13E: Wrong Answers Flashcards
Leasehold improvements are capitalized and amortized over…
The shorter of the remaining life of the lease and the useful
Life of improvements
Accrued rent receivable equation
Accrued rent receivable = rent revenue - cash collections
When the residual value is guaranteed by a third party, the lessee’s minimum lease payments include only…
The rentals
If interest payments are made on January 1st of each year on a capital lease, can the principal amount be affected on October 1st by accrued interest?
No
When calculating the initial lease liability, annual Executory costs are…3
1 not an expense or liability until incurred
2 excluded from minimum lease payments
3 not reflected in initial lease liability
In a six year capital lost starting December 31, year 1:
Does the first payment made on December 31, yr. 1 include interest expense? Does it include a lease liability?
Includes lease liability, but first payment doesn’t include interest
Expense
If the lease term is 5 years and the useful life is 8 years, what amount will be used to calculate depreciation if a bargain purchase option is exercised?
8 years
Because intend to use it over its useful life
Note disclosure: Aggregate amount for lease term
Is total remaining lease payments in the agreement
Note disclosure: amount for appropriate required period
Total lease payments over next 5 years
When a bargain purchase option exists, at the end of the lease the balance in the lease payable column should equal…
The bargain purchase option price
Failure to include the present value of the bargain purchase option price in the beginning present value of the lease would result in…
An ending balance in the lease payable column of zero
Sale leaseback arrangements are treated as though…
2 transactions were a single financing transaction if the lease
Qualifies as a capital lease
In a sale leaseback arrangement any gIn or loss is deferred and amortized over the life of the lease term if…
possession reverts to lessor
In a sale leaseback arrangement any gIn or loss is deferred and amortized over the economic life if…
Ownership transfers to the lessee
In a sale leaseback transaction, the seller lessee has retained the property, the gain on sale should be…
Deferred for both capital and operating leases
An example of an operating lease in which substantially all of the remaining use of the leased asset is retained by the lessee occurs when the lease term begins…
Within the last 25% of the asset’s original useful life
Deferred gain from sale leaseback transaction acts as…
Asset valuation allowance
Deferred gain acts as an asset valuation allowance resulting in net amount shown for leased asset being equal to…
Same carrying value as if sale and leaseback transaction had
Not occurred
A modification to a capital lease that changes the classification of the lease to an operating lease requires the transaction be accounted for as…
A sales leaseback transaction, defer gain and recognize it over
Life of operating lease
How do you record the journal entry for a capital lease payment made by the lessee?
Capital lease liability. Xxx
Cash. Xxx
How do you record the journal entry of the lessee for expenses associated with a capital lease?
Depreciation exp. Xxx
Accumulated depr. Xxx
Interest expense. Xxx
Capital lease liability. Xxx
Sales type lease
Sales revenue (the present value of the minimum lease payments) Less the carrying amount of the leased asset
is reported on the Lessor’s income statement at the inception of the lease
Direct financing lease
Interest revenue is the only item reported on the income statement
Over the lease term
Operating lease- lessee
Rental payments are recognized on a straight line basis
even though the lease calls for payments that increase over the
term of the lease
Operating lease- lessor
Initial direct costs should be treated as an asset and amortized
Over the life of the lease on a straight line basis
Unearned interest revenue
The difference between the fair value of the asset leased and the
Total payments to be received over the lease term
Residual value
Included in the lessor’s gross investment, whether guaranteed
Or Unguaranteed
Capital lease
Depreciation expense related to the leased asset is reported
on the lessee’s income statement over the lease term
Implicit rate
Produces a desired rate of return which causes the aggregate
Present value of the minimum lease payments to be equal to
The fair value of the leased property
Interest method
Produces a constant periodic rate of return on the net investment
Present value of the minimum lease payments
Should be recorded as both an asset and a liability by the lessee
When the lease contains a bargain purchase option
Bargain purchase option
Lessee’s right to purchase leased property for an amount
substantially lower than the expected FV at exercise date
Sale leaseback
The substance of this transaction is that it consists of two separate
And distinct transactions
Annuity due
A lease agreement which requires the annual payments to be
made at the beginning of each period
Initial direct costs
Costs, such as appraisal fees, incurred by the lessor in setting up
The lease agreement
Current lease obligation
The principal portion of the lease liability which must be paid
within the next operating cycle
As a capital lease progresses, the interest expense…
2) the carrying amount of the lease…
Decreases for the lessee
2) decreases for the lessee
Depreciation expense is calculated using (in the numerator)…
The present value of the minimum lease payments
When a bargain purchase option exists, depreciation is calculated using…
The asset’s useful life
If a capital lease is modified in such a way that it qualifies as an operating lease, it should be treated as…
A sales-leaseback transaction
If a seller lessee retains substantially all rights to use the property in a sales leaseback transaction, the gain on sale is…
Deferred by the seller lessee
Unguaranteed residual is considered part of…
The lessor’s net investment in lease unless there’s a transfer of
Title or bargain purchase option
Unguaranteed residual, is it part of the minimum lease payment for the lessee?
Not part of the minimum lease payment it is ignored
Do minimum lease payments include penalties?
Example
Yes
Ex. Failure to renew
Initial direct costs, how are they treated by the lessor?
Should be capitalized and amortized straight line over the life
Of the lease
Free or uneven lease payments received by the lessor should be recognized…
As revenue on a straight line basis and prorated over the life
Of the lease
