Leases

Question 1

On Jan.1 of the current year, Wren Co. leased a building to Brill under an operating lease for 10 years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciated $12,000 per year. For this year, Wren incurred insurance and property tax expense totaling $9,000. Wren’s rental income for the year should be:

$27,500
$29,000
$35,000
$36,500

Answer 1

$27,500

Question 2

Residual value

Answer 2

Guaranteed amount that the lessee expects to be the value at the end of the lease

If expected residual value is breather than the guaranteed residual value, one can ignore it and exclude from lease payments

Question 3

Factors an entity should assess in determining whether the lessee has a significant incentive to exercise an option to extend the lease include all of the following except:

The amount of lease payments in any optional period

The amount of contingent payments

Costs relating to the termination of the lease

The amount of the fixed lease payments for the original lease period

Answer 3

The amount of the fixed lease payments for the original lease period