. guaranteed residual value. Minimum lease payments may include a a. d. lessor conveys less than his or her total interest in the property. S 26. b. bargain purchase option. 29. b. c. lessee provides a sinking fund equal to one year's lease payments. The amount to be recorded as the cost of an asset under capital lease is equal to the a. The methods of accounting for a lease by the lessee are a. term of the lease is substantially equal to the economic life of the leased property. present value of the minimum lease payments plus the present value of any unguaranteed residual value. d. any of these. 25. d. b. Which of the following is a correct statement of one of the capitalization criteria? a. Twelfth Edition An essential element of a lease conveyance is that the a. c. b. d. operating and capital lease methods. c. 30. penalty for failure to renew.21 . No impact as the option does not enter into the transaction until the end of the lease term. c. carrying value of the asset on the lessor's books. d. 31. present value of the minimum lease payments or the fair value of the asset. P 27. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property. . b. Executory costs include a. sales. and capital lease methods. whichever is lower. The lessee must decrease the present value of the minimum lease payments by the present value of the option price. insurance. The lease term is equal to or more than 75% of the estimated economic life of the leased property. What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? a. all of these. at the time of the lease agreement. c. d. The minimum lease payments would be increased by the present value of the option price if. c. d. property taxes. whichever is shorter. assuming that the implicit rate is known to the lessee. an unguaranteed residual value and depreciate over the life of the asset. life of the asset or the term of the lease. unearned income a. Guaranteed residual value b. In the earlier years of a lease. d. c. d. b.Accounting for Leases 32. should be amortized over the period of the lease using the interest method. Yes No No No c. A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the a. b. use either its incremental borrowing rate or the implicit rate of the lessor. c. which set gives rise to a sales-type or direct-financing lease of a lessor? Transfers Ownership Contains Bargain Collectibility of Lease Any Important By End Of Lease? Purchase Option? Payments Assured? Uncertainties? a. compared to the operating method. 33. use either its incremental borrowing rate or the implicit rate of the lessor. whichever is higher. Unguaranteed residual value c. compared to the capital method. No Yes Yes No b. Yes No No Yes d. should be amortized over the period of the lease using the straight-line method. In computing depreciation of a leased asset.9 In computing the present value of the minimum lease payments. No Yes Yes Yes Which of the following would not be included in the Lease Receivable account? a. Based solely upon the following sets of circumstances indicated below. asset's remaining economic life. whichever is lower. c. a guaranteed residual value and depreciate over the life of the asset. 34. capital method will enable the lessee to report higher income. P 35. the lessee should a. 36. whichever is longer. term of the lease. . 38. compared to the operating method. b. d. d. life of the asset or the term of the lease. operating method will cause income to decrease. an unguaranteed residual value and depreciate over the term of the lease. d. 37. c. c. the lessee should subtract a. none of these. All would be included In a lease that is appropriately recorded as a direct-financing lease by the lessor. A bargain purchase option d. b. does not arise. compared to the capital method. operating method will cause debt to increase. capital method will cause debt to increase. 21 . should be recognized at the lease's expiration. b. from the lessee's perspective. a guaranteed residual value and depreciate over the term of the lease. assuming that the implicit rate is known to the lessee. the use of the a. use its incremental borrowing rate in all cases. recognition of the manufacturer's or dealer's profit at the inception of the lease. amount of the depreciation recorded each year by the lessor. manner in which rental receipts are recorded as rental income. Which of the following statements is correct? a. initial direct costs are expensed in the year of incurrence. it is treated by the lessee as no residual value. The present value of the minimum lease payments.10 Test Bank for Intermediate Accounting. S 41. The primary difference between a direct-financing lease and a sales-type lease is the a. d. the present value of minimum lease payments. less the present value of any unguaranteed residual value. c. it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term. b. d. b. P 42.21 . 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. S 40. Twelfth Edition S 39. b. c. the difference between the lease payments receivable and the fair market value of the leased property. In order to properly record a direct-financing lease. The minimum lease payments plus the unguaranteed residual value. d. b. c. d. initial direct costs are deferred and allocated over the lease term. c. a. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease. For a sales-type lease. d. In a direct-financing lease. the net investment to be recovered by the lessor is reduced. In a sales-type lease. If the residual value of a leased asset is guaranteed by a third party a. d. 43. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. For operating leases. initial direct costs are added to the net investment in the lease. The lease receivable in a direct-financing lease is best defined as a. none of these. . b. c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. 44. b. The cost of the asset to the lessor. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements. the lessor needs to know how to calculate the lease receivable. the third party is also liable for any lease payments not paid by the lessee. All of these. c. The present value of the minimum lease payments plus the present value of the unguaranteed residual value. the sales price includes the present value of the unguaranteed residual value. deferred credits.101. Multiple Choice Answers—Conceptual Item Ans.000 90. any gain on the sale should usually be a. The machinery has an estimated useful life of 15 years and no salvage value. c. recognized as a prior period adjustment. c d MULTIPLE CHOICE—Computational 47. lease expense of $100.000 at the end of each year for ten years with title to pass to Penn at the end of this period. c. 2008? a. On January 1. d. b. b. Item Ans. 39. recognized in the current year. 24. 2008.734. 32. $495. $94. The lease payments were determined to have a present value of $671. With respect to this capitalized lease.000 $765. The Lease Liability account should be disclosed as a. $90. 42. a b b a 29.11 *46. 36. Penn uses the straight-line method of depreciation for all of its fixed assets. 21 .681 and depreciation expense of $44. Item Ans. all current liabilities. 21. . *46. d.Accounting for Leases 45. b. What amount should Perez have charged to expense for the year ended December 31. 38. On that date Perez paid the landlord the following amounts: Rent deposit First month's rent Last month's rent Installation of new walls and offices $ 90. c b c d 45. current portions in current liabilities and the remainder in noncurrent liabilities.008 at an effective interest rate of 8%. 34.125 d.000 was charged to rent expense in 2008.000 90.068. interest expense of $53. c. When a company sells property and then leases it back.000 495. Penn Corporation signed a ten-year noncancelable lease for certain machinery. recognized at the end of the lease. c d d c 33. Item Ans.000 b. 26.125 c. Penn accordingly accounted for this lease transaction as a capital lease.000 The entire amount of $765. 22. The terms of the lease called for Penn to make annual payments of $100. Item Ans.734 and depreciation expense of $38. 30.681 and depreciation expense of $67. Perez Corporation leased office space for 10 years at a monthly rental of $90. 44. 31. deferred and recognized as income over the term of the lease.000. On December 1. a b a a 37. 2008. $184. interest expense of $44. Item Ans.000 48. 28. 40. all noncurrent liabilities. Penn should record for 2008 a. d a c d 41. 43. interest expense of $45. 23. d.000. Item Ans. 27. d d b c 25. 35. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. (f) The yearly rental payment includes $10. 2008. $0. Direct-financing lease d. $188.000. (d) At the termination of the lease.000. the title to the building will be transferred to the lessee. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dexter.237 From the lessor's viewpoint.237. b. d. 52. (b) The fair value of the building on January 1. with no residual value.237 b.236 What is the amount of the total annual lease payment? a. Dexter depreciates similar buildings on the straight-line method.000 of executory costs related to taxes on the property.500. what type of lease exists in this case? a. $188. $488. (e) Dexter's incremental borrowing rate is 11% per year.237 b. would record depreciation expense on this storage building in 2008 of (Rounded to the nearest dollar.21 . 53.237 c. the book value to Garr is $2. Inc. $478. 49. The following information pertains to this lease agreement. $498. $250. $300. (c) The building has an estimated economic life of 10 years. Inc. what type of lease is involved? a. 51. Twelfth Edition Use the following information for questions 49 through 54. (Annuity tables on page 21-20. Sale-leaseback c.) a. Operating lease Dexter.) On January 1. $498. 2008 is $3. however.12 Test Bank for Intermediate Accounting. $488. 50. signs a 10-year noncancelable lease agreement to lease a storage building from Garr Warehouse Company. Dexter. Sales-type lease b. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar. Inc.236 d. $488. $478. Sale-leaseback c.236 c. (a) The agreement requires equal rental payments at the end of each year. Capital lease d.000. Operating lease From the lessee's viewpoint.000.) a. . Garr Warehouse Co. Sales-type lease b.000.237 d. c. d.493 at an effective interest rate of 10%. Direct-financing lease c. c.799. The terms of the lease called for Dalton to make annual payments of $50. $34. . c. including $15. Dalton Corporation signed a five-year noncancelable lease for equipment.849. The present value at December 31. $488. $15. Assuming all payments are made on time. 56.849. 2007.849.151.256.Accounting for Leases 54. On December 31.200. Capital lease Huffman Company leases a machine from Lincoln Corp. $1. Operating lease d. Equal annual payments of $200. $871. The present value of an annuity due of 1 for six years at 10% is 4. 2007 of the eight lease payments over the lease term discounted at 10% is $1. under an agreement which meets the criteria to be a capital lease for Huffman.79079. d. 2015. $12. 57. what type of lease would this be for the lessee? a.000 at the beginning of each year for five years with title to pass to Dalton at the end of this period.849. 2008. $1.000 are due on December 31 of each year. 2008 balance sheet is a. Sales-type lease b. $29. The six-year lease requires payment of $102. $416. 55. c. b. there was no purchase option. 2007. $17. $509. Pool Corporation leased a ship from Renn Company for an eightyear period expiring December 30. and taxes.000 at the beginning of each year. $20. the amount that should be reported by Pool Corporation as the total obligation under capital leases on its December 31. The lease is properly classified as a capital lease on Pool's books.99271. The incremental borrowing rate for the lessee is 10%. 21 .000. $15. b. d. In 2008. $434. 58. the lessor's implicit rate is 8% and is known by the lessee.173.434. $10.091. The equipment has an estimated useful life of 7 years and no salvage value.13 If the lease were nonrenewable. Huffman should record the leased asset at a. Use the following information for questions 57 and 58. Dalton should record interest expense of a. title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years. On January 1. Dalton should record interest expense of a.054. The present value of an annuity due of 1 for six years at 8% is 4. In 2009.159. Dalton uses the straight-line method of depreciation for all of its fixed assets.685.151. Dalton accordingly accounts for this lease transaction as a capital lease. c. The minimum lease payments were determined to have a present value of $208.434.054. insurance. b. $1. beginning with December 31.000 per year for maintenance. b.366.000.661. d. interest expense of $20. $818. d.745 and depreciation expense of $32. interest expense of $22. With respect to this capitalized lease. c. Carley Corporation signed a five-year noncancelable lease for equipment.448 at an effective interest rate of 10%. Use the following information for questions 60 and 61.264. The minimum lease payments were determined to have a present value of $227. beginning with December 31. Assuming the first payment is made on time.000 d. interest expense of $22.469 and depreciation expense of $32.489. The asset is recorded at $450. Barkley Corporation is a lessee with a capital lease. interest expense of $22. 62. $60. 2016.14 Test Bank for Intermediate Accounting. interest expense of $30.000 and has an economic life of 8 years. The lease term is 5 years. b. Twelfth Edition 59.000 and depreciation expense of $45.000 c.000 at the end of each year for five years with title to pass to Carley at the end of this period. $880. .290. The equipment has an estimated useful life of 7 years and no salvage value. rent expense of $60. 2008. $50. Dodd Corporation leased a plane from Aero Company for an eight-year period expiring December 30.000 are due on December 31 of each year. On January 1. 2008 of the eight lease payments over the lease term discounted at 10% is $880.264.493. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. $80. With respect to this capitalized lease.21 . The asset is expected to have a market value of $150. Carley accordingly accounts for this lease transaction as a capital lease. $90.238. interest expense of $14. b.000 at the end of 5 years. $730.019 and depreciation expense of $32.000. 2008 balance sheet is a.493. 60. 2008. interest expense of $19. $792.745 and depreciation expense of $32.469 and depreciation expense of $32. the amount that should be reported by Dodd Corporation as the lease liability on its December 31.493. for 2009 Carley should record a. On December 31.000 b.489. The present value at December 31. The lease is properly classified as a capital lease on Dodd’s books.264. d. c. Equal annual payments of $150. What amount of depreciation expense would the lessee record for the first year of the lease? a. c. for 2008 Carley should record a.000 at the end of 8 years. d.745 and depreciation expense of $45. The terms of the lease called for Carley to make annual payments of $60.493. Carley uses the straight-line method of depreciation for all of its fixed assets.000 61.493. and a market value of $50. 2008. b. 638 64. 67. 2008. Marly finds out that Hay Corp.991 c. (b) The fair value of the machine on January 1. $133. with no salvage value. Depreciation Expense and Interest Expense If the present value of the future lease payments is $400.213 c. $400. Hay does not have knowledge of the 8% implicit rate used by Marly.000 at January 1. $123. Operating lease b. accounts for the lease as a capital lease? (Rounded to the nearest dollar.15 Hay Corporation enters into an agreement with Marly Rentals Co. what is the amount of the reduction in the lease liability for Hay Corp. on January 1. Operating lease b. Capital lease c. 2008? a.213 b. The machine reverts to the lessor upon the termination of the lease. $115. 63. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.Accounting for Leases Use the following information for questions 63 through 68. (Annuity tables on page 21-20. Depreciation Expense b. The machine has a remaining economic life of 10 years. what type of lease agreement exists? a. $385.213 are due on December 31 of each year.213 b. what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31. . What type of lease is this from Hay Corporation's viewpoint? a. Sales-type lease d.) a. is $400. $155. (d) Hay's incremental borrowing rate is 10% per year. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Direct-financing lease If Hay accounts for the lease as an operating lease. in the second full year of the lease if Hay Corp. Payments of $155. what amount would be recorded as Lease Receivable at the inception of the lease? a. Direct-financing lease If Marly records this lease as a direct-financing lease. 65.) 21 . $126. Capital lease c.000. 2008 for the purpose of leasing a machine to be used in its manufacturing operations. 66.070 From the viewpoint of Marly.000 d.734 d. Interest Expense d. (c) Hay depreciates all machinery it owns on a straight-line basis. Rent Expense c. Sales-type lease d. $465. 2008. (e) Immediately after signing the lease. 000) c. . 2009.000. Assuming that both the lease to Snead and the lease to Quirk are appropriately recorded as operating leases for accounting purposes. The equipment.800.000 in 2008.000.000) $(750. $720. d.000. $810. c. 2008. Hoyle could have bought the equipment from Eddy for $3.000) d. 2011.000. Eddy will lease the equipment to another company for two years. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $40. 72.000) b. Hoyle paid $720. During 2008. Sele leased this piece of equipment to Quirk Company for a three-year period expiring June 30. $656. d. Eddy leased equipment to Hoyle Company on May 1. b. Eddy incurred maintenance and other related costs under the terms of the lease of $64. If the lessor's interest rate implicit in the lease is 12%.000 $(360.21 . 2008? Sele Snead Quirk a.000.000) $(450. for $75.000 a month. The income before income taxes derived by Eddy from this lease for the year ended December 31. Depreciation Expense d.000 $(60. $656. should be a. $296. $210.000 $(660. $210. After the lease with Hoyle expires. 2008. 2003. c. Ignoring income taxes. 2008.000 instead of leasing it. Use the following information for questions 70 and 71.000 in rentals to Eddy for the 8-month period.000.000.200. should be a. 70. $360. of $2. Eddy's depreciation on the equipment in 2008 was $360.000 a month. is being depreciated on a straightline basis over an eight-year period with no salvage value. $810. which has been continually on lease since July 1.800. The original cost of the equipment was $4.000 which also is its fair market value on the date the machine is leased to Rich Company. $720. On July 1. Rental Revenue b. Eddy's accounting records showed a book value for the equipment on May 1. Interest Income c. Which of the following lease-related revenue and expense items would be recorded by Marly if the lease is accounted for as an operating lease? a. 2008. Twelfth Edition 68.000) $(450. 2007. 2008. the amount of expense incurred by Hoyle from this lease for the year ended December 31. $360. Hite Company has a machine with a cost of $400.000 $(360. Rental Revenue and Depreciation Expense Sele Company leased equipment to Snead Company on July 1.000.000.000) 69.000) $(150.16 Test Bank for Intermediate Accounting.000.000. what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31. The lease expires on May 1. for $60. b. the six beginning-of-the-year lease payments would be 71. 2008. $296.000. for a one-year period expiring June 30. 2008? a.361. $66. $82. and at the end of the lease term.000. The cash selling price of the machinery is $525. 21 . what gain or loss should Estes record? a. the leased asset and obligation accounts have the following balances: Leased equipment under capital lease Less accumulated depreciation--capital lease Interest payable Obligations under capital leases $400.465. $64. The first payment was made on July 1.250 d.000 and $43.480 $16.000.000 and are due on July 1 of each year. The rate of interest contemplated by Eby and Mills is 9%.200 c. 2018.180. b. $47. $64.Accounting for Leases a.000 and $21.250 b.17 Estes Co.000 384. $7.200 loss d. $0 and $0 75. Durham Company leased machinery to Santi Company on July 1. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Durham.000 and are due on July 1 of each year. $6.480 gain b. before the lessee transfers the asset to the lessor.000 If. $40. $64. 73. $0 Eby Company leased equipment to the Mills Company on July 1. 2008? a.400 b.000 and the cost of the equipment on Eby's accounting records was $496. 2018.000 and the cost of the machinery on Durham's accounting records was $465. 2008. The cash selling price of the equipment is $560. $78. The rate of interest used by Durham and Santi is 9%.520 14.800 gain 74. . 2008. Assume the lease payments were made on the basis that the residual value was guaranteed and Estes gets to recognize all the profits. d. the fair market value of the residual value is $8.600 d.800. 2008.120 loss c. Equal annual payments under the lease are $75. what amount of interest revenue would Durham record for the year ended December 31. for a ten-year period expiring June 30.000 $ 1. c. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Eby. for a ten-year period expiring June 30.000 $ 16. at the end of the lease.500 c. Equal annual payments under the lease are $80. $20. $92. 2008.000 and $50. what is the amount of profit on the sale and the interest revenue that Eby would record for the year ended December 31. The first payment was made on July 1. $8. leased a machine to Dains Co.667. $7. The cash selling price of the equipment is $1.94 347. $600. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Lennon. 78.293.098.000.19 27.000 and $180. $211. 2008? a.000.13 34.098.000. 76.000 and $155.368. Assuming that Foran.650.18 Test Bank for Intermediate Accounting. what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31. leased equipment to Foran.74 316.87 Dec. what is the amount of depreciation and interest expense that Foran should record for the year ended December 31.875 and $74. $0 and $0 b. $600. 2016.000 was made on July 1. $0 and $62. 2008. $900.00 $25. The rate of interest contemplated by Mayer and Lennon is 8%. $270.500.875 and the cost of the equipment on Lennon's accounting records was $1. $211.098. a dealer in machinery and equipment.160 d. Equal annual payments under the lease are $300. 2008 65. The economic life of the facility is 15 years with zero salvage value. Twelfth Edition Use the following information for questions 76 and 77.93 Dec.160 c. 2018.925.160 b. 2008.00 Dec.475 77.21 . on July 1.000 on the equipment. purchases land and constructs a service station and car wash for a total of $360.19 .000 d. 31.607.000 Mayer Company leased equipment from Lennon Company on July 1. The first payment was made on July 1.000 and $155. $0 and $155. The lease is a 10-year. 2009 65. 2007.098. 2007 $400.475 d.729. for an eightyear period expiring June 30. 2008.400.160 b.000. Inc.000 and $180. Use the following information for questions 79 through 83.490. the facility and land on which it was constructed are sold to a major oil company for $400. 31.13 374.901. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2008? a. Bohl uses straight-line depreciation for its other various business holdings. The first of 10 equal annual payments of $621.39 30. The lease is appropriately accounted for as a sale by Risen and as a purchase by Foran.000 on January 1. 2007 $65.875 and $62. At January 2. 2008.000 and $155. when construction is completed.13 $40. Bohl Co. 31.000. The lease is for a 10-year period (the useful life of the asset) expiring June 30.13 37. Risen Company. noncancelable lease.475 c. Risen had purchased the equipment for $3. Title to the facility and land will pass to Bohl at termination of the lease.000 and immediately leased from the oil company by Bohl. and established a list selling price of $5. uses straight-line depreciation. Inc. 2008.. Assume that the present value at July 1.000 and $360.900.000 and are due on July 1 of each year. $225.861. $225.000.000 What is the amount of profit on the sale and the amount of interest income that Risen should record for the year ended December 31. 2008? a. of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4. $270.000 and $180. Fair value of the land at time of the sale was $40. 2. 2008.000 c. Accounting for Leases 79.000. c c d a c 53. The equipment had a book value of $630. 78. 79. 8% d. 56. $61. 2008. Colt's rent expense for this equipment for the year ended December 31. $316. b. 73. $374. 50. $400.902 c.) a. 55. *84. Item Ans. Direct-financing lease d. 67. 12% b. From the viewpoint of the lessor.000 b. *84. 54. what type of lease is involved above? a. 2008. 51. $84. Ans . Item Ans. 63. $73.294 d. $65. Colt leased back the equipment at $7. Item Ans.000.000. The total lease-related expenses recognized by the lessee during 2008 is which of the following? (Rounded to the nearest dollar. $4. $347. Sales-type lease b.925 The total lease-related income recognized by the lessee during 2008 is which of the following? a. 68. 58.000 On June 30. 75. $35. Multiple Choice Answers—Computational Item 47. b c c b d d *83. b b . 2009 payment? (Rounded to the nearest dollar. should be a. Item Ans. a b c c c a 77. Item Ans. 81.000 d. c d c c a b 59. *83. 69.000 and a remaining useful life of 10 years. 62. $2.490 d.667 c. d c c d b b 65.000 b.000 per month for 5 years with no option to renew the lease or repurchase the equipment.000. c a c d a d 71. c. 57. d. Colt sold equipment to an unaffiliated company for $700. 64. 74. b Item Ans.490 What is the amount of the lessee's liability to the lessor after the December 31. 10% c. 72. 82.098 c. Operating lease What is the discount rate implicit in the amortization schedule presented above? a. $64. That same day. $ -0b.) a. 61. 6% 21 . 80. 66. 82. 76.000. 49. 81. $40. 60. Sale-leaseback c.19 80. 48. 52. $42. 70. $28. 50611 5.58238 6.64100 6.77933 6. Operating lease Operating lease c.29969 14.18360 4.05000 3.78637 6.48685 3.11519 10.85941 2.57710 3. Lease A does not contain a bargain purchase option.46321 7. Operating lease Capital lease b. The present value of an annuity due of 1 for 6 years at 11% is 4. 2008. but the lease term is equal to 90 percent of the estimated economic life of the leased property. Mendez's incremental borrowing rate is 11%.00000 2.72325 3.37462 5.78326 2. Mendez.54874 Present Value of an Ordinary Annuity of 1 Period 1 2 3 4 5 6 7 8 9 10 5% .94340 1. 86. Inc.74664 6.46511 4.6959.00000 2.39384 9.00000 2.00000 2.71008 10% .37440 4.49132 13.86842 5.02656 12.08901 12.72173 6% .69005 2. leased machinery with a fair value of $840.48717 11.95238 1.54595 4.80169 7.52563 6.60478 4.65022 MULTIPLE CHOICE—CPA Adapted 85.20637 5.7908. Twelfth Edition Future Value of Ordinary Annuity of 1 Period 1 2 3 4 5 6 7 8 9 10 5% 1. The agreement is a six-year noncancelable lease requiring annual payments of $160.000 from Cey Rentals Co.99271 4.21 . Lease B does not transfer ownership of the property to the lessee by the end of the lease term. Capital lease Operating lease On December 31.90909 1.67301 3.31213 3.79079 4.32948 5.63709 6.00000 2.77566 17.33493 5.33592 8.40183 3.97532 8.11141 4.10782 7.20979 6.000 beginning December 31.31000 4.43589 13.07569 5. Capital lease Capital lease d.57948 15.16986 3.93743 12% 1. The lease is appropriately accounted for by Mendez as a capital lease.96764 5.54911 11.24640 4.62288 5.10000 3.48756 14.18079 8% 1.89286 1.14201 9.83339 2.35285 8.06000 3.12000 3.15250 4.92593 1.08000 3. The present value of an annuity due of 1 for 6 years at 10% is 4.48656 10% 1.36009 8% .56376 4. 2008.10510 7. but the lease term is equal to 75 percent of the estimated economic life of the leased property.91732 5.73554 2.35526 4.86660 7.31013 5.63663 12.80191 8. Mendez knows the interest rate implicit in the lease payments is 10%.92280 10.32825 5.20 Test Bank for Intermediate Accounting.24689 6.21236 4.14457 12% .71561 9.75902 6.89747 11.57789 6% 1. .03735 3. How should the lessee classify these leases? Lease A Lease B a. Martinez.000 90. 87.000. 2008.000. the current liability shown for the lease at the end of year 1. the current liability shown for the lease at the end of year 2. d.200.000 d. for a five-year period. b. $150. the reduction of the lease liability in year 1.000 starting at the end of the first year. $680. $751. . In its December 31. The five lease payments are discounted at 10% over the lease term.344. The first payment was made on December 31.250 c. $1. $0 b. $90. b. 2008 balance sheet. On January 2. 88. 2008 balance sheet. based on implicit interest of 10%. Inc.528. A lessee had a ten-year capital lease requiring equal annual payments. c. 89. $606. The reduction of the lease liability in year 2 should equal a. $75. 2007. Mendez should report a lease liability of a. Inc. d.000.711.000. Martinez uses straight-line depreciation for all of its plant assets. Equal annual payments under the lease are $630.000 c. leased a machine from Bass. Aggregate lease payments were determined to have a present value of $900.000 (including $30. and the second payment was made on December 31. signed a ten-year noncancelable lease for a heavy duty drill press. with no salvage value.000 b. The lease is appropriately accounted for as a capital lease by Patten. $766. Martinez treated this transaction as a capital lease. b. $60. 21 . what amount of depreciation expense should Martinez report from this lease transaction? a. Use the following information for questions 89 and 90. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $2. $90.Accounting for Leases In its December 31.492. d. $56. The lease stipulated annual payments of $150. Patten Co. $1. In its 2008 income statement. Patten should report a lease liability of a. one-tenth of the original lease liability.000 annual executory costs) and are due on December 31 of each year. c. The drill press has an estimated useful life of 15 years.502. with title passing to Martinez at the expiration of the lease.800. c. 2007.000 In its 2008 income statement. what amount of interest expense should Martinez report from this lease transaction? a. 2008. $1.528.902.872. $100. $1.000 d.000.21 On December 31. 2008. a separate component of stockholders' equity. Multiple Choice Answers—CPA Adapted Item Ans. and Castro has no material cost uncertainties. On December 31. Castro leased equipment to Ermler for a five-year period ending December 31. Devin Corp. 2013.000. and cost is $600. 85. sold a machine to Ryan and simultaneously leased it back for one year. $10. net of income tax. The first payment was made on December 31. 2008. what amount of income should Castro realize from the lease transaction? a. d. d d .000. c a *93. $330.000 12 years 92. b. the gain should be reported as a. $0. c.000 85. The normal sales price of the equipment is $770. should be recognized over the period of the lease using the effective interest method. At the time of the sale. $220. *94. 92. 2008. 88. Castro Co. 2008 balance sheet. Item Ans. operating income. On December 31. In a lease that is recorded as a sales-type lease by the lessor. should be recognized over the period of the lease using the straight-line method.000 c. an extraordinary item. d. b. manufactures equipment that is sold or leased. c. $170.000.500 for 12 months @ 12%) Estimated remaining useful life $900. *93. b. Item Ans. c a 87.000 Carey sold its headquarters building at a gain. Pertinent information at this date follows: Sales price Carrying amount Present value of reasonable lease rentals ($7. d d 91. does not arise. should be recognized in full as revenue at the lease's inception. Twelfth Edition 91. interest revenue a. 86.22 Test Bank for Intermediate Accounting.000. $230.000 b.000 825.000 d. and simultaneously leased back the building. d a 89. In Devin’s December 31. d. Equal payments under the lease are $220. For the year ended December 31. Collectibility of the remaining lease payments is reasonably assured. at which date ownership of the leased asset will be transferred to Ermler. *94. the deferred profit from the sale of this machine should be a.000 executory costs) and are due on December 31 of each year. 90.21 .000. $85. 2008. Item Ans. c.000 (including $20. $75. Item Ans. a deferred gain. The lease was reported as a capital lease. $15.008 × . $155. 60.000 = $730. ($227.849. $155. 52.99271 = $434.173. Answer 47.493 – ($50. 50. [$158.8 > 75% of economic life. $880.787.14457 = $488.000 = $498.685 × .681. [$227.236 (PV of Ordinary Annuity Table). 55.236 + $10. 65.10 = $12. 62.264 – $150.125. 57. $400.369) = $871. Fair value = $400.213 – ($400.000 64. — 10 $671.000) × 4.08 = $53.448 – 0) ÷ 7 = $32.000. $227.000 = $973. Conceptual.$15. 66.10 = $15. $488. ($450.000.000 × .10 = $22.000 + $495.745)] × . $3.008 ÷ 15 = $44.448 – ($60.000 ÷ 6. 53.000 ÷ 10 = $300.000.000) × . 8/10 = . b c a c Conceptual.434. $385.1) = $126.Accounting for Leases 21 . 56.019.213 – ($284. 67.23 DERIVATIONS — Computational No. Fails to meet Group II requirements. $3. $400.000.237. 49.000 – $97. $671.000 – $50. Conceptual.493.054.734.685 – ($200.787 ×.48685 = $385. 48.000.745.1)] = $284. FV exceeds cost.493 – $50.000 .10 = $97. 54.991.10 = $19.685 – $200. $1.448 × .000 . ($208.849)] × .000) ÷ 8 = $50. 63. 61.000 – [$155.734. . b c c d a c c d c c a b d c c d b Derivation $90. 59. 58.000 – $22.366. 51.369 $973.213 × 2. ($102.000 1 (———— × 12) = $94.991 ———— = 96% > 90%.264. 600.60478 = $82. $1.50663)] ÷ 4.000) ÷ 15 = $2. 71.925 (See amortization table. Conceptual.000.000 – $360.800. d a b c c c a 77. $40. 72.000.000).000 = ($7.000 = $296.160. ($525. ($4. 79. 69.04 = $155. b c c b $4. $7.875 – $300. d d b b [($400.1446 = PV factor of ordinary annuity of $1 for 10 years at 10%.200). 75. *84. $8.000. 70.000 – $80.500.861.490 = $61.000 × . $560. d a Derivation Conceptual.800 – $16. [$400.900.000.490.000 – ($40.500.000 – $360.000 – $40.875 – $1.) ($400. $720. *83. Sele: Snead: Quirk: $720. $4.000 – $64.000 = $600.000. .000 – $75.000 × 6 = $42.000 × 6) – (4.04 = $155.650.000 $65.000 × 6) + ($75.000 – $3. 81.160.21 .000) × . 76.09 × 6/12 = $20.000 $400. Twelfth Edition DERIVATIONS — Computational (cont.000) × .000 1 ————— × — = $225.000 ———— = 10% or ————— = 6.500.09 × 6/12 = $21. Answer 68. 74.000) ÷ 15] + $37. 80. ($1.000 – $621.000 = $211. 82.861.1446* $400.875.000 – $496.000 ($60. ($60.000) × 6 = $(360.250.000.13 *6. $316.000) × . 73.000) ($75.098.475.000 ÷ 8) = $210.000) × . 10 2 ($4.24 Test Bank for Intermediate Accounting.000) × 6 = $(450.000 = $64.04 = $62.667.500.465. ($560.) No. 78.000) × .000 – $621. 89. 87.7908) – $160.000 = $1.44%. the asset is amortized in a manner consistent with the lessee's normal depreciation policy on assets owned.10)] = $1. Answer 85. $900. The effective-interest method is used to allocate each lease payment between interest expense and a reduction of the lease liability. the lessee treats the lease transactions as if the asset were being purchased.000. Conceptual. $85. . 90.Accounting for Leases 21 .000 ———— = 9. $1.000 × . the leased asset is amortized over the lease term.000 × 4.000 – [$600. Conceptual. *93. Conceptual. Solution 21-95 When the capital lease method is used. over the economic life of the asset and allowing for residual value.000 (2007). $770.902. 91. < 10% of FV of asset ∴ it is a minor leaseback. Explain the procedures used by the lessee to account for a capital lease.502.000 = $170. c a d a d d c a d d Derivation Conceptual. *94. 86.000 ÷ 15 = $60.000 = $606.902.000 – $630.000 EXERCISES Ex. $2. $900. 21-95—Capital lease (Essay). If the lease does not transfer ownership or contain a bargain purchase option.492. The present value of the lease payments is computed using the lessee's incremental borrowing rate.10 = $90.000 + $30.25 DERIVATIONS — CPA Adapted No. 88. The asset and liability are recorded at the lower of (1) the present value of the minimum lease payments (excluding executory costs) or (2) the fair value of the asset at the inception of the lease. 92. If the lease transfers ownership or contains a bargain purchase option. ($160.528.000 × .902.000.000 – $600.200 (2008).000. $900.000 – ($1. unless the implicit rate used by the lessor is lower and the lessee has knowledge of it. 170......................... Instructions (Round to the nearest dollar.000 a year for a four-year period ending March 31...... from this lease for the year ended December 31..000 Ex................... 21-96—Capital lease amortization and journal entries......... 21-97—Operating lease. no salvage value.........600 197..............000 350....000..26 Test Bank for Intermediate Accounting..................000 1.............000 426...21 .............000).........704.............................000 relating to the year ended December 31.440 Reduction Of Liability $179. Twelfth Edition Ex....... Lease Liability..........704.. (b) Prepare all of Windom 's journal entries for 2008.000 to Kirby on April 1......] (a) Under the operating method...400 1. 1................ purchased a machine on January 1...... Kirby Co.............000 Lease Liability...... 2012..704..704.600 350.................. Accumulated Depreciation ... 2008... 2008........ 2008.... for $1. under a cancelable lease.000 for the express purpose of leasing it............ The present value of the lease payments at 10% is $1......... Windom uses the effective-interest method of amortization and sum-of-the-years'-digits depreciation (no residual value)............840 1...... On April 1... Cash....... 2008.... Harley paid $300.. Windom Co..524. The seven annual lease payments of $350............. Kirby incurred total maintenance and other related costs under the provisions of the lease of $15........... Instructions [Assume the operating method is appropriate for parts (a) and (b)...........000 426. Kirby leased the machine to Harley Company for $300... Solution 21-96 (a) Date 1/1/08 12/31/08 12/31/09 (b) Annual Payments $350... as lessee records a capital lease of machinery on January 1.........000 Leased Machinery...326.....400 179....) (a) Prepare an amortization table for 2008 and 2009........ 2008.................560 Lease Liability $1...000 10% Interest $170......... The machine is expected to have a five-year life..704. Interest Expense........... Depreciation Expense (7/28 × $1.........000. 2008? .... what should be the income before income taxes derived by Kirby Co. 2008? (b) What should be the amount of rent expense incurred by Harley from this lease for the year ended December 31...... and be depreciated on a straight-line monthly basis........400 152..........000 are made at the end of each year.................. (c) The lease term is equal to 75% or more of the estimated economic life of the leased property.27 $225.000 $150. (d) The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property. The implicit rate is the rate of interest that will discount the minimum lease payments (excluding executory costs) and the unguaranteed residual value to the fair value of the asset at the inception of the lease. 4/1/08—12/31/08 ($300.000 × 9/12) Expenses: Depreciation ($200.000 $ 60. Explain the procedures used to account for a direct-financing lease. the lease at the date of inception must satisfy one or more of the following Group I criteria (a. etc.000 (b) Rent expense.000. (b) No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. The implicit interest rate is applied to the declining balance of the Lease Receivable balance. Solution 21-99 The lessor records the present value of the minimum lease payments (excluding executory costs) plus the present value of the unguaranteed residual value (a guaranteed residual value is included in the minimum lease payments) as Lease Receivable and removes the asset from the books. c. (b) The lease contains a bargain purchase option. Ex. Interest revenue is recognized by using the effective-interest method. 21-99—Direct-financing lease (essay). Ex. What are the criteria that must be satisfied for a lessor to classify a lease as a direct-financing or sales-type lease? Solution 21-98 In order for a lessor to classify a lease as a direct-financing or a sales-type lease. The lessor records payments received as a reduction in Lease Receivable and Interest Revenue. b.000 × 9/12) = $225. Group II (a) Collectibility of the payments required from the lessee is reasonably predictable.000 15. Income before taxes 21 . 21-98—Lease criteria for classification by lessor. and d) and both of the following Group II criteria (a and b): Group I (a) The lease transfers ownership of the property to the lessee. .000 165.Accounting for Leases Solution 21-97 (a) Revenue 4/1/08—12/31/08 ($300.000 × 9/12) Maintenance. Equal annual payments that are due on December 31 each year provide Piper Corp...........62288 = $108. and no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor........842 358..... Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Piper Corp..158 108.158 73...... Lease Amortization Schedule (Lessor) Annual Lease Rental $108.... On January 1.......158 Interest on Lease Receivable $40..000......) (c) Prepare a lease amortization schedule for Piper Corp....... collectibility is reasonably assured. Solution 21-100 (a) It is a sales-type lease to the lessor... the present value ($500......28 Test Bank for Intermediate Accounting. for the first three years.... (b) Calculate the annual lease payment... 4..... Cost of Goods Sold. 2....................... The cost of each trailer to Piper Corp.000 34...158 108.................. Piper Corp........ The remaining accounting treatment is similar to that accorded a direct-financing lease....000 431....... ...547 28. Twelfth Edition Ex. ($50............ Inventory.. The fair value of each trailer is $50.............000 × 10) ÷ 4....... Titles to the trailers pass to Runyan at the end of the lease..611 79.658 Lease Receivable Recovery $68.... with an 8% return on net investment (present value factor for 6 periods at 8% is 4.000) of the fair value of the leased trailers...............000 450..000) of the minimum lease payments equals or exceeds 90% ($450..000... It is not an operating lease because title to the assets passes to the lessee.....000 450.... Sales Revenue...................731 500.... (d) Prepare the journal entries for the lessor for 2008 and 2009 to record the lease agreement.. leases ten trailers to Runyan Company under a six-year noncancelable lease agreement..... Piper's (the manufacturer) profit upon sale is $50.....500 Lease Receivable $500.......... 3....62288).... is a manufacturer of truck trailers... The following information about the lease and the trailers is provided: 1......... 2008 Lease Receivable..21 ...000 (b) (c) Date 1/1/08 12/31/08 12/31/09 12/31/10 (d) January 1.. Piper Corp... 2008.......000 500. Piper Corp......000. 21-100—Lessor accounting—sales-type lease.231 278.... (Round to nearest dollar.... and the recognition of income (assume the use of a perpetual inventory method and round all amounts to the nearest dollar)....... Instructions (a) What type of lease is this for the lessor? Discuss.. is $45... Each trailer has an expected useful life of nine years.. which is recognized in the year of sale (2008).....158. the receipt of the lease rentals...... ...... Unearned Profit on Sale-Leaseback........000....................112 at the end of each year..................547 *Ex..................000. Lease Receivable.........................................000.......... December 31...............................29 68........................000 in 2008............................ Hartig Company sells land to Ortiz Corporation for $6.............. 6...000 Lease Liability......................................................158 40..) December 31......................... Hartig is aware that Ortiz Corporation set the annual rentals to ensure a rate of return of 8%.....158 73. 2008.... Collectibility of the rentals is reasonably predictable...................000 Land... 6....611 34................. 4.......000 960...................................................... 2009 Cash............. 2008.......000 ........... The following information relates to this transaction: 1..................000.. The incremental borrowing rate of Hartig Company is 10%... and immediately leases the land back....... The term of the noncancelable lease is 20 years and the title transfers to Hartig Company at the end of the lease term.......Accounting for Leases Solution 21-100 (cont... 108......... 7....................... Instructions (a) Prepare the journal entries for the entire year 2008 on the books of Hartig Company to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar. 21-101—Lessee and lessor accounting (sale-leaseback)......) (b) Prepare the journal entries for the entire year 2008 on the books of Ortiz Corporation to reflect the above purchase and lease transactions.. 2008 Cash...000............ 2008 Cash.......... Leased Land Under Capital Leases................................ The land has a fair market value of $6.. 5.....158 21 ...... and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.......... 3..000 6.....040....000 108....................000....................... The lease agreement calls for equal rental payments of $611...........000 on January 1.................. Lease Receivable..... On January 1....... The land has a cost basis of $5.. Interest Revenue...................... *Solution 21-101 (a) Hartig Company (Lessee) January 1............ 2.......... 5. Hartig Company pays all executory costs which total $255....000 to Hartig. Interest Revenue...................... 6........040.................... ......000 131...............................000 480.... Instructions (a) Prepare all of Owings's entries for 2008............... Lease Receivable......... 2008..........30 Test Bank for Intermediate Accounting...........000 Land....000 6...................................................................... Revenue from Sale-Leaseback ($960.. Interest Expense.......... Owings Co.....) Throughout 2008 Executory Costs (Insurance and Taxes).. On January 1...000.........000 start on January 1....................... Twelfth Edition *Solution 21-101 (cont.....000.....000 and leases it back... (b) Prepare all of Aber's entries for 2008..............112 611...................................................................................................................................................................... the lease is for 10 years and the implicit rate is 10%...... ............................ Partial Lease Amortization Schedule Date 1/1/08 12/31/08 (b) Annual Lease Payment $611...000 Cash....... Cash....000 *Ex........ Accounts Payable and Cash......... The machinery had a carrying value of $420.....112 Ortiz Corporation (Lessor) January 1.000 48............................... 2008 Land......000 Reduction of Lease Obligation $131.........112 480....................... 6.. December 31.....000.... Owings uses straight-line depreciation and there is no residual value.......112 6.. 21-102—Sale-leaseback.. sells machinery to Aber Corp......... 2008........................................ Lease Liability......000................................................000..............888 255.112 Balance $6....... December 31........000 ÷ 20).......21 .. at its fair value of $480........000.....868........... Interest Revenue..... 6..........000 48...000 131.............................000 255........................... 2008 Cash..............................000 5............................... 2008 Unearned Profit on Sale-Leaseback...................................................... The lease payments of $71.. 611............... Lease Receivable..............112 Interest 8% $480.................. 900 40................................................................000 6....................... Accumulated Depreciation—Capital Lease............................................. Machinery...31 480......000 40.................. Machinery....................... (Lessor) January 1.................................. Leased Machinery................................................................000 71...........900 ......000 71................................................ Lease Receivable.............. Interest Expense [10% × ($480.................. 2008 Cash..000 48................................. 2008 Interest Receivable..........900 40............................................................Accounting for Leases *Solution 21-102 (a) Owings Co... December 31..................................... Unearned Profit on Sale-Leaseback.................000 480............................................................................................................................... Cash................................................................... 2008 Machinery..000 480......................................... 21 ................................. December 31..........000 – $71...000 420.......000 6...........................900 480.......... Cash...................................................................................................................... Interest Revenue................................................................................000 71.000 480................. (Lessee) January 1...........................................000 60................................................. Depreciation Expense................ Lease Liability....................................................... Lease Receivable..000 71...000 40. Interest Payable... Unearned Profit on Sale-Leaseback...000 480........... Cash........................................................................................ (b) Aber Corp... Lease Liability................. 2008 Depreciation Expense...........000 48....000 480.....000)]........... 400...689 × 3......... 2.689 are due on June 30 of each year.... enters into a lease agreement on July 1... 2008 Leased Equipment Under Capital Leases..000 × 4/10) × 6/12]... Accumulated Depreciation—Capital Leases [($1... at 10%..........31213... Horton Company......32 Test Bank for Intermediate Accounting. The fair value of the equipment on July 1............. December 31........ 2008......000..000 280..... Include a partial amortization schedule.000) equals the fair value... 280..000 Lease Liability.400.. 2008..... 4.. Twelfth Edition PROBLEMS Pr... (b) 1.. as lessee.. 2008 Depreciation Expense.............. 2009..... $1... 21-103—Lessee accounting—capital lease...... December 31.. Instructions (a) Indicate the type of lease Horton Company has entered into and what accounting treatment is applicable..... 2008....400.000.21 ..400...............16986....... Solution 21-103 (a) Capitalized amount: $422.. Payments of $422. Interest Payable.... 3....... 2008 is $1. it is a capital lease and must be accounted for under the capital lease method.. June 30...... Interest Expense ($112....) 1.... of the leased property.. 1... for equipment. 3. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%............. 2.. Horton depreciates similar machinery it owns on the sum-of-the-years'-digits basis........... The equipment has an economic life of 6 years with no salvage value.. The following data are relevant to the lease agreement: 1. .... 3.. 3....400..... Horton's incremental borrowing rate is 10% per year.... 2009........400.000 56.000 56.... 4.. with no renewal option...31213 = $1............000 Because the present value of the lease payments ($1.400.. (b) Prepare the journal entries on Horton's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar.000 × 6/12).. 5.....000 1.... July 1..000 2........... The term of the noncancelable lease is 4 years...................689 × PV of an ordinary annuity for 4 periods at 8% $422. December 31.... The lessee pays all executory costs... July 1.................... ........ Holt Corp........... Forbes uses the straight-line method to depreciate its assets........... 4.........689 Interest on Unpaid Obligation $112........) (Round to nearest dollar................. ...689 422. 490..) (e) What journal entries would Forbes record during the first year of the lease? (Include an amortization schedule through 1/1/09 and round to the nearest dollar.145 × 6/12)....145 Reduction of Lease Obligation $310...000.400..000. Rental payments of $219..Accounting for Leases Solution 21-103 (cont........... Forbes's incremental borrowing rate is 8%......... Accumulated Depreciation—Capital Leases..689 422. payable at the beginning of each six-month period.......689 335.......... Annual Lease Payment $422............ enters into a five-year noncancelable lease............33 Balance of Lease Obligation $1.........000 for property taxes......000..........) Lease Amortization Schedule Date 7/1/08 6/30/09 6/30/10 3..................... at the inception of the lease of $3.. A guarantee by Forbes Company that Holt Corp......... 2009 Depreciation Expense...) ....400...000 from selling the asset at the expiration of the lease.... Interest Payable. The lease contains the following provisions: 1............ Lease Liability.............000 43............ 3.......000 × 3/10) × 6/12] Interest Expense ($87............ the actual residual value is expected to be $60....400..... A termination penalty assuring renewal of the lease for a period of four years after expiration of the initial lease term..... [($1. 21-104—Lessee accounting—capital lease.......089..... PV factor for amount due in 20 interest periods at 8% annual rate... Instructions (a) What kind of lease is this to Forbes Company? (b) What should be considered the lease term? (c) What are the minimum lease payments? (d) What is the present value of the minimum lease payments? (PV factor for annuity due of 20 semi-annual payments at 8% annual rate........ Forbes Company on January 1. 112..... (Interest payable entry assumed to have been reversed 1/1/09) December 31...000 87........... However.....573 Pr....311 753..000 including $19...................45639...544 21 ....... An option allowing the lessor to extend the lease one year beyond the last renewal exercised by the lessee.. 2009 Interest Expense................... Cash... for equipment having an estimated useful life of 10 years and a fair value to the lessor. 14..767 June 30. 2008.000 × 4/10) × 6/12 plus ($1............... 2. with four renewal options of one year each.000 310....000 490......000 1..... will realize $100...........689 4....13394.......573 43................. ..........103 19.........788 45....000 219...... Property Taxes............... January 1.............. In addition.......872....................... net of executory costs Factor for present value of $1 due in 20 interest periods at 4% ............................................ Cash......................000 (19................34 Test Bank for Intermediate Accounting.....000 200.....000 5 4 1 10 years years year years (b) (c) $ 219.........000............000 — 106.826..... July 1... Property Taxes ...497 .............................. Interest Expense .......000 $4...872...427 Lease Liability.......103 96... 2008 Leased Equipment Under Capital Leases.672.......897 103.............872.13394 $ 200..............................000 106....000 100.....000)......000................................... the present value (see computation in d below) of the minimum lease payments (see computation in c below) exceeds 90% of the fair value of the equipment ($3....................................000 Present value of lease payments (e) January 1..427 2............... 2008 Lease Liability............................827 Balance $2.100.....427 2...........000 14.....000 93..427 2..................324 2.000 2....000 93...... 200..........................000 200............................000) 200... Cash..........482.......000 × 20 4.. 20 periods.897 219.45639 Residual guarantee × 100.............173 $200.427 Date Initial PV 1/1/08 7/1/08 1/1/09 Lease Amortization Schedule Semi-Annual Interest Reduction of Lease Payment 4% Lease Obligation $200... 2008 Leases Liability.............................000 19...............21 ................. Twelfth Edition Solution 21-104 (a) This lease is a capital lease to Forbes Company because its term (10 years—see computation in b below) exceeds 75% of the equipment's estimated useful life. The lease term is: Noncancelable period Additional period for which termination penalty assures renewal Period covered by lessor extension option The minimum lease payments are: Semi-annual rental payments Executory costs Number of payments over lease term Residual guarantee Minimum lease payments (d) The present value of the minimum lease payments is: Factor for present value of an annuity due... 2.....................872.639 $2....579..... 4% Semi-annual payments............. 329.......173 Jenks..575 5...Accounting for Leases Solution 21-104 (cont. 2008 Depreciation Expense.173 103. Annual year-end lease payments of $5..... The lease contains a bargain purchase option which satisfies one of the criteria for classification as a direct-financing lease.. Instructions (a) What type of lease is this? Discuss......... (Round all amounts to nearest dollar...425. and there are no uncertainties as to future lessor costs......... Inc. 3.243 103.......766.821. Pr....... and to recognize income..........000... The term of the noncancelable lease is eight years and payments are required at the end of each year.....54027)] ÷ 5. 2.000) ÷ 10 = $281................886 2.. the payments are collectible.) December 31....... (b) Prepare a lease amortization schedule for the lessor for the first two years (2008-2009)........ an estimated useful life of fourteen years......000 $2...000..243* 21 ............... for the years 2008 and 2009.000...... National Airlines has the option to purchase the airplane for $9... Lessor's Lease Amortization Schedule Annual Interest on Lease Receivable Lease Rental Lease Receivable Recovery Lease Receivable $38.040. 4.766....000 when the lease expires at which time the fair value is expected to be $15.....944....000 – ($9. Collectibility of the payments is reasonably predictable......000. The following information relates to this agreement: 1..000 $5.....000...273. Solution 21-105 (a) The lease is a direct-financing type lease from the lessor's point of view or a capital lease from the lessee's point of view... 2008.35 281... to lease an airplane to National Airlines...............425 35.. and there are no important uncertainties surrounding the costs yet to be incurred by Jenks....000.........425 2.. Interest Payable ..000 at the termination of the lease when the asset is expected to have a fair value of $15. 21-105—Lessor accounting—direct-financing lease.036 (b) Date 1/1/08 12/31/08 12/31/09 *[$38.. *($2.000 to Jenks...... to reflect payments received under the lease... ........000.74664 = $5.766....427 – $60..766... Additionally.539 32......243... and a salvage value of zero at the end of that time (due to technological obsolescence). The airplane has a cost of $38. The option to buy for $9. 281....000 × ...872.425 allow Jenks to earn an 8% return on its investment.726.... enters into a lease agreement as lessor on January 1......425* $3.....000.. National Airlines will pay all executory costs related to the leased airplane.000.) (c) Prepare the journal entries on the books of the lessor to record the lease agreement..000 constitutes a bargain purchase option. Accumulated Depreciation—Capital Leases. 5.. Interest Expense.. ....... 5.................... 5...........000 2.......................000 Airplanes.................................................................821....... Twelfth Edition Solution 21-105 (cont. 38.........425 3..........36 Test Bank for Intermediate Accounting.. Interest Revenue............................................. 2009 Cash....................425 Lease Receivable.......944... 2008 Cash............000 December 31........................21 ........................ Interest Revenue...886 ...........000............539 2.....766.....425 Lease Receivable...........) (c) January 1..............................................................040......................726.............................................................766.... 2... December 31............................. 2008 Lease Receivable.......... 38...........000....................................................