Chapter 18: Accounting for Leases

Question 1

Lease

Answer 1

is a contract that gives the lessee the right to use an asset, legally owed by the lossor, for a specified period of time in return for periodic payments or rentals made by the lessee

Question 2

Lessor

Answer 2

the owner of the asset

Question 3

Lessee

Answer 3

the party acquiring the use of the of the asset

Question 4

Capital Lease

Answer 4

a lease that results in the lessee reporting the asset and the liability on the balance sheet and reporting the related interest and depreciation as expenses on the income statement

Question 5

Operating Lease

Answer 5

the lessee reports rent expense on the income statement and does not recognize an asset or liability on the balance sheet

Question 6

Bargain Purchase Option

Answer 6

allows the lessee to acquire the property at a price specified at the inception of the lease that is substantially below the expected fair market value of the property at the date the option can be exercised

Question 7

Lease Term

Answer 7

the duration of the non-cancellable portion of the lease plus any bargain renewal options

Question 8

Bargain Renewal Options

Answer 8

allow the lessee to extend the lease for a secondary period at a rent substantially below the market rent

Question 9

Minimum Lease Payments

Answer 9

are comprised of

• The minimum rental payments
• The guaranteed residual value, if any
• A penalty for failure to renew or extend the lease
• A bargain purchase option

Question 10

Minimum Rental Payments

Answer 10

the rental payments that the lessee will remit to the lessor over the lease term

Question 11

Executory Costs

Answer 11

include property taxes, insurance, maintenance, and other costs that are associated with the ownership of the leased asset

Question 12

Guaranteed Residual Value

Answer 12

occurs when the lessee promises that the lessor will recover a certain amount from the asset at the termination of the lease

Question 13

Finance Lease

Answer 13

a lease that transfers the risks and rewards of ownership

Question 14

Initial Direct Costs

Answer 14

are costs such as legal fees and commissions that are directly associated with originating the lease

Question 15

Implicit Rate

Answer 15

the rate of return required by the lessor–that is, the rate of return that equates the present value of the lease to the fair value of the leased asset

Question 16

Incremental Borrowing Rate

Answer 16

the rate that the lessee would incur in a debt agreement under similar terms and circumstance

Question 17

Direct-Finance Capital Lease

Answer 17

a lease that meets both Group I and Group II criteria to be considered a capital lease, but does not give rise to gross profit or loss

Question 18

Sales-Type Capital Lease

Answer 18

a lease that meets both Group I and Group II criteria to be considered a capital lease by the lessor and also gives rise to gross profit or loss

Question 19

Dealer’s or Manufacturer’s Profit

Answer 19

the gross profit on the sale of the product measured as the difference between the fair value (its selling price) and the carrying value of the property

Question 20

Leasehold Improvements

Answer 20

improvements made made by the lessee to lease property that are not movable and revert to the lessor when the lease expires