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Exam 15: Leases

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Question 81

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Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be:

A) The shorter of the physical life of the asset or the lease term.
B) The physical life of the asset.
C) The lease term.
D) A time period determined by management.

E) C) and D)
F) A) and B)

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Question 82

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Southern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2013. There is no expected residual value. Required: Prepare appropriate journal entries for Southern Edison for 2013 and 2014. Assume straight-line depreciation and a December 31 year-end.

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Question 83

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Each of the four independent situations below describes a lease requiring annual lease payments of $30,000. Required: For each situation, determine the appropriate lease classification by the lessee and indicate why.

C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings, the rate of return on assets is immediately increased when C records:

On December 31, 2013, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B's December 31, 2013, balance sheet, the deferred revenue from the sale of this machine should be:

Scape Corp. manufactures telephony equipment. Scape leased equipment to User, Inc., on January 1, 2013. Scape produced the equipment at a cost of $5,000,000. Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Required: Prepare appropriate entries for both User and Scape from the inception of the lease through the second rental payment on April 1, 2013. Depreciation is recorded at the end of each fiscal year (December 31).

Hamilton Security leased equipment to American Parcel Service for a 16-year period, at which time possession of the leased asset will revert back to Hamilton. The equipment cost Hamilton $16 million and has an expected useful life of 22 years. Its normal sales price is $23 million. The present value of the minimum lease payments for both the lessor and lessee is $20 million. The first payment was made at the inception of the lease. Required: How would American Parcel Service classify this lease if it prepares its financial statements using U.S. GAAP? IFRS? Why?

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the leased asset should be recorded is the:

Discuss the financial statement disclosure requirements for all leases entered into by the lessee.

S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an) :

In its 2013 annual report to shareholders, Douglas-Roberts International Corporation disclosed the following: In 2013, the company entered into three sale-leaseback arrangements with various financial institutions. Under the first arrangement, truck cab assembly machinery with a net book value of $58 million was sold for $60 million and leased back under an eight-year operating lease agreement. Under the second arrangement, tooling and related engine manufacturing equipment with a net book value of $261 million was sold for $260 million and leased back under an 11.5-year operating lease agreement. The third arrangement consisted of additional engine manufacturing equipment with a net book value of $62 million that was sold for $65 million and leased back under a 10-year operating lease agreement. The gain on these transactions was deferred and is being amortized over the terms of the lease agreements. Discuss the most likely reasons for these three transactions, and explain the basis for the last sentence of the disclosure.

Capital leases are agreements that are formulated outwardly as leases, but are installment purchases in substance.

L Corp. recorded a capital lease in February using an annuity due present value table. The company's December 31 statement of cash flows using the indirect method will report:

Big Bucks leased equipment to Shannon Company on July 1, 2013. The lease payments were calculated to provide the lessor a 10% return. Ten annual lease payments of $36,000 are due at the beginning of each fiscal year beginning July 1, 2013. The lease payments were calculated to provide the lessor a 10% return. Big Bucks had constructed the equipment recently for $198,000 and its retail fair value was $300,000. Its estimated useful life was 15 years. Required: 1. Following the guidance of the new ASU, prepare the journal entries to record the lease by Shannon at its commencement and at December 31, 2013. 2. Following the guidance of the new ASU, prepare the journal entries to record the lease by Big Bucks at its commencement and at December 31, 2013.

What is the effective annual interest rate?

What would be the amount of interest expense recorded with payment 5?

What is meant by the term "minimum lease payments"?

One of the four criteria for a capital lease specifies that the lease term be equal to or greater than:

If the lessor retains title to leased property under the terms of the lease:

GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type: