LEASES

Question 1

Calc, the warranty expense?

Answer 1

stero sales of the system 3,000,000 x 4% = 120,000 warranty expense

assurance type of warranty creates a loss contingency

Question 2

When should the lessee recognize a lease liability and right of use asset?

Answer 2

for both the finance and operating lease the lessee must recognize the lease liability and right to use asset at the same amount at the commencement date meaning the start of the lease

Question 3

When are lease expense recognized?

Answer 3

beginning of the lease term

Question 4

2 reasons why loss contingencies are accrued?

Answer 4

onces the loss is actually “Probable”

the amount of loss is reasonably estimated

Question 5

The first annual payment consist of what?

Answer 5

The lease liability but not the interest expense bc the interest expense is apart of lease liability

The 1st payment reduces lease liability however there is no interest

Question 6

the only time when the finance lease and operating lease will have the same accounting?

Answer 6

when the reduction of the lease liability is recorded when the periodic lease payments are made

Question 7

When are gain contingencies recognized?

Answer 7

when they’re realized

Question 8

What are 5 criteria for a finance lease?

Answer 8

1. The ownership of the leased asset is transferred to the “Lessee” by the end of the term
2. lease includes an option to purchase the leased asset that the lessee is reasonably certain to exercise
3. the lease is 75% of the remaining econ life of the leased asset
4. the present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value (generally considered as 90%) of the leased asset,
5. the leased asset is so specialized that it is expected to have no alternative use to the lessor at the end of the lease term

Question 9

What implicit rate is used for the lease?

Answer 9

which is rate is known to both parties lessee and lessor

Question 10

example of where the the present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially by aleast 90%?

Answer 10

present value of lease payments are 13,000 / 14,000 fair value = 93% so it meet the requirement as a finance lease

Question 11

What is the lessor finance lease called?

Answer 11

Sales type lease for the lessor

Question 12

For a short term lease can a lessee elect to recognize the right to use asset and liability?

Answer 12

No bc the lessee recognizes lease payments as rent expense on the straight line basis over the full lease term

Question 13

When calc the Present Value of the lease what are the main things you need to look for?

Answer 13

Remember to use lease term NOT the useful of the asset mentioned

For the interest rate use the rate is known usually by both parties of the lease

Question 14

Calc, the right to use asset for the lessee?

Answer 14

Start off with the monthly payment made which is 90,000 x 6.145 = 553,050

Question 15

Calc, the lease liability for YEAR 1? for the lessee

Answer 15

first annual payment 153,000 x 5.5 (9% is known by both parties = 841,500

841,500 - 153,000 = 688,500 lease liability Year 1

Question 16

Calc, the right to use asset for the finance lease as amortization expense ?

Answer 16

505,000 / 9 years for the lease = 56,111 right to use asset

Question 17

Calc, the interest expense for the finance lease?

Answer 17

Using the effective interest method and the Formula is
P x I x T

379,000 x 10% x 1 = 37,900

Question 18

Calc, the lease liability for the finance lease liability?

Answer 18

Step 1 - calc the interest included

75,000 Carrying amount x 10% lessor implicit rate = 7,500 interest

Step 2 - calc the principal component

9000 cash - 7500 interest = 1500

Step 3 - calc the lease liability

finance lease liability 75,000 - 1500 = 73,500 finance lease liability

Question 19

Calc, the lease liability immediately after the first required for the finance lease with guarantees residual values?

Answer 19

Here we will start off with the annual payment of 13,000 x 4.240 PV = 61,620

10,000 residual value x 0.650 = 13,000

61,620 - 13,000 = 48,620 lease liability

Question 20

Calc, the reduce the lease liability using the effective interest method?

Answer 20

Step 1 - subtract the total lease amount by the annual lease payment

270,000 lease liability recorded - 40,000 annual rent = 230,000 Carrying amount beginning

Step 2 - Calc the interest expense

230,000 carrying amount x 10% = 23,000 interest expense

Step 3 - subtract the annual payment and interest expense

40,000 annual payment
23,000

= 17,000 lease liability expense

Question 21

Calc, the BOY liability balance for the lease using the effective interest method?

Answer 21

Step 1 - calc the interest expense

PV of the lease payments 112,500 x 8% = 9000 interest expense

Step 2 - subtract the annual pay from interest expense

10,000 annual payment - interest expense 9000 = 1,000 reduction in the lease obgligation

Step 3 -

PV of the lease payments 112,500 - 1,000 reduction in the lease obigligation = 111,500

Question 22

Calc, the interest expense at the end of the year of the lease?

Answer 22

Step 1 - calc the the Carrying amount of the beginning of the period

60,000 annual pay x 5.0757 = 304,542 carrying amount

Step 2 - calc the interest expense

carrying amount 304,542 x 5% interest rate = 15,227 interest expense

Question 23

Calc, the amount that should be recognized as amortized expense on the right to use asset using the straight line method?

Answer 23

Present of the lease payment 240,000 since this is straight line method we need to subtract the salvage value 20,000

240,000 - 20,000 = 220,000
divide it by the economic useful life 8 years

220,000 / 8 years = 27,500

Question 24

When the lessee considers the purchase option of the finance lease. What period of time should the lessee amortize the right to use asset?

Answer 24

the econ life of the asset

Question 25

purchase option or transfer of lease term do we use the lease term or useful life to amortize?

Answer 25

we use the useful to amortize this will in result cause a amortization expense in the income statement

Question 26

Are lease liability and right to use asset used asset at the lease commencement date?

Answer 26

Yes for both finance and operating leases lease liability and right to use asset are required to be used

Question 27

Are finance and operating leases liability presented separaetly or together?

Answer 27

they are reported separately from each other and other liabilities on the balance sheet

Question 28

Calc, the operating lease monthly expense that should be recognized over the life of the lease?

Answer 28

operating lease lease expense is recognized by using the straight line basis

Step 1 - calc the lease payment

15,000 monthly payment
120 - 9 = 112

15,000 x 112 months = 1,680,000 lease payment

Step 2 - calc the lease expense

1,680,000 / 120 = 14,000 lease expense

Question 29

Calc, the operating lease lease expense for the lease agreement ?

Answer 29

Step 1 - calc the lease payment

28,900 per month x 56 months beginning OCT 1 = 1,618,400

Step 2 - calc the lease monthly with 60 months

1,618,000 lease payment / 60 26,973

Step 3 -

26,973 monthly expense
x 7 months June 1 - Dec 31

= 188,813 lease expense for the current year

Question 30

Are Contingences losses both expenses and liabilities required to be accrued?

Answer 30

Yes, both expenses and liabilities are required to be disclosed

Question 31

contingency losses reasonably possible should they be disclosed and accrued?

Answer 31

Only disclosed not accrued

Question 32

Calc, the contingent liability for the note disclose financial statements for the year Dec 31, Year 4?

Answer 32

When a note receivable is discounted. Gain or Loss is removed from the statement. contingent liability is disclosed in a note

Question 33

Calc, the amortization amount of the right to use asset?

Answer 33

Step 1 - calc the lease expense

55,000 payment for 1-7 years 55,000 x 7 = 385,000 + 100,000 final payment = 485,000 / 8 years
= 60,625 lease expense

Step 2 - calc

final payment 100,000 - 55,000 annual payment = 45,000 x 0.540 = 24,300

55,000 * 5.747 = 316,085

Step 3 - calc the amortizated with the 8%

316,085 x 8% = 27,231

Step 4 - calc the right to use asset lease expense 60,625 - 27,231 = 33,394

Question 34

For which type of lease is a lessee not required to recognize the right to use asset and lease liability?

Answer 34

short term leases

Question 35

What is recognized by the lessee at the lease commencement date?

Answer 35

For both Operating & Finance lease, a lessee must recognize a lease liability and right to use asset at the lease commencement date

Question 36

What are the two components of the periodic lease payment recognized by the lessee in a finance lease?

Answer 36

Each periodic lease payment made by the lessee consists of
Interest expense
Interest expense = Lease liability at the beginning of the period × Discount rate

Reduction of the lease liability
Reduction of the lease liability = Periodic lease payment – Interest expense

NOTE: If the first payment is received at the lease commencement date, its only component is the reduction of the lease liability. No interest expense is recognized.

Question 37

How is a right-of-use (ROU) asset amortized by a lessee in a finance lease?

Answer 37

amortized by using the straight line method

Question 38

How are finance lease payments presented in a lessee’s statement of cash flows?

Answer 38

repayment of the principal portion (cashflow from financing activities)

Payment of interest (cashflow from operating activities)

Question 39

Calc, the current liabilities for the operating lease for equipment?

Answer 39

Step 1 - Calc the lease liability

135,000 opening balance
20,000. initial payment

= 115,000 lease liability

Step 2 - calc the interest expense

115,000 lease liability
10%. effective interest

= 11,500 interest expense

Step 3 - calc the interest liability

20,000 cash
11,500 interest expense

= 8,500 current liability

Question 40

How are lease expense recognized for operating lease?

Answer 40

Recognize lease expense for the same amount each period of the lease term

Question 41

Calc, the estimated liability for warranties?

Answer 41

3000
30,000 replacement
36,000 warranty expense
9,000 12/31 year 1

Question 42

How is revenue from a service type warranty is recognized ?

Answer 42

over the coverage period

Question 43

Calc, the rent expense for the monthly income statement Year 3?

Answer 43

Year 1 12 x 3,000 = 36,000
Year 2 12 x 4,500 = 54,000
Year 3 12 x 6,000 = 72,000
Year 4 12 x 6,000 = 72,000

= 234,000 / 4 years for the lease
= 58,500 / 12
= 4875 rent expense

Question 44

Calc, the finance lease carrying amount?

Answer 44

The carrying amount of the right to use asset

PRESENT VALUE OF THE LEASE 50,000
PRESENT VALUE \PURCHASE OPTION 20,000

PRESENT VALUE OF LEASE PAYMENT 70,000
USEFUL LIFE 10

RIGHT TO USE ASSET 7000

CARRYING VALUE OF ASSET LEASE 63,000

Question 45

Calc, the amortization amount of the right to use asset?

Answer 45

Step 1 - calc the lease expense

Lease Expense 55,000 (payment through 1-7 years) x 7 + 100,000 / 8 years

= 60,625 annual lease expense

Step 2 - Calc, the interest expense

start off with the annual payment 55,000 x 5.747 = 316,085

100,000 - 55,000 = 45,000
45,000 x 0.540 = 24,300

316,085 - 24,300 = 340,385 x 8% = 27,230

60,625 - 27230 = 33,395

Question 46

Extended warranty that is purchased separately that is classified as a service type warranty, how will the company recognize the warranty for the sale?

Answer 46

for the year it was recognized over the coverage period

Question 47

When no contingent liability is recognized how is that recognized?

Answer 47

as a noncontingent liability

Question 48

Calc, the current liability for the operating lease leased under equipment?

Answer 48

Operating lease obligation was recorded 135,000 - 20,000 = 115,000

115,000 x 10% = 11,500
20,000 - 11,500

Question 49

Calc, the rent expense monthly income statement?

Answer 49

Year 1 - 36,000
Year 2 - 54,000
Year 3 - 72,000
Year 4 - 72,000

= 234,000 / 4 years = 58,500
= 58,500 / 12
= 4875