FAR 12.05 - LEASES INVOLVING REAL ESTATE Flashcards
FAR 12.05 - LEASES INVOLVING REAL ESTATE
Juneau Corporation leased land and a building, which has a remaining useful life of 40 years, from Ark and Sass partnership for 35 years.
At the inception of the lease, the land had a carrying value of $40,000 and a fair value of $50,000.
The building had a carrying value of $40,000 and a fair value of $250,000.
How will Juneau record the lease?
The land and building as a single capital lease
The land as a capital lease and the building as an operating lease
The land as an operating lease and the building as a capital lease
The land and building as a single operating lease
The land and building as a single capital lease
EXPLANATION:
The lease neither transfers title to the lessee nor includes a bargain purchase option. As a result, the land is evaluated to determine if it is significant.
Since the land, with a fair value of $50,000, represents less than 25% of the $300,000 fair value of the land and building, the land will be ignored and the lease will be accounted for as a building lease.
The 35 year lease term exceeds 75% of the useful life of the building and, as a result, the lease will be recorded as a single capital lease.
FAR 12.05 - LEASES INVOLVING REAL ESTATE
Green Co. incurred leasehold improvement costs for its leased property. The estimated useful life of the
improvements was 15 years.The remaining term of the nonrenewable lease was 20 years. These costs should be?
Capitalized and depreciated over 15 years.
Expensed as incurred.
Capitalized and depreciated over 20 years.
Capitalized and expensed in the year in which the lease expires.
Capitalized and depreciated over 15 years.
EXPLANATION:
A lessee must capitalize leasehold improvements and amortize them over the shorter of their useful life or the lease
term.
