Chapter 12 Financail and Reporting Analysis Flashcards
Lessees like the operating lease method under ASC 840 (required accounting prior to 2019) because
their liabilities remain the same at lease signing.
For an operating lease accounted for under ASC 840 (the required accounting before 2019), the lessee
will not record an asset or a liability at inception of the lease.
To adjust the balance sheet for the effects of ASC 842, an analyst would
increase assets, current liabilities, and long-term liabilities.
When the lessee uses the operating lease method
the total asset turnover ratio is higher.
For a capital lease, the lessee
will record a liability for the future lease payments when the lease is signed.
To adjust the balance sheet for the effects of ASC 842, an analyst would
increase assets, current liabilities, and long-term liabilities.
Arnold, Inc. leases a stamping machine to Devitt Company for 8 years. Arnold’s cost of the machine is $80,000, and a fair value is also $80,000. the economic life is ten years. The present value of minimum lease payments is $75,000. Devitt is credit worthy. Arnold would classify the lease as
A direct financing lease. (At least one of the four lease criteria are met and Devitt is credit worthy. Therefore it would not be an operating lease.)
Under ASC 842, when accounting for a finance lease, the lessee
establishes a Right-of-use asset-finance lease.
At the inception of a lease, a lessor using the direct financing method would
remove the leased asset from its balance sheet.
For a capital lease, the lessee depreciates the asset over
the lease term when only the third and fourth capital lease criteria are met.
In a capital lease where annual lease payments are made on the last day of an accounting year, the lessee records a current obligation equal to the
principal reduction to take place within the next accounting year.
A guaranteed residual
increase the present value of minimum lease payments.
One step in estimating the interest rate is to
subtract the current potion of the capital lease liability from the next year’s capital lease payment.
Executory costs
Have no effect on the present value of minimum lease payments.
At the end of an accounting year, the lessee classifies a portion of the lease obligations as current
whenever payments are due in the subsequent year.
When payments are made at the beginning of a lease period in a capital lease, the lessee
reduces the lease obligation for the full amount of the first payment.
In a sale and leaseback and the proceeds of the sale exceed the lessee’s book value of the asset, the lessee
defers the gain.
When a capital lease includes a guaranteed residual value and there is no bargain purchase or transfer of ownership, the lessee will depreciate the capitalized lease asset to
the amount of the guaranteed residual.
To estimate the number of rental payments contained in the total amount of operating lease payments due after 5 years, an analyst would
divide the total by the lease payment in year 5.
The lessee’s Obligation under capital lease-current at the end of its accounting year includes
interest incurred but not paid during the current accounting year.
When a capital lease has a guaranteed residual, the lessee will recognize
a loss if the fair value of the end of the lease is less than the guaranteed amount.
One step in estimating the interest rate is to
subtract the current portion of the capital lease liability from the next year’s capital lease payment.
The residual value for a leased asset
is the expected fair value of the end of the lease.
At the inception of a capital lease, the lessee records an asset equal to
the present value of minimum lease payments, not the undocumented amount.
For an operating lease with equal lease payments and accounted for under ASC 842, the lessee
records an Operating lease with equal lease payments and accounted for under ASC 842, the lessee
A lessee would capitalize a lease contract if the
lease contract transfers ownership at the end of the lease term.
During the first year of a sales-type lease, the lessor recognizes
Gross profit and financing income.
Under ASC 842, lessees would
treat leases as finance leases when the underlying asset is highly specialized.
When computing the present value of minimum lease payments, a lessee would include
guaranteed residuals.
A lessor using the direct financing method would recognize
financing income.
A lessee
obtains a right-of-use asset through the lease.
Under ASC 842, the Operating lease liability
is the same as it would be under a finance lease.
A lease would be classified as a capital lease when the
lease is 80% of the asset economic life.
McHugh, Inc. leases a horse trailer to Waimon Company for 3 years. McHugh’s cost of the trailer is $40,000, and the fair value is also $40,000. The economic life is ten years. The present value of minimum lease payments is $15,000. Waimon is credit worthy. McHugh would classify the lease as
an operating lease
Under ASC 842, lessees would
classify a lease as a finance lease when the lease term is 75% or more of the economic life.
At the end of a lease, the actual residual value is less than the residual value that was expected at the beginning of the lease. Under what circumstances would the lessee have to pay the lessor the difference between the values?
The lessee guarantees the residual value.
Under ASC 842, the right-of-use asset - operating lease equals
the operating lease liability, adjusted for prepayments or accruals.
True or false: Lessee accounting under ASC 842 and IFRS is essentially the same (i.e., converged).
False (ASC842 has the concept of an operating lease, where as IFRS treats most leases as finance leases.
At the end of an accounting year,
the capital lease obligation will usually exceed the capital lease asset.
Managers prefer to classify leases as operating leases because
bonuses may be tied to accounting net income.
In the first year of a direct financing lease,
net income will be higher than it would be in an operating lease.
For an operating lease with equal lease payments and accounted for under ASC 842, the lessee
credits the right-of-use asset when it records amortization.
Bonduris Corporation enters into a 3-year lease accounted for as an operating lease under ASC 842. The lease calls for annual payments to be made at the beginning of each period. Immediately after the first payment is made, the amount of Bonduris’s Right-of-use asset-operating lease
Exceed the amount of its Operating lease liability.
Under ASC 842, a lease meets one of the five finance lease criteria, the fair value of the asset equals the lessor’s cost, and collectibility is not an issue. The lessor would classify the lease as a (an)
Sales-type lease
When computing the lease payment amount, the lessor divides the amount to bed recovered by
an annuity present value factor when n = lease term.
At the end of 2017, a lessee reports a current capital lease obligation of $200,000, capital lease minimum rental commitments of $450,000, and a present value of toatl lease payments of $4,050,000. During 2018, the lessee is expected to pay
$450,000
Accounting under ASC 842 and IFRS 16 would be nearly identical for leases
classified as finance leases under ASC 842.
For an operating lease with equal lease payments and accounted for under ASC 842, the lessee
records an Operating lease liability on the balance sheet.
In a direct financing lease,
the lessor removes the leased asset from its balance sheet.
On January 1, 2017, Klopman Corporation enters into a 10-year lease accounted for as an operating lease under ASC 842. The lease calls for annual payments to be made at the beginning of each year. Klopman uses a calendar year as its accounting year. At Decencer 32, 2017, the amount of Kolpman’s Right-of-use asset - operating lease
Equals the amount of its Operating lease liability. (At Decenber 31, the asset and liability are equal because there is no prepayment until 1/1/ of the next year.
For an operating lease with equal lease payments and accounted for under ASC 842, the lessee
recorda a Right-of-use asset on the balance sheet.
Ture or false: ASC 842 results in having “what-you-may-call-it” asstes that smooth income
true
In a capital lease
the obligation is amortized moire quickly than is the lease asset.
The amount of expense recognized by a lessee for a capital lease is
the same as it would be under an operating lease over the life of the lease.
Mueninghoff Company enters into a nine-year lease on January 1, 2017 that requires lease payments to increase by 5% each year. The lease requires payments to be made on December 31 each year with the first payment to be made on December 31, 2017. Under ASC 842 operating lease accounting, lease expense will
exceed the amount of the lease payment made on December 31, 2017.
A lease contract requires year end rental payments to increase in the future. If the lessee accounts for the lease as an operating lease, the rent expense for the first year of the lease
exceeds the amount of the first lease payment.
The IAS 17 criteria for determining whether a lease is a finacnce lease
contain a criterion dealing with asset specialization.
IFRS 16 differs from ASC 842 on its lessor accounting guidance in that it
addresses accounting for investment property.
When a lessee classifies a lease as a capital lease
it is more likely to violate a debt covenant.
Sande\retto Corporation enters into a six-year lease on January 1, 2017 that requires lease payments to increase by 5% each year. The lease requires payments to be made on December 31 each year with the firat payment to be made on December 31, 2017. Under ASC 842 operation lease accounting, after the payment is made, the Right-of-use asset - operating lease will
be less than the amount of the Operating lease liability.
A lease contract requires year end rental payments to increase in the future. If the lessee accounts for the lease as an operating lease, the lessee will recognize
a liability for accrued rent.
IFRS 16 differs from ASC 842 on its lessor accounting guidance on that it
addresses accounting for Investment property.
