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Exam 15: Leases

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Question 1

True/False

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When accounting for a capital lease, the lessee records the leased asset at the present value of the minimum lease payments or the asset's fair value, whichever is lower.

A) True
B) False

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Question 2

Multiple Choice

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Crystal Corporation recorded a lease payment as follows: Crystal must have a(n) :

A) Operating lease.
B) Leveraged lease.
C) Capital lease.
D) Direct financing lease.

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

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Question 3

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At the inception of a lease agreement, the company's debt to equity ratio and rate of return on assets are both affected whether the lease is classified as a capital lease or as an operating lease.

You and a colleague are reviewing a prospective lease transaction for your employer, Ma and Pa Kettle's (MPK). Having heard of the new lease accounting standard update, your CFO has assigned you the task of assessing the impact of the lease transactions on the company's financial statements. The terms are these: At the beginning of its fiscal year, MPK would lease restaurant space from Wilson Corporation under a 10-year lease agreement. The contract calls for annual lease payments of $25,000 each at the end of each year. The building was acquired last week by Wilson at a cost of $300,000 and is expected to have a useful life of 25 years with no residual value for calculating straight-line depreciation. Wilson seeks a 10% return on its lease investments. Required: What will be the effect of the lease on MPK's earnings for the first year and balance sheet at the end of the year (ignore taxes)? In preparation for negotiations with the lessor, the CFO also wants to know the effect on Wilson's financial statements. Journal entries are not required but might be helpful in your assessment.

On January 1, 2013, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $20,000 for 2013, $18,000 for 2014, $16,000 for 2015, and $14,000 for 2016. What is the correct amount of lease expense for 2014?

For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option, the depreciation period used by the lessee must be:

In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset.

Required: 1. Calculate the amount to be recorded as a leased asset and the associated lease liability. 2. Prepare Rumsfeld's journal entries for this lease for 2013 and 2014.

If the leaseback portion of a sale-leaseback transaction is classified as a capital lease:

The lessee normally measures the lease liability to be recorded as the:

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

What is a bargain purchase option and when do the parties to a lease know if it exists?

For a capital lease, an amount equal to the present value of the minimum lease payments should be recorded by the lessee as a(n) :

Compare and contrast the way leases are classified between operating and finance (capital) leases under U.S. GAAP and IFRS.

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $600,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation?

B Corp. has a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the debt/equity ratio is increased when B records:

For the lessee to account for a lease as a capital lease, the lease must meet:

What would the lessee record as annual depreciation on the asset using the straight-line method, assuming no residual value?

Southwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2013. Hi-Tech manufactured the equipment at a cost of $90,000. There is no expected residual value. Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2013. Assume a December 31 year-end.

Which of the following statements regarding guaranteed residual values is true for the lessee?