Chapter 13

Question 1

list the 4 criteria for a capital lease. it can have any of the following

Answer 1

1. The lease provides for the transfer of ownership.
2. The lease contains a bargain purchase option (BPO).
   The lease term is 75% or more of the estimated economic life of the leased property.
3. This criterion is inapplicable if the beginning of the lease term falls within the last 25% of the property’s total estimated economic life.
4. The present value of the minimum lease payments is at least 90% of the fair value of the leased property to the lessor at the inception of the lease.

Question 2

How do you record a capital lease on the balance sheet?

Answer 2

present value of the minimum lease payments.

Question 3

The discount rate used in calculating the present value of the minimum lease payments is the lower of

Answer 3

1. The lessor’s implicit rate if it is known to the lessee or
2. The lessee’s incremental borrowing rate.

Question 4

Do you include residual value in the calculation of a capital lease?

Answer 4

yes.

Question 5

If fair value of a capital lease is less than the present value of the minimum lease payments, you should record the lease at what?

Answer 5

Fair value

Question 6

if a BPO is in a capital lease the lessee should depreciate based on?

Answer 6

The useful life of the asset.

Question 7

The JE by the lessor for a financing type capital lease

Answer 7

DR. Lease receivables (gross investment)
CR. Asset (FV = carrying amount)
CR. Unearned interest income

Question 8

The JE by the lessor for a sales type capital lease

Answer 8

DR.  Lease payments receivable
DR. Cost of goods sold
CR.  Unearned interest income
CR. Sales revenue
CR. Asset

Question 9

what must be disclosed for a capital lease

Answer 9

5 years worth of lease payments and the balance after that.

Question 10

off balance sheet financing refers to what?

Answer 10

operating leases

Question 11

how do you calculate the percentages on a sale/ lease back

Answer 11

PV on lease payments/ sales price

Question 12

if a sale lease back falls into the below 10% range then

Answer 12

recognize gains and loss immediately

Question 13

if a sale lease back falls into the below 10% to 90% range then

Answer 13

defer gains and recognize over the life of lease

Question 14

What two things make a probable loss contingency

Answer 14

1. probable
2. reasonably estimated
   (must accrue to minimum if a range)

Question 15

What do you do if the loss in reasonably possible contingency?

Answer 15

Disclose

Question 16

what do you do for a remote loss contingency?

Answer 16

Nothing

Question 17

Do you disclose a guarantee

Answer 17

always

Question 18

Do you accrue a guarantee

Answer 18

always

Question 19

do you accrue for gain contingencies?

Answer 19

never

Question 20

Calculate unearned interest income is a sales type lease

Answer 20

Gross investment
- PV of minimum lease payments
- PV of unguaranteed residual value
= unearned interest income

Question 21

Depreciation on capital lease should use what?

Answer 21

the depreciation of the asset is over its entire estimated economic life.