Section 3F - Leases Flashcards

Question

Both quantitative and qualitative disclosures are required for both the lessor and lessee. Which of the following is an incorrect matching of the information and party to the lease? Lessor: contractual obligations for each of the five succeeding years Lessee: information about risks associated with residual values Lessor: gross investment and net investment in the lease Lessee: operating lease costs

Answer 1

Lease obligations and lease costs are generally related to the lessee, while revenues and investments are generally related to the lessor. ## Footnote **Information about risks associated with residual values is reported by the lessor, not the lessee, as it affects the overall collectibility of the lease receivable.**

Answer 2

Depreciation expense: No; Interest revenue: Yes ## Footnote A lease with transfer of title meets the criteria to be classified as a sales-type lease. The lessor (Able) should remove the asset from the books, record a receivable, and recognize interest revenue from the receivable.

Answer 3

IDC include items such as commissions and payments made to current tenants to obtain the lease. **IDC are capitalized (not expensed)** and include only those costs that entity would not have incurred if the lease had not been entered into (i.e., must be incremental costs, not internal, such as commissions and payments made to current tenants to obtain the lease). The lessee (not the lessor) includes IDC in the measurement of a right-of-use (ROU) asset.

Answer 4

Profit on sale, $720,000; Interest revenue, $146,000 1. Here that gross profit recognized immediately is $720,000, the difference between the selling price and the cost of the equipment ($3,520,000 – $2,800,000). 2. After the first payment is received, the remaining lease obligation will be paid like a long-term liability, with interest accruing on the unpaid balance. 3. The unpaid balance for the first year is generally the difference between the selling price and the rent payment (when the payment is made at the start of the year). 4. The unpaid balance for interest to accrue on is thus $2,920,000 ($3,520,000 – $600,000). The interest accrues from the payment in July to the end of the year, thus $146,000 ($2,920,000 × 0.1 × 6/12).

Answer 5

$56,111 * Tell Co. must treat the lease as a finance lease because the present value of the lease payments exceeds 90% of the fair value (sales price) of the equipment. * Tell's cost equals the present value of $505,000. * The question does not indicate or imply that Tell guarantees any residual value or that ownership transfers at the end of the 9-year lease. * Therefore, the depreciable/amortizable cost of $505,000 must be charged to depreciation/amortization over the period of use, which is the lease term of 9 years. The depreciation/amortization expense for the current year (one full year's depreciation/amortization) is $505,000 ÷ 9 years, or $56,111.

Answer 6

exercise price of all purchase options. ## Footnote The exercise price of a purchase option is included in the initial measurement of a lease liability only if the lessee has a significant economic incentive to exercise that option.

Answer 7

Amount for required period, $500,000; Aggregate amount for period thereafter, $300,000 The lessee in a lease context must make disclosures as to future required payments under the lease. One must disclose the payments required under the lease for the next 5 years (here that is 5 × $100,000, or $500,000), as well as disclosing the total amounts to be paid thereafter or $300,000 (the 3 remaining years' obligations at $100,000 a year).

Answer 8

agreement amount, timing, and uncertainty leasing arrangement

Answer 9

1. Finance 2. Operating 3. one 4. Variable 5. Sublease 6. sale/leaseback 7. operating , finance 8. discount 9. ROU 10. five 11. maturity

Answer 10

$17,000 * When accounting for a lease as a sales-type or direct financing lease for a lessor, one of the lease criteria must be met. In this situation, one criterion is a transfer of title at the end of the lease. * Also, when accounting for one of these leases from the perspective of the lessor, one must further decide if the lease is sales-type or direct financing. * Since the transfer of title criterion is met, this is considered a sales-type lease and there could be an element of gross profit recognized by the lessor at the beginning of the lease, generally based on the difference between the sales price and the cost of the item to the lessor. Here that gross profit recognized immediately is $17,000, the difference between the selling price and the cost of the equipment ($77,000 – $60,000).

Answer 11

1 year. The core principle of the lessee accounting model is that an entity should recognize assets and liabilities arising from leases with a lease term of more than 1 year.

Answer 12

$14,000 Total lease expense should be ratably recognized over the life of the lease (on a straight-line basis). Total lease expense is $1,680,000 [(120 months − 8 free months) × $15,000]. Monthly lease expense is $14,000 ($1,680,000 ÷ 120-month lease term). First year - first 8 months free (15,000 × 4 months) $ 60,000 _Years 2-10 (12 months × $15,000 × 9 years) 1,620,000_ Total rent on the lease $1,680,000 _Divide by lease term of 120 months 120_ Rent expense per month $ 14,000

Answer 13

Qualitative: a reconciliation of opening and closing right-of-use (ROU) asset balances * Lease disclosure requirements are quite extensive for both the lessor and lessee. * The guiding objective is that lessees and lessors provide disclosures that enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. * Information disclosed is both qualitative and quantitative. Qualitative information describes the quality of something, while quantitative describes the quantity (i.e., amount) of something. * A reconciliation is quantitative in nature, not qualitative.

Answer 14

The estimated useful life of the leased asset is 12 years. * For a lease to be treated as a finance lease, only one of the five criteria must be met (FASB ASC 842-10-25-2). * One of the criteria is: “The lease term is for the major part of the remaining economic life of the underlying asset. * However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.” FASB ASC 842-10-55-2 uses the former 75% and 90% rules as benchmarks. * The lease term of 10 years is more than 75% of the estimated useful life of the leased asset (12 years × 0.75 = 9 years).

Answer 15

$16,300 ## Footnote In an operating lease, the lessee’s amortization expense is plugged so that total lease expense (interest plus amortization) is a straight-line amount. Therefore, lessees that hold operating leases with uneven payments (e.g., advance payment, scheduled rent increases, or scheduled rent decreases) must average the payments. Total lease expense for Year 8 is $16,300 [($15,300 + $16,400 + $17,200) ÷ 3].

Answer 16

II only . FASB ASC 842-40-30-2 provides that if the lease is not at fair value, the entity should adjust the sale price and record any gain as additional financing. FASB ASC 842-40-55-24 provides an example where the gain is partially recognized and partially deferred as additional financing. Item I (deferred if the sale is at fair value) is incorrect as the deferral would only occur if the sale is not at fair value.

Answer 17

20X3 interest revenue recognized; 20X3 amount recognized smaller than 20X2 ## Footnote if you look at the # of yrs they will lease makes it a capital lease.8 yrs of a 10 yr lease makes it 80% therefore a capital lease and if it's a capital lease you recognize interest revenue. Since it qualifies as a capital lease, interest revenue is recorded. If this were an operating lease, then rent revenue would be recorded. As such, JCK will recognize an interest bearing receivable. Each payment received will be allocated to interest first with the remainder allocated to reducing the principal balance of the receivable. Since the principal balance is reduced each period, the amount allocated to interest will decrease each period. As a result, JCK will recognize interest revenue and the amount will decrease each year.

Answer 18

$688,500 The finance lease obligation that a lessee recognizes on their books is based on the present value of the lease payments. The lease payments are the annual lease payments made at the beginning of each year of $153,000. The discount rate to get the present value of the payments is the rate implicit in the lease, unless that cannot be readily determined. In the case the lessee cannot determine the implicit rate, the lessee is required to use its incremental borrowing rate. Here, the implicit rate in the lease is known to the lessee, which is 9%. Thus, the amount of the lease liability will be based on the present value factor for an annuity due of 7 years based on 9% (5.5) multiplied by the annual rental of $153,000: * 5.5 × $153,000 = $841,500 However, since the first payment was just made, that amount must be lowered to get the remaining liability at the end of the year: * $841,500 − $153,000 = $688,500

Answer 19

termination contingent optional

Answer 20

noncancelable extend , exercise terminate lessor

Answer 21

$188,813. The commencement of a lease is the date of the lease agreement. Rental expense should be as of that date. When the lease payments begin later than the commencement date, the lease payments must be spread evenly over the longer period of time, which includes the months between the commencement date and the beginning of the lease payments. * $28,900 × 56 months = $1,618,400 * $1,618,400 ÷ 60 months = $26,973.33 * $26,973.33 × 7 months (June through December) = $188,813

Answer 22

commencement , rent-free

Answer 23

$2,675,000 * The lessee should capitalize the present value of the lease payments. The lease payments in this lease were the seven annual beginning-of-the-year payments of $500,000 each. * There was not a purchase option, and the lessee did not guarantee any portion of residual value. * 3The amount that should be capitalized is the $500,000 annuity payment times the present value of an annuity due for seven years (5.35), or $2,675,000.

Answer 24

$66,500. This is a finance lease, and the lease liability for the lessee at the beginning of the lease is based on the present value of the lease payments, including the purchase at the end of the lease, discounted to their present value (at the beginning of the lease) based on the implicit interest rate specified in the lease itself. Thus, the lease liability here is based on the $10,000 rental payments each year, plus the $10,000 purchase at the end of the 10th year. The present value of both of these items at the beginning of the lease, based on a 12% interest rate would be the $10,000 rent × 6.328 (the present value of an annuity due for 10 periods at 12%) = $63,280. Add this amount to the $10,000 × 0.322 (the present value of $1 at 12%, for 10 periods) = $3,220, and the two amounts add to $66,500.

Answer 25

Multiply the carrying amount of the lease liability by the lease’s discount rate .Finance leases use the effective interest method, which calculates interest expense by multiplying the discount rate times the carrying value.

Answer 26

the amount of any fee related to extending the initial lease term. The right-of-use (ROU) asset is initially measured as the lease liability plus any lease payments made to the lessor at or before the commencement date, minus any lease incentives received, plus any initial direct costs incurred by the lessee. The lessee should include initial direct costs in its initial measurement of the ROU asset and the initial direct costs are deferred and amortized over the term of the lease on a straight-line basis for both finance leases and operating leases. The ROU asset does not include fees to extend the initial lease term.

Answer 27

The lessee includes the nonlease component when computing the present value of the lease payments. **The other answer choices are correct:** 1. If the component cost represents a transfer of a good or service to the lessee, it is treated as a nonlease component. 2. Nonlease components are expensed by the lessee. 3. The lessee allocates the consideration to lease and nonlease components on a relative standalone price basis.

Answer 28

expensed at the beginning of the lease * Costs incurred by the lessor that are associated directly with originating a lease, that are essential to acquire that lease, and would not have been incurred had the lease agreement not occurred are called initial direct costs (IDC). * The method of accounting for IDC depends on the nature of the lease. * For a sales-type lease with selling profit, initial direct costs are expensed in the period of "sale"—that is, at the beginning of the lease. * For an operating lease, direct financing lease, and sales-type lease without selling profit, initial direct costs are deferred (recorded as an asset) and expensed over the term of the lease. Initial direct costs are not contra assets.

Answer 29

The present value of the lease payments being a major part of the fair value The present value of the lease payments being substantially all (not a major part) of the fair value is one of the five finance lease criteria. The five FASB criteria for a finance lease are (1) transfer of ownership, (2) purchase option reasonably certain to exercise, (3) the lease term is the major part of the economic life of the asset, (4) the present value of the lease payments is substantially all of fair value, and (5) there is no alternative use for the asset.

Answer 30

Sale/leaseback transactions occur when a transferor sells an asset to a transferee and then the transferee leases that same asset back. ## Footnote Sale/leaseback transactions occur when an entity (transferor) sells an asset to another entity (transferee) and then the **transferor** leases that same asset back from the transferee. ***The other answer choices are correct statements:*** If the sale/leaseback transaction is not at fair value, the entity should adjust the selling price of the asset. Sale/leaseback transactions generally involve fixed assets such as real estate. Sale/leaseback transactions may provide financing, accounting, or tax benefits.

Answer 31

$231,652 After the commencement date, both Bradley and Kravis account for the lease by treating $90,000 of the annual $120,000 payment as lease payments. The remaining $30,000 of annual payments are discounted over 10 periods at 5% and are accounted for as payments made to settle the financial liability of $231,652 recognized by Bradley and payments received to settle the financial asset of $231,652 recognized by Kravis ($30,000 × 7.72173).

Answer 32

The lessor records a lease receivable. The lessor does not record a receivable; rather, the lessor treats operating leases as a rental arrangement and records rent revenue on a straight-line basis over the lease term. The lessor does not derecognize the leased asset. Operating leases are considered “non-debt” liabilities to separate them from traditional liabilities, and are therefore excluded from debt ratios. Operating leases cannot meet any of the finance lease criteria, and the rights and responsibilities do not transfer to the lessee but are retained by the lessor.

Answer 33

Operating lease * The lease is an operating lease to Rocky Bottom Cafe because the present value of the lease payments is not “substantially all” of the fair value of the asset ($5.3 million ÷ $6.1 million = 87%). * While FASB ASC 842 no longer applies a "bright line" test to the classification of leases, 90% of fair value is generally considered the cutoff in determining “substantially all” of the fair value. * Absent information that Rocky Bottom Cafe applies a different standard in its accounting policies, this would not represent substantially all of the fair value. None of the five classification criteria for finance leases are met.

Answer 34

$9,000. This problem tests the rule that straight-line recognition should be used to record the rent revenue, regardless of the payment schedule. At $1,000 per month (straight-line), total revenue recognized by the end of the second year should be $24,000. Since cash was actually received at that point in the amount of $15,000 ($9,000 + $6,000), a receivable of $9,000 remains in the rent receivable account for the difference ($24,000 − $15,000).

Answer 35

Over the life of the lease Fees associated with acquiring a contract—including a lease contract—are considered initial direct costs under and are capitalized in the right-of-use asset and amortized over the life of the lease.

Answer 36

$5,750 Initial amount of lease $135,000 _Less first payment 20,000_ Lease amount applicable to last half of 20X1 $115k _Times interest rate (10% x 6/12 year) x .05_ Interest revenue for 20X1 $ 5,750

Answer 37

The lease payments plus residual value The lessor shall measure the lease receivable in a direct financing lease initially as the sum of the following amounts: * The lease payments * The unguaranteed residual value accruing to the benefit of the lessor * The guaranteed residual value by the lessee or third party

Answer 38

payments unguaranteed residual value

Answer 39

27,500 ## Footnote FASB ASC 842-20-35-8 states, “A lessee shall amortize the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. However, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, the lessee shall amortize the right-of-use asset to the end of the useful life of the underlying asset.” Thus, Nori recognizes depreciation expenses as follows: Depreciation expense for 20X1 = (Cost - Salvage value) / Useful life = ($240,000 - $20,000) / 8 years = $220,000 / 8 = $27,500

Answer 40

$51,600 **Annual lease payment = Fair value of equipment / Present value factor** = $323,400 / 4.312 = $75,000 **Total lease amount collected = Annual lease payment x 5 years** = $75,000 x 5 = $375,000 **Interest revenue = Lease amount collected - Fair value of equipment earned** = $375,000 - $323,400 = $51,600

Answer 41

**The lease contains a purchase option that is reasonably certain to be exercised.** 1. Title (ownership) transfers to the lessee by the end of the lease term. 2. The lease contains a purchase option that the lessee is reasonably certain to exercise. 3. The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life. 4. The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. “Substantially all” is considered 90% or more of the present value. 5. The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term.

Answer 42

$4,875 Non-level lease payments must be expensed on a straight-line basis unless another systematic method is more representative.

Answer 43

Operating lease * Restaurant Equipment, Inc., would classify the lease as an operating lease. Although bright lines have been removed, FASB ASC 842-10-55-2 establishes that the former rules (75% rule and 90% rule) would be a reasonable approach to use as a benchmark. * The lease is for 50% (5 years/10 years) of the economic life. The present value of the lease payments is 87% ($5.3 million ÷ $6.1 million = 87%) of the fair value of the underlying asset, representing less than “substantially all” of the fair value of the asset. * Without further information, this percentage would not result in the lease being classified as a sales-type lease with selling profit. * Therefore, Restaurant Equipment, Inc., should classify this as an operating lease if its accounting policy adheres to the 90% rule.

Answer 44

$15,227 The initial obligation would be capitalized at $60,000 × 5.0757 = $304,542. Initial obligation $304,542 _Interest rate (5%) x .05_ Interest expense $ 15,227

Answer 45

Only incremental costs will qualify as initial direct costs. Only incremental costs qualify as initial direct costs subject to capitalization in both lessor and lessee accounting. The same definition is used by both lessors and lessees: these costs are (1) those that the entity would not have incurred if the lease had not been entered into and (2) are the same for both the lessor and lessee. Although the definition of what qualifies as an initial direct cost is the same for the lessee and lessor, the lessee and lessor may have different costs associated with the lease. Initial direct costs are capitalized and amortized over the life of the lease.

Answer 46

incurred lessor and lessee

Answer 47

$105,000 The landscaping costs represent a leasehold improvement. Leasehold improvements need to be amortized over the remaining term of the lease at the time of the improvement or the improvement's own useful life, whichever is shorter. Since there is no information indicating that the lease will be renewed beyond its original term, the most certain remaining lease term is eight years, which is shorter than the 15-year life of the landscaping. Therefore, the cost should be amortized over eight years. Recall that carrying value is amortized cost (cost less accumulated amortization).

Answer 48

a gain appearing on the income statement. ## Footnote Per the question information, this would qualify as a sale/leaseback transaction. If the sale/leaseback transaction was at fair value, the gain can be recognized. If it was below fair value, the gain should be deferred and treated as additional financing.

Answer 49

The beginning present value of the lease did not include the present value of the purchase option. * The liability under a finance lease obligation should be equal to the discounted present value of the lease payments, which includes a purchase option reasonably certain to be exercised. * If the calculated liability includes only the discounted present value of the periodic payments to be made over the 5-year lease term, the liability will be shown as paid in full with the last periodic payment. * Therefore it appears Cott did not include the amount of its purchase option in the lease payments when calculating its lease liability.

Answer 50

The shipping company will not derecognize the asset in the current year. * The first step is to determine if this transaction qualifies as a sale. * Per FASB ASC 842-40-25-2, a sale has not occurred if the leaseback could be classified as a finance lease or a sales-type lease. * Since title will transfer back to the shipping company, this does not qualify for sale/leaseback treatment. The shipping company will not derecognize the asset and will recognize the consideration received as a financial liability.

Answer 51

For lessee operating leases, the expense recognized would be the straight-line amount of the future lease payments and deferred initial direct costs. * .Finance leases use the effective interest method, not the straight-line method. * This results in yearly interest expense differences. For operating leases, the yearly expense remains constant (straight-line) since it combines the lease liability and amortization into one yearly amount. * Lessee operating leases show one constant cost/expense that combines the lease liability unwinding and asset amortization versus finance leases that separate the lease liability unwinding and asset amortization.

Answer 52

Both finance leases of lessees and long-lived assets of lessors subject to operating leases FASB ASC 360-10-15-4 lists the following types of leases that are tested for impairment: 1. Right-of-use assets of lessees 2. Long-lived assets of lessors subject to operating leases 3. Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting 4. Long-term prepaid assets

Answer 53

Right-of-use operating oil and gas prepaid

Answer 54

Both I and II . Both of the listed criteria must be met in order for the ROU asset to be considered a separate lease component: * The underlying asset is not highly dependent on, or highly interrelated with, other underlying assets in the contract. * The lessee can benefit from use of the asset either on its own or together with other, readily available, resources.

Answer 55

lease payments represent more than half (\>50%) of the asset fair value. Lease payments must represent substantially all of the asset fair value, not more than half (\>50%). The other answer choices are correct. A lessee uses the following factors to determine if a lease is a finance or operating lease: 1. Inclusion of a purchase option that the lessee is reasonably certain to exercise 2. Transfer of the asset title at the end of the lease 3. The lease term is for a major portion of the asset’s life.

Answer 56

purchase option title assets life

Answer 57

The guidance in FASB Topic 842 applies to leases on intangible assets, inventory, and assets under construction. . FASB Topic 842 does not apply to (1) leases of intangible assets, inventory, and assets under construction; (2) leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources; or (3) leases of biological assets, including timber. The customer or the lessor can control the asset. A low-value exemption, along with a short-term exemption, is contained in FASB ASC 842.

Answer 58

an operating lease. FASB ASC 842-10-25-9 requires that a modified lease not accounted for as a separate contract to be reassessed as of the modification date and be accounted for in accordance to FASB ASC 842-10-25-10 through 25-14. The lease modification changed the lease classification from a finance lease to an operating lease effective March 1, 20X1.

Answer 59

for many organizations. Leasing provides access to assets and financing. It reduces risk exposure related to owning an asset. Almost all entities enter into some form of lease (e.g., rental of office space).

Answer 60

Selling profit or loss is recognized immediately in a sales-type lease while it is deferred in a direct financing lease. * Both sales-type leases and direct financing leases require the lessor at commencement to derecognize the leased asset and recognize the net investment in the lease. * Sales-type leases recognize a selling profit at commencement whereas selling profits are deferred in direct financing leases.

Answer 61

The discount rate is the rate that the lessee would expect to pay a bank if funds were borrowed to buy (rather than lease) the asset. * The rate that the lessee would expect to pay a bank if funds were borrowed to buy (rather than lease) the asset is the lessee’s incremental borrowing rate, not the discount rate. * The discount rate is the rate implicit in the lease and is the rate that the lessor “desires” to achieve a certain lease payment. If the lessee does not know the implicit rate, they are allowed to use the incremental rate instead.

Answer 62

amortized over the period of the lease as interest revenue using the effective interest method * Some of the revenue recognized by a lessor on a sales-type lease is financing revenue, interest revenue included within the rent payments. * The lease transaction is treated as a purchase on credit, and part of the payments is treated as an interest element to the transaction, using the interest rate implicit in the lease and the implied principal financed by the rental payments using an effective interest rate (the implicit rate)..

Answer 63

finance lease. The lessee determines that the lease is a finance lease because (1) the lease term is for a significant portion of the asset’s life (83.3%) and (2) the present value of the lease payments represent a significant portion of the asset’s fair value (92.7%).

Answer 64

$66,000 The cost of the installation of walls and offices should be capitalized as a leasehold improvement and amortized over the lease term. _Clark Co.'s December 20X1 office utilization expense consists of:_ Monthly rent **$60,000** *Amortization of walls and offices* _($360,000 / 60 months = $6,000/month) **6,000**_ **Total $66,000** Note: The last month's rent is capitalized as prepaid rent and expensed the last month of the lease term. The refundable security deposit is an asset.

Answer 65

The residual value guarantee generally results in operating classification by lessees. ## Footnote Residual value guarantees generally result in finance classification by lessees.

Answer 66

residual value lease , ROU specified

Answer 67

$500,000 Sales-type leases give rise to profit to the lessor usually defined as the difference between the sales price and the carrying value of the asset. Present value of lease payments (i.e. sales price) $3,300,000 _Less carrying value of leased property 2,800,000_ Income to be reported for year ended December 31, 20X1 $ 500,000

Answer 68

Over the life of the lease ## Footnote FASB ASC 842-30-25-11 stipulates that the income shall be recognized on a straight-line basis unless another systematic and rational basis is more clearly evident. Since the bonus represents a deviation from a straight-line pattern of lease payments, it should be recognized in income in straight-line fashion over the life of the lease.

Answer 69

Both Lease M and Lease P as finance leases ## Footnote Lease M is a finance lease because the lease term is greater than or equal to 75% of the economic life of the property. Lease P is also a finance lease for the same reason.

Answer 70

Deferred Rent Revenue ## Footnote Handy Dandy would make the following journal entry on March 1, Year 5: Cash 20,000 Deferred Revenue 20,000

Answer 71

$312,000 FASB ASC 842-20-30-1 requires capitalization of the present value of lease payments for operating and finance leases. The contract does not contain a separate nonlease component (FASB ASC 842-10-15-28 and 55-143) for the real estate taxes since they are not considered a separate good or service. Therefore, they are included in the payment. Capitalized lease liability at 12/31/X1 (for nine years at 9%) = $ 52,000 x 6 = $312,000

Answer 72

The seller should account for any amounts received as a financial liability. * When the transaction is not considered a sale, the seller/lessee should not derecognize the asset and should account for any amounts received as a financial liability. * The buyer should not recognize the transferred asset and should account for any amounts paid as a receivable.

Answer 73

The right to use a new asset is obtained and the lease is priced at standalone market price. ## Footnote Both a lessee and a lessor should account for a lease modification as a new lease, separate from the original lease, when the lease grants the lessee an additional right of use not included in the original lease, and the additional right of use is priced commensurate with its standalone price (in the context of that particular contract).

Answer 74

January The commencement of a lease is the date of the lease agreement. Rental expense should begin as of that date.

Answer 75

Lease liability * In general, each lease payment would consist of two elements—interest expense on the amount owed during the preceding period and reduction in lease liability * . In the case described, “interest expense” would be zero (because the time period December 31, 20X1, to December 31, 20X1, produces no interest charge) so all of the initial payment is attributed to reduction of lease liability.

Answer 76

the estimated useful life of the asset at the commencement of the lease. * The inclusion of a purchase option which is reasonably certain to be exercised makes this a finance lease for the lessee. * As such, the lessee will retain ownership and possession of the asset after the end of the lease term. * Accordingly, the amortization period is the estimated useful life of the asset as of the beginning of the lease.

Answer 77

The lease contains a purchase option that is reasonably certain to be exercised.

Answer 78

$615,000 ## Footnote This lease qualifies as a finance lease because the lease term of 10 years exceeds 75% of the asset’s useful life of 12 years (10 \> 0.75 × 12 = 9). When a lease is considered a finance lease, then the lessee capitalizes the lease property as a right-of-use asset and recognizes a lease obligation for the present value of the lease payments. The lease payments are $100,000 a year at the end of each year, and their present value is $100,000 × 6.15 (present value of an ordinary annuity for 10 periods at 10%). Thus, the answer is $615,000: $100,000 × 6.15 = $615,000

Answer 79

The lessor recognizes interest revenue at the beginning of the lease term. The lessor recognizes interest revenue over the lease term, not at the beginning of the lease term.

Answer 80

$9,000. Depreciation (amortization) expense for 20X1 = ("Cost" - Salvage) / Useful life = $108,000 / 12 years = $9,000

Answer 81

$50,625 * If a purchase option is reasonably certain to be exercised, the lessee includes the present value of the exercise price in determining the right-of-use (ROU) asset and liability. * However, payments are not given in this question, but rather the value of the asset and the residual value. * Remy would record annual amortization of $50,625. * The expected residual value of $20,000 is deducted from the cost of $425,000 and the remaining $405,000 is amortized over the eight-year economic life of the asset as it is expected that the purchase option will be exercised.

Answer 82

$0. Since the transaction is recorded as a sale/leaseback, the gain is recognized at the lease's commencement on the income statement, not the balance sheet.

Answer 83

included as part of lease payments at present value. Per FASB ASC 842-10-30-5, at the commencement date, lease payments include fixed payments, variable lease payments, reasonably certain option exercise prices, payments for penalties, fees paid by the lessee to owners of a special-purpose entity, and amounts probable of being owed under residual value guarantees. Note: The lessee includes in the payment only the amount of the guaranteed residual value that is probable of being owed. If the expected residual value will be greater than the guaranteed residual value, then the lessee can ignore it.

Answer 84

present value guaranteed included remeasure True Unguaranteed

Answer 85

end lessor trie trie

Answer 86

12 months or less. The FASB defines a short-term lease as a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. (FASB ASC Glossary)

Answer 87

equal the present value of the lease payments at the beginning of the lease. ## Footnote FASB ASC 842-20-30-1, in a discussion of accounting and reporting by lessees, notes that at commencement the lessee shall measure a lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement and the right-of-use asset.

Answer 88

**_A lessee classifies a lease as either a finance or a sales-type lease at the commencement date._** The statement “A lessee classifies a lease as either a finance or a sales-type lease at the commencement date” is incorrect because lessees classify leases as operating or finance, not sales-type. **The other answer choices are correct statements:** 1. Under FASB Topic 842, there are no “bright lines” for fair value (old 90% test) or asset life (old 75% test). 2. The right-of-use (ROU) asset and the lease liability are initially measured at present value of the lease payments. 3. One of the criteria for identifying a separate lease component is that the underlying asset is not dependent on the other underlying assets in the lease.

Answer 89

estimated life of the underlying asset. **The estimated life of the underlying asset is a fixed amount and would not be an example of a variable provision.** _The other answer choices are examples of common lease provisions:_ 1. External market rate or index (e.g., LIBOR (London Interbank Offered Rate) or SOFR (Secured Overnight Financing Rate)) 2. Usage of the underlying asset (e.g., miles on a leased car) 3. Performance of the underlying asset (i.e., percentage of revenue generated from leased asset)

Answer 90

third party lessor , lessee commencement true

Answer 91

Lessees should first use the rate implicit in the lease, if known. * Both lessees and lessors discount lease payments at the lease commencement date using the rate implicit in the lease. * If the lessee does not know the rate implicit in the lease, it can use its incremental borrowing rate. * Only nonpublic entities can use their risk-free interest rate as their incremental borrowing rate.

Answer 92

Contingencies related to technological advances * Technological advances are generally not considered events which could trigger a change in lease payments. * he remaining answer choices (contingencies related to revenues, asset usage, and external market rates) are examples that could trigger a change in a year’s particular payment but not a change in the original measurement of the liability or receivable since these would be considered variable payments.

Answer 93

rent expense equal to the 20X1 lease payments. In addition to transfer of title and purchase option, FASB ASC 842-10-25-2 provides three additional criteria for determining whether a lease is a finance lease: 1. The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset FASB ASC 842-10-55-2 uses the former 75% and 90% rules as benchmarks. In Mollat's case the lease term is only 70% of economic life and the present value is only 80% of the equipment's fair value. The lease is, therefore, an operating lease and the lease payments should be reported as rent expense.

Answer 94

Finance The lessee must classify a lease as a finance lease instead of an operating lease if any one of the following five criteria is met: 1. The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life. 2. The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. Crane's lease meets criteria 3. and 4. (only one is necessary). For the lessee, no other criteria have to be met. Crane is the lessee; therefore, the lease is a finance lease for Crane.

Answer 95

Whether the present value of the lease payments constitutes a significant portion of the fair value of the leased asset

Answer 96

The lessee can use the incremental rate if the implicit rate is unknown. Both lessees and lessors discount lease payments at the lease commencement date using the rate implicit in the lease. Only the lessor must use the incremental rate; the lessee is permitted to use its incremental borrowing rate for purposes of discounting its lease payments if the lessee does not know the rate implicit in the lease.

Answer 97

For sales-type leases with selling profit, the lessor recognizes the profit ratably over the term of the lease. * For sales-type leases with selling profit, the lessor derecognizes the asset and records sales revenue, cost of goods sold, and a lease receivable (i.e., net investment in lease) at the beginning of the lease. * Selling profit is therefore also recognized at the beginning of the lease, not ratably over the term of the lease.

Answer 98

$73,500 * At December 31, 20X1, the total lease liability was $76,364 (the sum of the current portion of $1,364 and the long-term portion of $75,000). The $9,000 payment made on January 2, 20X2, was for the $1,364 current portion and the interest of $7,636 ($9,000 - $1,364). * After the January 2, 20X2, payment, the total lease liability is $75,000. Interest for 20X2 is $7,500 ($75,000 × 10% implicit rate). * Therefore, the reduction in principal that will be included in the January 2, 20X3, payment will be $1,500, which is the $9,000 payment minus $7,500 interest for 20X2. * This $1,500 represents the current portion of the lease liability. * Therefore, the long-term portion of the liability at December 31, 20X2, is the $75,000 total lease liability less the $1,500 current portion, or $73,500.

Answer 99

capitalized and depreciated over 15 years. The leasehold improvements will benefit a number of years and therefore must be capitalized and depreciated over the periods benefited. The improvements are expected to have a useful life of 15 years and should be depreciated over that period since it is shorter than the remaining lease term.

Answer 100

begins at the commencement date. The lease term includes any rent-free periods, begins at commencement, can change or be revised under certain lease modifications, and only includes optional renewal periods if there is “reasonable certainty” that the lessee has a significant economic incentive to exercise the option.

Answer 101

$1,000,000 Absent additional information, executory costs are included in the amount capitalized as lease payments receivable by the lessor or obligation under a finance lease by the lessee since the contract does not contain a separate nonlease component (FASB ASC 842-10-15-28 and 55-143) for the real estate taxes since they are not considered a separate good or service. The real estate taxes are expensed. Arena should report a finance lease obligation at $1,000,000.

Answer 102

$461,456 The value of the machine from the lease is the present value of the lease payments (using the annuity due factor) and the present value of the guaranteed residual value, over the five-year lease term, as follows: ($100,000 × 4.4651) + ($20,000 × 0.7473) = $461,456.

Answer 103

$100,000 per annum for each of the next five years and $900,000 in the aggregate * FASB ASC 842-20-25-6 states that after commencement the lessee shall recognize a single lease cost, variable lease payments not included in the lease liability, and impairment. * Per illustrative guidance (FASB ASC 842-10-55-142), the operating costs are not considered components to the contract and are variable and recognized in profit or loss. * FASB ASC 842-20-50-6 provides that lessees disclose for operating leases a maturity analysis showing the undiscounted cash flows on an annual basis for each of the first five years and the total of the amounts for the remaining years. South Co. should disclose a requirement to pay $100,000 during each of the next five years and a total of $900,000. The building operating expenses paid by South (the lessee) are considered variable costs and are reported as period expense (i.e., not subject to disclosure within the liability but separately).

Answer 104

included by the lessee as part of lease payments at present value. * The guaranteed residual value is a promise made by the lessee to return a certain value to the lessor which the lessor desires to recover its investment in the asset. * When calculating the lease payments, the lessor includes the guaranteed residual value in the lease liability computation. * However, if the residual value of the asset at the end of the lease term is expected to be greater than the guarantee, the lessee can ignore the guaranteed residual value. * If the amount owed under a guaranteed residual value changes, the lessee must remeasure payments.

Answer 105

Lease Liability = $76,840; Interest Expense = $7,807 The original liability can be calculated in one of two ways: (1) present value of an annuity due for 4 periods at 7% or (2) present value of an ordinary annuity for 3 periods plus the first payment. The answer is exactly the same. 1. Present Value, Annuity Due (PVAD): $42,500 at 7% for 4 periods = $42,500 × 3.62432 = $154,033 2. Present Value, Ordinary Annuity (PVOA): $42,500 at 7% for 4 periods = $42,500 × 2.62432 = $111,533 + $42,500 = $154,033 One payment is made on day one, reducing the lease liability before any interest ($154,033 – $42,500 = $111,533). Interest on the liability for the year would be $7,807 ($111,533 × .07), recorded with another payment made on the last day of the year, so the liability would be $76,840 with rounding ($111,533 – $34,693 ($42,500 – $7,807)).

Answer 106

As a finance lease The FASB lease standard establishes five criteria for classifying leases: (1) Ownership of the asset is transferred at the end of the lease; (2) the lease contains a bargain purchase option; (3) the lease term is for the majority of the economic life of the asset; (4) the present value of lease payments is substantially all or more of the fair value of the leased asset; and (5) the leased asset has no alternative uses. If one or more of these conditions are present, the lease is a finance or sales-type lease. This lease is a finance lease because it has no alternative use.

Answer 107

The lessee would revalue the lease liability and adjust it for the impact of the modification, and further adjust the ROU asset for the impact ## Footnote The lessee must (1) reassess the lease classification as of the modification effective date. The lessee will (2) reallocate the remaining consideration in the contract and (3) remeasure the lease liability, using the relevant assumptions (e.g., discount rate) at the date of the modification.

Answer 108

For lessees, applying Topic 842 results in the recognition of a right-to-use asset and lease liability for all leases, except those specifically scoped out of the standard. Per FASB ASU 2016-02, the main difference between previous GAAP and FASB Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. FASB ASC 842 primarily focused on changes to lessee accounting, not lessor accounting. The income statement treatment is different depending on the lease classification. Lastly, full convergence with international standards was not achieved.

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Section 3F - Leases Flashcards

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