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Exam 15: Leases

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Question 51

True/False

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The criterion of 75% of economic life for classifying a lease as a capital lease is consistent with the basic premise that most of the risks and rewards of ownership occur during the first 75% of an asset's life.

A) True
B) False

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Question 52

Multiple Choice

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Francisco leased equipment from Julio on December 31, 2013. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2013. The present value of the lease is $1,020,000. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2014?

A) $824,400.
B) $807,000.
C) $806,400.
D) $792,000.

E) All of the above
F) A) and B)

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Question 53

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KateCo leased a warehouse from Big Dave Industries on July 1, 2013. The present value of the lease payments discounted at 10% was $160,000. Ten annual lease payments of $24,000 are due at the beginning of each fiscal year beginning July 1, 2013. Big Dave had constructed the equipment recently for $132,000 and its retail fair value was $200,000. Required: Following the guidance of the new ASU, prepare the two journal entries to record the lease by Big Dave at its commencement.

Recording a sales-type lease is similar to recording:

How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to classifying a lease as a capital lease?

Each of the independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate. For convenience, here are some table values: Required: For each situation determine the amount recorded as a liability by the lessee at the inception of the lease.

Python Company leased equipment from Hope Leasing on January 1, 2013. Hope purchased the equipment at a cost of $222,664. Other information: There is no expected residual value. Required: Prepare appropriate journal entries for Python for 2013. Assume straight-line depreciation and a December 31 year-end.

What are the three types of expenses that a lessee experiences with a capital lease?

When a lease qualifies as a capital lease, what is the cost basis of the asset acquired?

Damon is the lessee in connection with a lease. Under the new ASU, Damon would not record:

Mann Co. is the lessor in a six-year lease beginning December 31, 2013. The agreement specifies that Woo Corp. make equal annual lease payments on December 31 of each year. Under the new ASU, in its 2014 income statement:

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that:

Warren Co. recorded a right-of-use asset of $800,000 in a 10-year lease under which no profit was recorded at commencement by the lessor. The interest rate charged the lessee was 10%. Under the new ASU, the balance in the right-of-use asset after two years will be:

Savinsky Industries prepares its financial statements using IFRS and reports its leases as finance leases. If the company reported under U.S. GAAP, is it possible that some of the leases could be classified as an operating lease? Explain

What is the net carrying value of the lease liability in Lone Star's June 30, 2013, balance sheet? Round your answer to the nearest dollar.

In this situation, Reagan:

Additional lessor conditions for classification as a capital lease are consistent with the criteria of the:

On December 31, 2013, Perry Corporation leased equipment to Admiral Company for a five-year period. The annual lease payment, excluding executory costs, is $40,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2013. The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2013, by what amount will Perry's pretax earnings increase from this lease?

What is the effective annual interest rate?

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are expensed at the inception of the lease in: