ACG4111 Exam 2 Review: Chapter 15 Leases

Question 1

To a lessee, what is the cost basis of a leased asset?

Answer 1

The PV of the minimum lease payments + PV of non-lease components

Question 2

Calculate amount of annual lease payment made at beginning of each year

Answer 2

Selling price / PV of annuity due (n=years r=interest rate)

Question 3

What is true of reassessment of the lease term?

Answer 3

If the lessee reassesses the lease term, it must remeasure the lease liability as the present value of the remaining payments.

Question 4

What is the next effect of the lease on earnings?

Answer 4

An expense of the monthly payment at the end of each month

Question 5

Calculate the balance of right of use asset after 2 years of a 10 year finance lease

Answer 5

PV - (PV / lease term) * years passed

Question 6

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

Answer 6

Any of the five criteria specified by GAAP regarding accounting for leases

Question 7

Calculate the total decrease in earnings on the IS

Answer 7

A. (PV - annual lease payment) * interest rate * 6/12 (if only half year has passed)
B. PV / lease term * 6/12 (if only half year has passed)
= A+B

Question 8

Calculate amount lessee should report as lease liability

Answer 8

PV - annual payment = outstanding balance
Outstanding balance - (annual payment - (outstanding balance * interest rate))
= lease liability

Question 9

Calculate total amount for lessee to record on IS after 1 year

Answer 9

(PV - annual payment) * implicit rate

Question 10

Calculate amount of right-of-use asset for lessor

Answer 10

Lease payment * PVAD factor (n = lease term, i = implicit rate)

Question 11

Calculate lessor’s amortization expense per year

Answer 11

(PV - residual value) / lease term or useful asset life (whichever is shorter)

Question 12

Journal entry for lessor to record return of equipment at end of lease term

Answer 12

Debit cash (residual value - appraised value)

Question 13

Initial direct costs incurred by lessor are deferred and expensed over lease term

Answer 13

In both an operating ;ease and a sales-type lease with no selling profit

Question 14

Calculate interest revenue after 2 years, assuming paid one at beginning of lease term

Answer 14

PV - annual payment = outstanding balance 1
OBS 1 - (annual payment - (outstanding balance 1 * interest rate)) = OBS 2
OBS 2 * interest rate = interest revenue for year 2

Question 15

Cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee which will be

Answer 15

The shorter of lease term or physical life of asset.

Question 16

Calculate lease payable to include in current liabilities for a finance lease of lessee

Answer 16

(PV - annual payment) * interest rate = interest expense
Annual payment - interest expense = lease payable

Question 17

Total expenses over life of an operating lease compared to a finance lease

Answer 17

Expenses of an operating lease is greater than a finance lease

Question 18

Calculate the amount of annual lease payments

Answer 18

(PV - (purchase option * PV of 1 (n=lease term, r=interest rate))) / PV of annuity due

Question 19

Calculate lessee’s annual amortization of right-of-use asset under straight-line

Answer 19

(PV - salvage value) / asset life

Question 20

Calculate interest expense for lessee (BBC Co. (2 parter))

Answer 20

If Jan 2018 - Dec 2018: (PV + annual payment) * interest rate
If Jan 2018 - Dec 2019: (PV - annual payment) * interest rate

Question 21

Calculate amortization expense for lessee (BBC Co. (2 parter))

Answer 21

Annual payment - (PV - annual payment) * interest rate

Question 22

What amount if any should be added to right-of-use asset and lease payable under this rental agreement? (On Jan 1st, McBK stores leased retail space for five year-period)

Answer 22

No additional amount should be added.

Question 23

Journal entry for lessor to record at beginning of lease term

Answer 23

Credit to deferred revenue (semiannual lease payments)

Question 24

Calculate depreciation expense of lessor after 1 year

Answer 24

PV / asset life

Question 25

What is the amount of total lease-related expense should lessee report in its IS after 1 year?

Answer 25

Annual rental payable at beginning of each year