4.2 Leases Flashcards
If the lease term is less than 12 months, when may a lessee elect not to recognize the right-of-use asset and lease liability?
A. The term of the lease is for the major part of the remaining economic life of the leased asset.
B. The lease transfers ownership of the leased asset to the lessee by the end of the lease term.
C. The present value of the sum of (1) the lease payments and (2) any residual value guaranteed by the lessee is 90% or more of the fair value of the leased asset.
D. The lease does not include a purchase option that the lessee is reasonably certain to exercise.
D. The lease does not include a purchase option that the lessee is reasonably certain to exercise.
The amount recorded initially by the lessee as a lease liability should normally
A. Exceed the total of the lease payments
B. Exceed the present value of the lease payments at the beginning of the lase
C. Equal the total of the lease payments.
D. Equal the present value of the lease payments at the beginning of the lease.
D. Equal the present value of the lease payments at the beginning of the lease.
On January 1, Year 1, Lessee entered into a 4-year lease that does not transfer ownership at the end of the lease term. It also includes a purchase option not reasonably expected to be exercised. The leased asset has (1) a 6-year economic life, (2) no residual value, and (3) a present value of the annual lease payments equal to 75% of the leased asset’s fair value. If the leased asset has no alternative use to the lessor at the end of the lease term, how should Lessee classify the lease?
A. Operating
B. Finance
C. Short-term
D. Sales-type
B. Finance
A lessee classifies a lease as a finance lease or an operating lease. A finance lease meets at least one of five classification criteria. The lease does not (1) transfer ownership of the leased asset to the lessee or (2) contain a purchase option the lessee is reasonably certain to exercise. (3) the lease term also is for 67% (4 years / 6years) of the lease asset’s remaining economic life, not a major part (at least 75%). (4) Furthermore, the present value of the sum of the lease payments is 75% of the leased asset’s fair value, not substantially all (at least 90%). However, (5) the leased asset is so specialized that it is expected to have no alternative use to the lessor at the end of the lease term. Consequently, a criterion for classification of the lease as a finance lease is met.
Which of the following is a criterion for a lease to be classified as a finance lease in the books of a lessee?
A. The lease contains a purchase option that the lessee is reasonably certain to exercise.
B. The lease does not transfer ownership of the property to the lessee.
C. The lease term is equal to 65% or more of the estimated useful life of the leased property.
D. The present value of the minimum lease payments is 70% or more of the fair market value of the lease property
A. The lease contains a purchase option that the lessee is reasonably certain to exercise.
The present value of lease payments should be used by the lessee in determining amount of a lease liability under a lease classified by the lessee as a(n)
- Finance lease: yes/no
- Operating lease: yes/no
- Finance lease: yes
- Operating lease: yes
For finance and operating leases, a lessee must recognize a lease liability and a right-of-use asset at the lease commencement date. A lease liability is measured initially at the present value of the lease payments to be made over the lease term.
On July 1, Year 1, V Co. leased manufacturing equipment to W Co. to use in the production of widgets. The lease contained a transfer of title and was noncancelable. At the commencement of the lease, the equipment had an amortizable base of $10,000 and will be amortized using the straight-line method over its remaining useful life of 5 years. For the period ending December 31, Year 2, what amount of amortization should be claimed, and by which party?
A. $1,000; W Co.
B. $1,000; V Co.
C. $2,000; W Co.
D. $2,000; V Co.
C. $2,000; W Co.
The lease transfers ownership; thus, W Co. is entitled to claim amortization on the equipment. Given an amortizable base of $10,000 and 5-year useful life, the annual amortization expense is $2,000 ($10,000 / 5 years).
Which of the following lease payments is not classified as an outflow from operating activities on the statement of cash flows?
A. Payments for short-term leases
B. The interest portion of a payment for a sales-type lease
C. Payments for operating leases
D. The principal portion of a payment for a finance-type lease
D. The principal portion of a payment for a finance-type lease
The principal portion of a finance-type lease payment is reported as a cash outflow from financing activities.
Quick Company’s lease payments are made at the end of each period. Quick’s liability for a finance lease will be reduced periodically by the
A. Lease payment plus the amortization of the related asset
B. Lease payment minus the amortization of the related asset
C. Lease payment
D. Lease payment minus the portion of the lease payment allocable to interest
D. Lease payment minus the portion of the lease payment allocable to interest
The lease liability consists of the present value of the lease payments. The lease liability is reduced by the portion of the lease payment attributable to the lease liability. This amount is the lease payment minus the interest component of the payment. Thus, the liability is decreased by the lease payment each period minus the portion of the payment allocable to interest.
On January 1, Year 1, Lessee entered into a 4-year lease and did not incur initial direct costs. At the lease commencement date, Lessee
A. Must discount the lease payments using the lessor’s incremental borrowing rate
B. Applies different accounting for initial measurement of a right-of-use asset under finance and operating leases
C. Measures the lease liability at the sum of the present values of the rental payments and the expected residual value of the leased asset
D. Recognizes the same amount for the right-of-use asset and the lease liability under a finance lease and an operating lease
D. Recognizes the same amount for the right-of-use asset and the lease liability under a finance lease and an operating lease
For finance and operating leases, a lessee must recognize a lease liability and a right-of-use asset at the lease commencement date. The same accounting applies to (1) initial recognition and measurement of (a) the lease liability and (b) the right-of-use asset and (2) subsequent measurement of the lease liability. The accounting for subsequent measurement of a right-of-use asset differs under finance and operating leases. At the lease commencement date, a right-of-use asset is measured at the amount at which the lease liability was recognized plus initial direct costs incurred by the lessee. When no initial direct costs were incurred by the lessee, a right-of-use asset equals the lease liability recognized.
Which of the following meets a criterion for a lessee to account for a lease as a finance lease?
A. A third party has guaranteed the residual value of the leased asset
B. The present value of the lease payment is 75% of the fair value of the leased asset
C. The lessee is reasonably certain to exercise the option to purchase the leased asset
D. The lease is for unspecialized equipment
C. The lessee is reasonably certain to exercise the option to purchase the leased asset
A lease is classified as a sales-type lease by the lessor and a finance lease by the lessee if, at lease commencement, the lease includes an option to purchase the leased asset that the lessee is reasonably certain to exercise.
GAAP list five criteria for determining when a lease should be classified as a finance lease by a lessee. Which of the following is a criterion?
A. The lease term equals 75% or more of the remaining estimated useful life of the leased property
B. The lessee guarantees the residual value of the leased property
C. The lease agreement provides for the transfer of ownership of the leased property
D. The present value of the lease payments equals or exceeds 75% of the fair value of the leased property
C. The lease agreement provides for the transfer of ownership of the leased property
A lease is classified as a finance lease if any of the following five criteria are met:
(1) the ownership of the leased asset is transferred to the lessee by the end of the lease term
(2) the lease includes an option to purchase the leased asset that the lessee is reasonably certain to exercise
(3) the lease term is for the major part (generally considered as 75%) of the remaining economic life of the leased asset
(4) the present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value (generally considered 90%) of the leased asset
(5) the leased asset is so specialized that it is expected to have no alternative use to the lessor at the end of the lease term
A corporation signed a 3-year lease for an automobile on December 1. The automobile had a list price of $17,000 and an estimated useful life of 8 years. The lease called for payments of $500 per month for 36 months. The present value of the $500 payments was $15,054 at the corporation’s incremental borrowing rate and $15,496 at the lessor’s implicit rate, which is known to the lessee. Based on the above information, the corporation should record the lease as a(n)
A. Operating lease
B. Sales-type lease
C. Finance lease
D. Sales-leaseback
C. Finance lease
A lessee must report a lease as a finance lease if the present value of the lease payments and any residual value guaranteed by the lessee is 90% or more of the fair value of the leased asset. If the lessor’s implicit rate is known to the lessee, that is appropriate discount rate. Dividing the present value by the list price of the automobile yields a result >90% ($15,469 / 17,000 = 91.2%). Thus, this lease must be classified by the corporation as a finance lease.
