Unit 5 Test Flashcards
Company A leases a piece of machinery from Company B on January 1, Year 1. Information pertaining to the lease is as follows:
The lease is non-cancellable with a term of three years.
The machinery has a cost and fair value at the start of the lease of $40,000; an estimated economic life of five years; and a residual value at the end of the lease of $7,500 (unguaranteed).
The lease contains no renewal options, and the machinery reverts to Company A at the end of the lease.
The present value of the residual value has been calculated as $6,478.
How much should Company A record as the right of use asset on January 1, Year 1?
$33,522
$33,522 = $40,000 - $6,478. Company A will record the asset at the amount it will pay in lease payments over the lease term. This amount is determined by using the fair value of the asset, less the present value of the residual value.
A company is leasing cars for four years at an agreed price of $500 per month, per car. The company provides the option to lease one additional year for $100 per month, per car. Each car has a useful life of six years. The company classifies the lease as a finance lease based on a specific test.
Which test did the company use for this purpose based on the information provided?
Lease term
The lease is five out of the six years, which is greater than 75% of the asset’s useful life.
On January 1, Year 1, a corporation signed an agreement to lease a delivery truck for 36 months. The fair market value of the truck was $80,000 as of January 1, Year 1. The corporation estimates that the truck’s fair market value will be $20,000 on December 31, Year 3. The corporation is reasonably certain it will exercise the lease option to purchase the delivery truck for $1,000 at the end of the lease.
How will the corporation report lease payments in its income statement?
Partially as amortization expense and partially as interest expense
The fact pattern indicates a purchase option that the company is reasonably certain to exercise. Thus, it is appropriate to classify the lease as a finance lease and to report the payments in this manner.
Company A (lessee) has reached a lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. This is an operating lease with no renewal option and contains the following information:
The lease is for three years, requiring annual payments at the beginning of the year of $10,213.
The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a non-guaranteed residual value of $12,500.
Present value of the residual value is $10,798.
Company B depreciates assets like the boom lift using straight-line depreciation.
How should Company B record the lease payments received on January 1, Year 2?
Debit Cash for $10,213: Credit Unearned Lease Revenue for $10,213
Company B will record a debit for the cash received from the lease payment. It will credit the Unearned Lease Revenue account since the payment is on the annuity-due basis.
A lessor incurs $10,000 of initial direct costs related to an operating lease.
How should the $10,000 cost be treated?
Defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue.
Initial direct costs are allocated in proportion to rental revenue and expenses over the term of the lease.
Company A leased a delivery truck from Company B. The initial measurement of Company A’s lease liability is $100,000. Company A paid $2,000 to its attorney for legal assistance with the lease agreement. Company B paid $5,000 to Company A as an incentive to lease the vehicle.
What is Company A’s initial value of its right-of-use asset for the delivery truck?
$97,000
$97,000 = $100,000 - $5,000 + $2,000. Initial direct costs should be added to the lease liability, and incentives should be subtracted from the lease liability when measuring the value of the right-of-use asset. This calculation properly includes the initial direct cost and subtracts the lease incentive.
Company A leases computers from Company B with annual payments of $6,469. The leases are for two years, and the computers have an economic life of three years. At the end of the lease, the computers are expected to have a residual value of $5,000.
Company A has an option to purchase the computers for $2,000 at the end of the lease agreement, which it expects to do. The fair value of the lease is $15,000, and the present value of the lease is $12,689. The present value of the option to purchase the computers is $1,849.
How does Company A account for the amortization of the computers due to the bargain purchase option?
It will amortize $14,538 using the economic life of the computers.
$14,538 = $12,689 + $1,849. Company A amortizes $14,538 using the economic life of the computers because of the bargain purchase option.
Which two finance lease elements are a part of each lease payment?
A reduction of the lease liability and the financing cost (interest expense)
The company and landlord have a gross lease for the warehouse. The landlord is responsible for accounting for the property insurance and property taxes.
Company A agrees to lease racks to Company B for five years. The expected economic life of the racks are five years. At the end of the lease, Company B has the right to purchase the racks for $5,000, but the company is not certain it will exercise the right.
Which test must the lease pass to be classified as a finance lease?
Lease term
The lease term is for 100% of the expected economic life of the racks, so it meets the requirements of the lease term test.
Company A (lessee) has reached an operating lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. The lease agreement contains no renewal options and contains the following information:
The lease is for three years, requiring annual payments at the beginning of the year of $10,213.
The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a non-guaranteed residual value of $12,500.
Present value of the residual value is $10,798.
Company B depreciates assets like the boom lift using straight-line depreciation.
What is the depreciation expense for Year 2 that the lessor will record?
$8,000
$8,000 = $40,000 / 5. Company B uses the straight-line depreciation method to depreciate assets. The cost of the boom lift is $40,000, and the economic life is five years.
