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Exam 15: Leases

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Question 31

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What would the lessee record as annual depreciation on the asset using the straight-line method?

A) $ 5,328.
B) $ 6,328.
C) $ 6,392.
D) $10,000.Depreciation = $63,282 / 10 years = $6,328

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

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Question 32

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What is the effective annual interest rate?

A) 9%.
B) 10%.
C) 11%.
D) 20%.$2,660 / $26,600 = 10% (from Payment #2)

E) A) and B)
F) B) and D)

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Question 33

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

What would be the amount of interest expense recorded with payment #5?

The four criteria provided in FASB Statement No. 13 for distinguishing a capital lease from an operating lease do not include:

What would be the outstanding balance after payment #10?

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 matched with the interest revenues they help generate in

One of the four criteria for a capital lease specifies that the lease term be equal to or greater than:

On January 1, 2009, Holbrook Company leased a building under a 3-year operating lease. The annual rental payments are $68,000 on January 1, 2009, the inception of the lease, and $50,000 January 1 of 2010 and 2011. Holbrook made structural modifications to the building costing $90,000 before occupying the building. The useful life of the building and the modifications is 30 years with no expected residual value. Required: Prepare the appropriate journal entries for Holbrook Company for 2009. Holbrook's fiscal year is the calendar year, and the company uses straight-line depreciation.

Python Company leased equipment from Hope Leasing on January 1, 2009. Hope purchased the equipment at a cost of $222,666. There is no expected residual value. Required: Prepare appropriate journal entries for Python for 2009. Assume straight-line depreciation and a December 31 year-end.

Discuss the interest rates used by the lessee and the lessor for determining the present value of a capital lease.

Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009. Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2009 and 2010. Assume a December 31 year-end. $\begin{array}{l}\text { Other information: }\\\begin{array} { l l } \text { Lease term } & 3 \text { years } \\\text { Annual payments } & \$ 80,000 \text { on January } 1 \text { each year } \\\text { Life of asset } & 3 \text { years } \\\text { Implicit interest rate } & 8 \% \\\text { Incremental rate } & 8 \% \\\text { PV, annuity due, } 3 \text { periods, } 8 \% & 2.7833 \\\text { PV, ordinary annuity, } 3 \text { periods, } 8 \% & 2.5771 \\\text { Hi-Tech's cost of the equipment } & \$ 222,666 \\\text { There is no expected residual value. }\end{array}\end{array}$

N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2009. Lease payments of $26,000, which includes real estate taxes of $1,000, are due annually, beginning on December 31, 2010, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; N's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should N report as capitalized lease liability at December 31, 2009?

When accounting for a nonoperating 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.

Merlin Co. leased equipment to Houdini Inc. The equipment cost the lessor $200,000. The appropriate interest rate for this lease is 15%. The annual lease payments are made at the end of each year. The lease term is 3 years. The residual value at the end of the lease term is expected to be $40,000. Houdini has the option to purchase the equipment at that time for $20,000. Assume this is a direct financing lease. Required: 1. For this lease: (a.) The lease payment computed by the lessor is $_____________ (b.) The amount the lessee should capitalize is $____________ 2. How much interest should be recognized at the end of year 1 by the: (a.) Lessor? $__________ (b.) Lessee? $_____ $\begin{array} { c c c c } { \mathbf { n } / \mathbf { i } } & \text { PV of \$1 } & \begin{array} { c } \text { PV, } \\\text { ordinary } \\\text { annuity }\end{array} & \begin{array} { c } \text { PV, } \\\text { annuity } \\\text { due }\end{array} \\\text { 1 period, } 15 \% & .86957 & .86957 & 1.00000 \\\text { 2 periods, 15\% } & .75614 & 1.62571 & 1.86957 \\\text { 3 periods, 15\% } & .65752 & 2.28323 & 2.62571\end{array}$

Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be:

On February 1, 2009, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is 8 years. The fair market value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

On January 1, 2009, Packard Corporation leased equipment to Hewlitt Company. The lease term is 8 years. The first payment of $450,000 was made on January 1, 2009. Remaining payments are made on December 31 each year, beginning with December 31, 2009. The equipment cost Packard Corporation $2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2010, balance sheet?

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 2009 and 2010.

How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to the interest rate used to discount minimum lease payments?