FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE Flashcards
FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE
On July 1, 20X9, Gee, Inc. leased a delivery truck from Marr Corp. under a 3-year operating lease. Total rent for the term of the lease will be $36,000, payable as follows:
12 months at $ 500 = $ 6,000
12 months at $ 750 = 9,000
12 months at $1,750 = 21,000
All payments were made when due. In Marr’s June 30, 20X11, balance sheet, the accrued rent receivable should be reported as
$12,000
$21,000
$0
$9,000
$9,000
EXPLANATION:
Since the lease is a 3-year operating lease, the $36,000 to be received over the term of the lease will be recognized
uniformly at the rate of $12,000 per year.
As of 6/30/X11, $24,000 in rent was earned but only $15,000 had been received ($6,000 + $9,000).
Marr would report rent receivable of $9,000.
FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE
Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, 20X2. Under the terms of the operating lease, rent for the first year is $8,000 and rent for years 2 through 5 is $12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease rent-free.
In its December 31, 20X2, income statement, what amount should Wall report as rental income?
$10,800
$8,000
$12,000
$11,600
$10,800
EXPLANATION:
In an operating lease, the lessor recognizes rental revenue and the lessee recognizes rental expense uniformly over the term of the lease regardless of the pattern of payments.
When payments increase or decrease during the term of the lease, when the lease contains periods that may be rent free, or involves nonrefundable deposits, the total of the payments is recognized evenly over the term of the lease.
Over the 5-year term of the lease, Wall will receive the following rents:
Months 1-6 - 1/2 year @ $0 or $0
Months 7-12 - 1/2 year @ $8,000 or $4,000
Months 13-60- 4 yrs @ $12500 or $50,000
The total rent to be received will be $54,000 to be recognized uniformly over the 5-year term of the lease.
Wall will recognize $54,000/5 years or $10,800 as rental income in 20X2.
FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE
When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?
When received.
At the expiration of the lease.
At the inception of the lease.
Over the life of the lease.
Over the life of the lease.
EXPLANATION:
A nonrefundable lease bonus paid by a lessee is treated as part of the minimum lease payments and is recognized over
the term of the lease
FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE
On January 1, 20X1, Mollat Co. signed a 7-year lease for equipment having a 10-year economic life. The present value of the monthly lease payments equaled 80% of the equipment’s fair value. The lease agreement provides for neither a transfer of title to Mollat nor a bargain purchase option. In its 20X1 income statement Mollat should report…
Rent expense equal to the 20X1 lease payments less interest expense.
Lease amortization equal to one-tenth of the equipment’s fair value.
Lease amortization equal to one-seventh of 80% of the equipment’s fair value.
Rent expense equal to the 20X1 lease payments.
Rent expense equal to the 20X1 lease payments.
EXPLANATION:
The lease does not transfer title to Mollat or contain a bargain purchase option.
It has a lease term that is lower than 75% of the asset’s economic life and the present value of the minimum lease payments is less than 90% of the fair market value of the asset. As a result, the lease will be reported as an operating lease.
Mollat, as lessee in an operating lease, will recognize the payments made as rent expense.
There will be no amortization or interest in relation to the lease.
FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE
A company enters into a three-year operating lease agreement effective
January 1, year 1. The amounts due on
the first day of each year are $25,000 in year 1, $30,000 in year 2, and $35,000 in year 3. What amount, if any, is the related liability on the first day of year 2?
$5,000
$65,000
$0
$60,000
$5,000
.
EXPLANATION:
Operating lease expense must be recognized evenly over the lease term.
Dividing the total lease payments by the total number of payment periods gives the uniform yearly lease expense of $30,000 ((25,000 + 30,000 + 35,000) / 3)= 30,000).
The $5,000 liability for deferred lease payments at the first day of year 2 is calculated by comparing lease expense recognized with actual rent paid as of that date (60,000 – 55,000 = 5,000).
FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE
A company has an operating lease for its office space. The lease term is 120 months and requires monthly rent of $15,000. As an incentive for the company to enter into the lease, the lessor granted the first eight months’ rent at no cost.
What amount of monthly rent expense should be recognized over the life of the lease?
$14,000
$15,000
$16,072
$14,062
$14,000
EXPLANATION:
The total amount paid over the course of the lease term is $15,000 x 112, or $1,680,000.
GAAP requires that lease expense be recognized uniformly over the lease term, including in cases of free rent.
The free rent does not reduce the length of the lease term, which is 120 months, with a monthly allocation of $1,680,000 / 120, or $14,000.
FAR 12.01 - ACCOUNTING FOR LEASES: OPERATING LEASE
Douglas Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is seven years.
The lease is for five years, and Douglas can purchase the machinery at fair market value at the end of the lease.
What is the depreciable life of the leased machinery for financial reporting?
Seven years
Five years
Six years
Zero
Five years
EXPLANATION:
The lease is a capital lease because the lease term of 5 years is more than 75% of the 6 year useful life.
Because this it is a capital lease with no title transfer and no bargain purchase option, for financial reporting the lessee must depreciate the asset over the shorter of either the economic useful life (six years) or lease term (five years).
