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CHAPTER 21

ACCOUNTING FOR LEASES


IFRS questions are available at t e en! o" t is # a$ter%

TRUE&FALSE'Con#e$tual
Ans(er
T F F T F F T F F T F F T F T F T F T T

No%
1. 2. 3. 4. 5. #. %. &. ). 1+. 11. 12. 13. 14. 15. 1#. 1%. 1&. 1). 2+.

)es#ri$tion
Benefits of leasing. Accounting for long-term leases. Classifying lease containing purchase option. Accounting for executory costs. epreciating a capitali!e" asset. $essee recor"ing of interest expense. Benefit of leasing to lessor. istinction 'et(een "irect-financing an" sales-type leases. $essors* classification of leases. irect-financing leases. Accounting for operating lease. Computing annual lease payments. ,uarantee" resi"ual -alue "efinition. ,uarantee" -s. unguarantee" resi"ual -alue. .nguarantee" resi"ual -alue an" minimum lease payments. /et in-estment an" guarantee"0unguarantee" resi"ual -alue. ifference 'et(een "irect-financing an" sales-type leases. ,ross profit in sales-type lease. 1e-ie( of estimate" unguarantee" resi"ual -alue. FA2B re3uire" lease "isclosures.

*ULTIPLE CHOICE'Con#e$tual
Ans(er
" " ' c a ' ' a c " " c a ' a a " a c

No%
21. 22. 23. 24. 2 25. 2 2#. 5 2%. 2&. 2). 3+. 31. 32. 33. 34. 5 35. 3#. 3%. 3&. 2 3).

)es#ri$tion
A"-antages of leasing. A"-antages of leasing. Basic principle of lease accounting. Conceptual support for treating all leases as a sale0purchase. 4ssential element of a lease. Bargain purchase option an" minimum lease payments. Cost amount for a capital lease. $ease accounting 'y lessee. 6no(le"ge of the capitali!ation criteria. Components of minimum lease payments. 7"entification of executory costs. iscount rate use" 'y lessee. epreciation of a lease" asset 'y lessee. 4ffect of a capital lease on lessee8s "e't. epreciation of a capital lease. 7"entification of lease type for lessor. 4lements of lease recei-a'le 'y lessor. 1ecognition of unearne" lease income. irect-financing lease recei-a'le.

21 & 2

Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition

*ULTIPLE CHOICE'Con#e$tual 0#ont%1


Ans(er
" a c c ' c " c c " ' "
5 2

No%
2

)es#ri$tion
Thir" party guarantee of resi"ual -alue. $essor*s accounting for resi"ual -alue. Accounting for initial "irect costs. ifference 'et(een "irect financing an" sales-type lease. Amount of re-enue in sales-type lease. Accounting for a sales-type lease. Accounting for initial "irect costs. isclosing o'ligations un"er capital leases. $easing criteria to a-oi" asset capitali!ation. 1ecor"ing asset an" interest expense in sale-lease'ac: lease. Accounting for sale-lease'ac: lease. ,ain0loss recognition in a sale-lease'ac:.

4+. 41. 42. 2 43. 5 44. 45. 4#. 4%. 4&. 94). 95+. 951.

These 3uestions also appear in the 5ro'lem-2ol-ing 2ur-i-al ,ui"e. These 3uestions also appear in the 2tu"y ,ui"e. 9This topic is "ealt (ith in an Appen"ix to the chapter.

*ULTIPLE CHOICE'Co-$utational
Ans(er
' c c " a c c " c c a ' " c c " a c " c ' c a ' ' c a c

No%
52. 53. 54. 55. 5#. 5%. 5&. 5). #+. #1. #2. #3. #4. #5. ##. #%. #&. #). %+. %1. %2. %3. %4. %5. %#. %%. %&. %).

)es#ri$tion
;perating lease expense for year. Calculate interest expense an" "epreciation expense for lessee. Calculate minimum annual lease payment. Calculate total annual lease payment. 7"entification of lease type for lessor. 7"entification of lease type for lessee. Calculate "epreciation expense for lessee. 7"entification of lease type for lessee. Calculate lease" asset amount. Calculate total lease o'ligation. Compute interest expense for year. Compute interest expense for year. Calculate lease lia'ility amount. Compute interest expense an" "epreciation expense for year. Compute interest expense an" "epreciation expense for year. Compute "epreciation expense for lease (ith transfer of title. Calculate lease" asset amount. Compute interest expense for first year. Compute principal re"uction for secon" year. Calculate "epreciation expense for lessee. Compute interest expense for first year. Calculate lease" asset an" lease lia'ility amounts. Calculate annual lease payments. 7"entification of lease type for lessee. 4xpense recor"e" 'y lessee0operating lease. Calculate re"uction of lease o'ligation for lessee. 7"entification of lease type for lessor. Calculate lease recei-a'le.

Accounting for $eases

21 & 3

*ULTIPLE CHOICE'Co-$utational 0#ont%1


Ans(er
" a " a " ' ' c c c c a ' c c ' " " ' '

No%
&+. &1. &2. &3. &4 &5. &#. &%. &&. &). )+. )1. )2. )3. )4. )5. )#. )%. 9)&. 9)).

)es#ri$tion
1e-enues an" expenses recor"e" 'y lessor0operating lease. ;perating lease expense for year. Calculate expense of an operating lease. Calculate income from operating lease. <ournal entry in "irect-financing lease. Calculate lease payments. <ournal entry for lessee. <ournal entry for lessee. Calculate loss on guarantee" resi"ual -alue lease. Calculate interest re-enue in sales-type lease. etermine gross profit an" interest re-enue. Calculate interest expense an" "epreciation expense for lessee. Calculate profit an" interest income for lessor0sales-type lease. Calculate profit on sales-type lease an" interest income. 7"entification of lease type for lessor. etermine "iscount rate implicit in lease payments. $ease-relate" expenses recogni!e" 'y lessee. etermine long-term lease o'ligation for lessee. ,ain recogni!e" 'y lessee in a sale-lease'ac:. 2ale-lease'ac:0operating lease.

*ULTIPLE CHOICE'CPA A!a$te!


Ans(er
c a " a " " c a " "

No%
1++. 1+1. 1+2. 1+3. 1+4. 1+5. 1+#. 1+%. 91+&. 91+).

)es#ri$tion
7"entification of lease type for lessee. Calculate the lease lia'ility of a lessee. Calculate the lease lia'ility of a lessee. etermine re"uction of lease o'ligation for lessee. Calculate interest expense for lessee. Calculate "epreciation expense for lessee. 1ecognition of interest re-enue in a sales-type lease. Calculate income reali!e" 'y lessor0sales-type lease. 1eporting gain on a sale-lease'ac:. Accounting for the gain on a sale-lease'ac:.

E2ERCISES
Ite421-11+ 421-111 421-112 421-113 421-114 421-115 9421-11# 9421-11%

)es#ri$tion
Capital lease =essay>. Capital lease amorti!ation an" ?ournal entries. ;perating lease. $ease criteria for classification 'y lessor. irect-financing lease =essay>. $essor accounting@sales-type lease. $essee an" lessor accounting =sale-lease'ac:>. 2ale-lease'ac:.

21 & 6

Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition

PRO+LE*S
Ite521-11& 521-11) 521-12+

)es#ri$tion
$essee accounting@capital lease. $essee accounting@capital lease. $essor accounting@"irect-financing lease.

CHAPTER LEARNING O+4ECTI5ES


1. 2. 3. 4. 5. #. %. &. ). 91+ . 911. 4xplain the natureA economic su'stanceA an" a"-antages of lease transactions. escri'e the accounting criteria an" proce"ures for capitali!ing leases 'y the lessee. Contrast the operating an" capitali!ation metho"s of recor"ing leases. 7"entify the classifications of leases for the lessor. escri'e the lessor8s accounting for "irect-financing leases. 7"entify special features of lease arrangements that cause uni3ue accounting pro'lems. escri'e the effect of resi"ual -aluesA guarantee" an" unguarantee"A on lease accounting. escri'e the lessor8s accounting for sales-type leases. $ist the "isclosure re3uirements for leases. .n"erstan" an" apply lease-accounting concepts to -arious lease arrangements. escri'e the lessee8s accounting for sale-lease'ac: transactions.

Accounting for $eases

21 & :

SU**AR7 OF LEARNING O+4ECTI5ES +7 8UESTIONS


Ite Typ Ite Typ Ite Typ Ite Typ Item Typ Ite Typ Ite Typ

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TF TF TF TF BC BC BC BC TF TF TF TF TF TF TF TF TF TF TF TF BC BC

2. 3+. 31. 32. 33. 52. 53. 54. %. 3#. 3%. 3&. 3). 13. 1#. 4+.

TF BC BC BC BC BC BC BC TF BC BC BC BC TF TF BC BC BC BC BC BC BC

21. 55. 5#. 5&. 5). #+. #1. #2. 34. 5%. %&. %). &+. &5. 41. &#. 45. 4#. &). 4&. )). 1+&.

42. 43. 5 44.


2

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Learnin. Ob9e#tive 1 BC 22. BC 23. Learnin. Ob9e#tive 2 BC #3. BC %+. BC #4. BC %1. BC #5. BC %2. BC ##. BC %3. BC #%. BC %4. BC #&. BC %5. BC #). BC %#. Learnin. Ob9e#tive 3 5 BC 35. BC &1. Learnin. Ob9e#tive 6 BC &3. BC 11#. BC )4. BC Learnin. Ob9e#tive : BC &4. BC 113. BC )5. BC 114. Learnin. Ob9e#tive ; BC 11). 5 Learnin. Ob9e#tive < BC &%. BC 12+. BC &&. BC Learnin. Ob9e#tive = BC )+. BC 1+5. BC )2. BC 1+#. BC )3. BC 1+%. Learnin. Ob9e#tive > BC Learnin. Ob9e#tive 11? BC 1+). BC 11%. BC 11#. 4

BC BC BC BC BC BC BC BC BC 4

24. %%. )1. )#. )%. 1++. 1+1. 1+2. &2.

BC BC BC BC BC BC BC BC BC

25.

BC BC BC BC 4 4 5 5 4

1+3. 1+4. 1+5. 11+. 111. 11&. 11). 112.

4 4

12+.

BC BC BC

113. 115.

4 4

TF D True-False BC D Bultiple Choice 4 D 4xercise 5 D 5ro'lem

21 & ;

Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition

TRUE&FALSE'Con#e$tual
1. 2. 3. 4. 5. #. %. &. ). 1+. 11. 12. 13. 14. 15. 1#. 1%. 1&. $easing e3uipment re"uces the ris: of o'solescence to the lesseeA an" passes the ris: of resi"ual -alue to the lessor. The FA2B agrees (ith the capitali!ation approach an" re3uires companies to capitali!e all long-term leases. A lease that contains a purchase option must 'e capitali!e" 'y the lessee. 4xecutory costs shoul" 'e exclu"e" 'y the lessee in computing the present -alue of the minimum lease payments. A capitali!e" lease" asset is al(ays "epreciate" o-er the term of the lease 'y the lessee. A lessee recor"s interest expense in 'oth a capital lease an" an operating lease. A 'enefit of leasing to the lessor is the return of the lease" property at the en" of the lease term. The "istinction 'et(een a "irect-financing lease an" a sales-type lease is the presence or a'sence of a transfer of title. $essors classify an" account for all leases that "on*t 3ualify as sales-type leases as operating leases. irect-financing leases are in su'stance the financing of an asset purchase 'y the lessee. .n"er the operating metho"A the lessor recor"s each rental receipt as part interest re-enue an" part rental re-enue. 7n computing the annual lease paymentsA the lessor "e"ucts only a guarantee" resi"ual -alue from the fair mar:et -alue of a lease" asset. Ehen the lessee agrees to ma:e up any "eficiency 'elo( a state" amount that the lessor reali!es in resi"ual -alueA that state" amount is the guarantee" resi"ual -alue. Both a guarantee" an" an unguarantee" resi"ual -alue affect the lessee*s computation of amounts capitali!e" as a lease" asset. From the lessee*s -ie(pointA an unguarantee" resi"ual -alue is the same as no resi"ual -alue in terms of computing the minimum lease payments. The lessor (ill reco-er a greater net in-estment if the resi"ual -alue is guarantee" instea" of unguarantee". The primary "ifference 'et(een a "irect-financing lease an" a sales-type lease is the manufacturer*s or "ealer*s gross profit. The gross profit amount in a sales-type lease is greater (hen a guarantee" resi"ual -alue exists.

Accounting for $eases 1). 2+.

21 & <

Companies must perio"ically re-ie( the estimate" unguarantee" resi"ual -alue in a sales-type lease. The FA2B re3uires lessees an" lessors to "isclose certain information a'out leases in their financial statements or in the notes.

True&False Ans(ers'Con#e$tual
Ite1. 2. 3. 4. 5. Ans% T F F T F Ite#. %. &. ). 1+. Ans% F T F F T Ite11. 12. 13. 14. 15. Ans% F F T F T Ite1#. 1%. 1&. 1). 2+. Ans% F T F T T

*ULTIPLE CHOICE'Con#e$tual
21. Ba?or reasons (hy a company may 'ecome in-ol-e" in leasing to other companies is =are> a. interest re-enue. '. high resi"ual -alues. c. tax incenti-es. ". all of these. Ehich of the follo(ing is an a"-antage of leasingF a. ;ff-'alance-sheet financing '. $ess costly financing c. 1++G financing at fixe" rates ". All of these Ehich of the follo(ing 'est "escri'es current practice in accounting for leasesF a. $eases are not capitali!e". '. $eases similar to installment purchases are capitali!e". c. All long-term leases are capitali!e". ". All leases are capitali!e". Ehile only certain leases are currently accounte" for as a sale or purchaseA there is theoretic ?ustification for consi"ering all leases to 'e sales or purchases. The principal reason that supports this i"ea is that a. all leases are generally for the economic life of the property an" the resi"ual -alue of the property at the en" of the lease is minimal. '. at the en" of the lease the property usually can 'e purchase" 'y the lessee. c. a lease reflects the purchase or sale of a 3uantifia'le right to the use of property. ". "uring the life of the lease the lessee can effecti-ely treat the property as if it (ere o(ne" 'y the lessee.

22.

23.

24.

21 & =
2

Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition An essential element of a lease con-eyance is that the a. lessor con-eys less than his or her total interest in the property. '. lessee pro-i"es a sin:ing fun" e3ual to one year8s lease payments. c. property that is the su'?ect of the lease agreement must 'e hel" for sale 'y the lessor prior to the "rafting of the lease agreement. ". term of the lease is su'stantially e3ual to the economic life of the lease" property. Ehat impact "oes a 'argain purchase option ha-e on the present -alue of the minimum lease payments compute" 'y the lesseeF a. /o impact as the option "oes not enter into the transaction until the en" of the lease term. '. The lessee must increase the present -alue of the minimum lease payments 'y the present -alue of the option price. c. The lessee must "ecrease the present -alue of the minimum lease payments 'y the present -alue of the option price. ". The minimum lease payments (oul" 'e increase" 'y the present -alue of the option price ifA at the time of the lease agreementA it appeare" certain that the lessee (oul" exercise the option at the en" of the lease an" purchase the asset at the option price. The amount to 'e recor"e" as the cost of an asset un"er capital lease is e3ual to the a. present -alue of the minimum lease payments. '. present -alue of the minimum lease payments or the fair -alue of the assetA (hiche-er is lo(er. c. present -alue of the minimum lease payments plus the present -alue of any unguarantee" resi"ual -alue. ". carrying -alue of the asset on the lessor8s 'oo:s. The metho"s of accounting for a lease 'y the lessee are a. operating an" capital lease metho"s. '. operatingA salesA an" capital lease metho"s. c. operating an" le-erage" lease metho"s. ". none of these. Ehich of the follo(ing is a correct statement of one of the capitali!ation criteriaF a. The lease transfers o(nership of the property to the lessor. '. The lease contains a purchase option. c. The lease term is e3ual to or more than %5G of the estimate" economic life of the lease" property. ". The minimum lease payments =exclu"ing executory costs> e3ual or excee" )+G of the fair -alue of the lease" property. Binimum lease payments may inclu"e a a. penalty for failure to rene(. '. 'argain purchase option. c. guarantee" resi"ual -alue. ". any of these. 4xecutory costs inclu"e a. maintenance. '. property taxes. c. insurance. ". all of these.

25.

2#.

2%.

2&.

2).

3+.

31.

Accounting for $eases 32.

21 & >

7n computing the present -alue of the minimum lease paymentsA the lessee shoul" a. use its incremental 'orro(ing rate in all cases. '. use either its incremental 'orro(ing rate or the implicit rate of the lessorA (hiche-er is higherA assuming that the implicit rate is :no(n to the lessee. c. use either its incremental 'orro(ing rate or the implicit rate of the lessorA (hiche-er is lo(erA assuming that the implicit rate is :no(n to the lessee. ". none of these. 7n computing "epreciation of a lease" assetA the lessee shoul" su'tract a. a guarantee" resi"ual -alue an" "epreciate o-er the term of the lease. '. an unguarantee" resi"ual -alue an" "epreciate o-er the term of the lease. c. a guarantee" resi"ual -alue an" "epreciate o-er the life of the asset. ". an unguarantee" resi"ual -alue an" "epreciate o-er the life of the asset. 7n the earlier years of a leaseA from the lessee8s perspecti-eA the use of the a. capital metho" (ill ena'le the lessee to report higher incomeA compare" to the operating metho". '. capital metho" (ill cause "e't to increaseA compare" to the operating metho". c. operating metho" (ill cause income to "ecreaseA compare" to the capital metho". ". operating metho" (ill cause "e't to increaseA compare" to the capital metho". A lessee (ith a capital lease containing a 'argain purchase option shoul" "epreciate the lease" asset o-er the a. asset8s remaining economic life. '. term of the lease. c. life of the asset or the term of the leaseA (hiche-er is shorter. ". life of the asset or the term of the leaseA (hiche-er is longer. Base" solely upon the follo(ing sets of circumstances in"icate" 'elo(A (hich set gi-es rise to a sales-type or "irect-financing lease of a lessorF Transfers ;(nership Contains Bargain Collecti'ility of $ease Any 7mportant By 4n" ;f $easeF 5urchase ;ptionF 5ayments Assure"F .ncertaintiesF a. /o Hes Hes /o '. Hes /o /o /o c. Hes /o /o Hes ". /o Hes Hes Hes Ehich of the follo(ing (oul" not 'e inclu"e" in the $ease 1ecei-a'le accountF a. ,uarantee" resi"ual -alue '. .nguarantee" resi"ual -alue c. A 'argain purchase option ". All (oul" 'e inclu"e" 7n a lease that is appropriately recor"e" as a "irect-financing lease 'y the lessorA unearne" income a. shoul" 'e amorti!e" o-er the perio" of the lease using the effecti-e interest metho". '. shoul" 'e amorti!e" o-er the perio" of the lease using the straight-line metho". c. "oes not arise. ". shoul" 'e recogni!e" at the lease8s expiration.

33.

34.

35.

3#.

3%.

3&.

21 & 1@ Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition


2

3).

7n or"er to properly recor" a "irect-financing leaseA the lessor nee"s to :no( ho( to calculate the lease recei-a'le. The lease recei-a'le in a "irect-financing lease is 'est "efine" as a. the amount of fun"s the lessor has tie" up in the asset (hich is the su'?ect of the "irect-financing lease. '. the "ifference 'et(een the lease payments recei-a'le an" the fair mar:et -alue of the lease" property. c. the present -alue of minimum lease payments. ". the total 'oo: -alue of the asset less any accumulate" "epreciation recor"e" 'y the lessor prior to the lease agreement. 7f the resi"ual -alue of a lease" asset is guarantee" 'y a thir" party a. it is treate" 'y the lessee as no resi"ual -alue. '. the thir" party is also lia'le for any lease payments not pai" 'y the lessee. c. the net in-estment to 'e reco-ere" 'y the lessor is re"uce". ". it is treate" 'y the lessee as an a""itional payment an" 'y the lessor as reali!e" at the en" of the lease term. Ehen lessors account for resi"ual -alues relate" to lease" assetsA they a. al(ays inclu"e the resi"ual -alue 'ecause they al(ays assume the resi"ual -alue (ill 'e reali!e". '. inclu"e the unguarantee" resi"ual -alue in sales re-enue. c. recogni!e more gross profit on a sales-type lease (ith a guarantee" resi"ual -alue than on a sales-type lease (ith an unguarantee" resi"ual -alue. ". All of the a'o-e are true (ith regar" to lessors an" resi"ual -alues. The initial "irect costs of leasing a. are generally 'orne 'y the lessee. '. inclu"e incremental costs relate" to internal acti-ities of leasingA an" internal costs relate" to costs pai" to external thir" parties for originating a lease arrangement. c. are expense" in the perio" of the sale un"er a sales-type lease. ". All of the a'o-e are true (ith regar" to the initial "irect costs of leasing. The primary "ifference 'et(een a "irect-financing lease an" a sales-type lease is the a. manner in (hich rental receipts are recor"e" as rental income. '. amount of the "epreciation recor"e" each year 'y the lessor. c. recognition of the manufacturer8s or "ealer8s profit at the inception of the lease. ". allocation of initial "irect costs 'y the lessor to perio"s 'enefite" 'y the lease arrangements. A lessor (ith a sales-type lease in-ol-ing an unguarantee" resi"ual -alue a-aila'le to the lessor at the en" of the lease term (ill report sales re-enue in the perio" of inception of the lease at (hich of the follo(ing amountsF a. The minimum lease payments plus the unguarantee" resi"ual -alue. '. The present -alue of the minimum lease payments. c. The cost of the asset to the lessorA less the present -alue of any unguarantee" resi"ual -alue. ". The present -alue of the minimum lease payments plus the present -alue of the unguarantee" resi"ual -alue.

4+.

41.

42.

43.

44.

Accounting for $eases 45.

21 & 11

For a sales-type leaseA a. the sales price inclu"es the present -alue of the unguarantee" resi"ual -alue. '. the present -alue of the guarantee" resi"ual -alue is "e"ucte" to "etermine the cost of goo"s sol". c. the gross profit (ill 'e the same (hether the resi"ual -alue is guarantee" or unguarantee". ". none of these. Ehich of the follo(ing statements is correctF a. 7n a "irect-financing leaseA initial "irect costs are a""e" to the net in-estment in the lease. '. 7n a sales-type leaseA initial "irect costs are expense" in the year of incurrence. c. For operating leasesA initial "irect costs are "eferre" an" allocate" o-er the lease term. ". All of these. The $ease $ia'ility account shoul" 'e "isclose" as a. all current lia'ilities. '. all noncurrent lia'ilities. c. current portions in current lia'ilities an" the remain"er in noncurrent lia'ilities. ". "eferre" cre"its. To a-oi" lease" asset capitali!ationA companies can "e-ise lease agreements that fail to satisfy any of the four leasing criteria. Ehich of the follo(ing is not one of the (ays to accomplish this goalF a. $essee uses a higher interest rate than that use" 'y lessor. '. 2et the lease term at something less than %5G of the estimate" useful life of the property. c. Erite in a 'argain purchase option. ". .se a thir" party to guarantee the asset*s resi"ual -alue. 7f the lease in a sale-lease'ac: transaction meets one of the four leasing criteria an" is therefore accounte" for as a capital leaseA (ho recor"s the asset on its 'oo:s an" (hich party recor"s interest expense "uring the lease perio"F 5arty recor"ing the asset on its 'oo:s 2eller-lessee 5urchaser-lessor 5urchaser-lessor 2eller-lessee 5arty recor"ing interest expense 5urchaser-lessor 2eller-lessee 5urchaser-lessor 2eller-lessee

4#.

4%.

4&.

94).

a. '. c. ". 95+.

7n a sale-lease'ac: transaction (here none of the four leasing criteria are satisfie"A (hich of the follo(ing is falseF a. The seller-lessee remo-es the asset from its 'oo:s. '. The purchaser-lessor recor"s a gain. c. The seller-lessee recor"s the lease as an operating lease. ". All of the a'o-e are false statements.

21 & 12 Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition 951. Ehen a company sells property an" then leases it 'ac:A any gain on the sale shoul" usually 'e a. recogni!e" in the current year. '. recogni!e" as a prior perio" a"?ustment. c. recogni!e" at the en" of the lease. ". "eferre" an" recogni!e" as income o-er the term of the lease.

*ulti$le C oi#e Ans(ers'Con#e$tual


IteAns% IteAns% IteAns% IteAns% IteAns% IteAns% IteAns%

21. 22. 23. 24. 25.

" " ' c a

2#. 2%. 2&. 2). 3+.

' ' a c "

31. 32. 33. 34. 35.

" c a ' a

3#. 3%. 3&. 3). 4+.

a " a c "

41. 42. 43. 44. 45.

a c c ' c

4#. 4%. 4&. 94). 95+.

" c c " '

951.

"

*ULTIPLE CHOICE'Co-$utational
52. ;n ecem'er 1A 2+11A ,oet! Corporation lease" office space for 1+ years at a monthly rental of I)+A+++. ;n that "ate 5ere! pai" the lan"lor" the follo(ing amountsC 1ent "eposit First month8s rent $ast month8s rent 7nstallation of ne( (alls an" offices I )+A+++ )+A+++ )+A+++ 4)5A+++ I%#5A+++

The entire amount of I%#5A+++ (as charge" to rent expense in 2+11. Ehat amount shoul" ,oet! ha-e charge" to expense for the year en"e" ecem'er 31A 2+11F a. I)+A+++ '. I)4A125 c. I1&4A125 ". I4)5A+++ 53. ;n <anuary 1A 2+11A ean Corporation signe" a ten-year noncancela'le lease for certain machinery. The terms of the lease calle" for ean to ma:e annual payments of I1++A+++ at the en" of each year for ten years (ith title to pass to ean at the en" of this perio". The machinery has an estimate" useful life of 15 years an" no sal-age -alue. ean uses the straight-line metho" of "epreciation for all of its fixe" assets. ean accor"ingly accounte" for this lease transaction as a capital lease. The lease payments (ere "etermine" to ha-e a present -alue of I#%1A++& at an effecti-e interest rate of &G. Eith respect to this capitali!e" leaseA ean shoul" recor" for 2+11 a. lease expense of I1++A+++. '. interest expense of I44A%34 an" "epreciation expense of I3&A+#&. c. interest expense of I53A#&1 an" "epreciation expense of I44A%34. ". interest expense of I45A#&1 an" "epreciation expense of I#%A1+1.

Accounting for $eases .se the follo(ing information for 3uestions 54 through 5). =Annuity ta'les on page 21-2+.>

21 & 13

;n <anuary 1A 2+11A HanceyA 7nc. signs a 1+-year noncancela'le lease agreement to lease a storage 'uil"ing from Jolt Earehouse Company. Collecti'ility of lease payments is reasona'ly pre"icta'le an" no important uncertainties surroun" the amount of costs yet to 'e incurre" 'y the lessor. The follo(ing information pertains to this lease agreement. =a> The agreement re3uires e3ual rental payments at the en" of each year. ='> The fair -alue of the 'uil"ing on <anuary 1A 2+11 is I3A+++A+++K ho(e-erA the 'oo: -alue to Jolt is I2A5++A+++. =c> The 'uil"ing has an estimate" economic life of 1+ yearsA (ith no resi"ual -alue. Hancey "epreciates similar 'uil"ings on the straight-line metho". ="> At the termination of the leaseA the title to the 'uil"ing (ill 'e transferre" to the lessee. =e> Hancey8s incremental 'orro(ing rate is 11G per year. Jolt Earehouse Co. set the annual rental to insure a 1+G rate of return. The implicit rate of the lessor is :no(n 'y HanceyA 7nc. =f> The yearly rental payment inclu"es I1+A+++ of executory costs relate" to taxes on the property. 54. Ehat is the amount of the minimum annual lease paymentF =1oun"e" to the nearest "ollar.> a. I1&&A23% '. I4%&A23# c. I4&&A23# ". I4)&A23# Ehat is the amount of the total annual lease paymentF a. I1&&A23% '. I4%&A23% c. I4&&A23% ". I4)&A23% From the lessee8s -ie(pointA (hat type of lease exists in this caseF a. 2ales-type lease '. 2ale-lease'ac: c. Capital lease ". ;perating lease From the lessor8s -ie(pointA (hat type of lease is in-ol-e"F a. 2ales-type lease '. 2ale-lease'ac: c. irect-financing lease ". ;perating lease HanceyA 7nc. (oul" recor" "epreciation expense on this storage 'uil"ing in 2+11 of =1oun"e" to the nearest "ollar.> a. I+. '. I25+A+++. c. I3++A+++. ". I4&&A23%.

55.

5#.

5%.

5&.

21 & 16 Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition 5). 7f the lease (ere nonrene(a'leA there (as no purchase optionA title to the 'uil"ing "oes not pass to the lessee at termination of the lease an" the lease (ere only for eight yearsA (hat type of lease (oul" this 'e for the lesseeF a. 2ales-type lease '. irect-financing lease c. ;perating lease ". Capital lease Betcalf Company leases a machine from Lollmer Corp. un"er an agreement (hich meets the criteria to 'e a capital lease for Betcalf. The six-year lease re3uires payment of I1+2A+++ at the 'eginning of each yearA inclu"ing I15A+++ per year for maintenanceA insuranceA an" taxes. The incremental 'orro(ing rate for the lessee is 1+GK the lessor8s implicit rate is &G an" is :no(n 'y the lessee. The present -alue of an annuity "ue of 1 for six years at 1+G is 4.%)+%). The present -alue of an annuity "ue of 1 for six years at &G is 4.))2%1. Betcalf shoul" recor" the lease" asset at a. I5+)A25#. '. I4&&A##1. c. I434A3##. ". I41#A%)). ;n ecem'er 31A 2+11A $ang Corporation lease" a ship from Fort Company for an eightyear perio" expiring ecem'er 3+A 2+1). 43ual annual payments of I2++A+++ are "ue on ecem'er 31 of each yearA 'eginning (ith ecem'er 31A 2+11. The lease is properly classifie" as a capital lease on $ang 8s 'oo:s. The present -alue at ecem'er 31A 2+11 of the eight lease payments o-er the lease term "iscounte" at 1+G is I1A1%3A#&5. Assuming all payments are ma"e on timeA the amount that shoul" 'e reporte" 'y $ang Corporation as the total o'ligation un"er capital leases on its ecem'er 31A 2+12 'alance sheet is a. I1A+)1A+54. '. I1A+++A15). c. I&%1A+54. ". I1A2++A+++.

#+.

#1.

.se the follo(ing information for 3uestions #2 an" #3. ;n <anuary 1A 2+11A 2au"er Corporation signe" a fi-e-year noncancela'le lease for e3uipment. The terms of the lease calle" for 2au"er to ma:e annual payments of I5+A+++ at the 'eginning of each year for fi-e years (ith title to pass to 2au"er at the en" of this perio". The e3uipment has an estimate" useful life of % years an" no sal-age -alue. 2au"er uses the straight-line metho" of "epreciation for all of its fixe" assets. 2au"er accor"ingly accounts for this lease transaction as a capital lease. The minimum lease payments (ere "etermine" to ha-e a present -alue of I2+&A4)3 at an effecti-e interest rate of 1+G. #2. 7n 2+11A 2au"er shoul" recor" interest expense of a. I15A&4). '. I2)A151. c. I2+A&4). ". I34A151. 7n 2+12A 2au"er shoul" recor" interest expense of a. I1+A&4). '. I12A434. c. I15A&4). ". I1%A434.

#3.

Accounting for $eases #4.

21 & 1:

;n ecem'er 31A 2+11A 6uhn Corporation lease" a plane from Bell Company for an eight-year perio" expiring ecem'er 3+A 2+1). 43ual annual payments of I15+A+++ are "ue on ecem'er 31 of each yearA 'eginning (ith ecem'er 31A 2+11. The lease is properly classifie" as a capital lease on 6uhn*s 'oo:s. The present -alue at ecem'er 31A 2+11 of the eight lease payments o-er the lease term "iscounte" at 1+G is I&&+A2#4. Assuming the first payment is ma"e on timeA the amount that shoul" 'e reporte" 'y 6uhn Corporation as the lease lia'ility on its ecem'er 31A 2+11 'alance sheet is a. I&&+A2#4. '. I&1&A2)+. c. I%)2A23&. ". I%3+A2#4.

.se the follo(ing information for 3uestions #5 an" ##. ;n <anuary 1A 2+11A ;gle'y Corporation signe" a fi-e-year noncancela'le lease for e3uipment. The terms of the lease calle" for ;gle'y to ma:e annual payments of I#+A+++ at the en" of each year for fi-e years (ith title to pass to ;gle'y at the en" of this perio". The e3uipment has an estimate" useful life of % years an" no sal-age -alue. ;gle'y uses the straight-line metho" of "epreciation for all of its fixe" assets. ;gle'y accor"ingly accounts for this lease transaction as a capital lease. The minimum lease payments (ere "etermine" to ha-e a present -alue of I22%A44& at an effecti-e interest rate of 1+G. #5. Eith respect to this capitali!e" leaseA for 2+11 ;gle'y shoul" recor" a. rent expense of I#+A+++. '. interest expense of I22A%45 an" "epreciation expense of I45A4&). c. interest expense of I22A%45 an" "epreciation expense of I32A4)3. ". interest expense of I3+A+++ an" "epreciation expense of I45A4&). Eith respect to this capitali!e" leaseA for 2+12 ;gle'y shoul" recor" a. interest expense of I22A%45 an" "epreciation expense of I32A4)3. '. interest expense of I2+A4#) an" "epreciation expense of I32A4)3. c. interest expense of I1)A+1) an" "epreciation expense of I32A4)3. ". interest expense of I14A4#) an" "epreciation expense of I32A4)3. 4mporia Corporation is a lessee (ith a capital lease. The asset is recor"e" at I45+A+++ an" has an economic life of & years. The lease term is 5 years. The asset is expecte" to ha-e a mar:et -alue of I15+A+++ at the en" of 5 yearsA an" a mar:et -alue of I5+A+++ at the en" of & years. The lease agreement pro-i"es for the transfer of title of the asset to the lessee at the en" of the lease term. Ehat amount of "epreciation expense (oul" the lessee recor" for the first year of the leaseF a. I)+A+++ '. I&+A+++ c. I#+A+++ ". I5+A+++

##.

#%.

21 & 1; Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition #&. 5isaA 7nc. lease" e3uipment from To(er Company un"er a four-year lease re3uiring e3ual annual payments of I&#A+3&A (ith the first payment "ue at lease inception. The lease "oes not transfer o(nershipA nor is there a 'argain purchase option. The e3uipment has a 4-year useful life an" no sal-age -alue. 7f 5isaA 7nc.*s incremental 'orro(ing rate is 1+G an" the rate implicit in the lease =(hich is :no(n 'y 5isaA 7nc.> is &GA (hat is the amount recor"e" for the lease" asset at the lease inceptionF 5L Annuity ue 5L ;r"inary Annuity &GA 4 perio"s 3.5%%1+ 3.31213 1+GA 4 perio"s 3.4&#&5 3.1#)&# a. '. c. ". #). I3+%A%#% I2%2A%2& I2&4A)#) I3++A+++

5isaA 7nc. lease" e3uipment from To(er Company un"er a four-year lease re3uiring e3ual annual payments of I&#A+3&A (ith the first payment "ue at lease inception. The lease "oes not transfer o(nershipA nor is there a 'argain purchase option. The e3uipment has a 4-year useful life an" no sal-age -alue. 5isaA 7nc.*s incremental 'orro(ing rate is 1+G an" the rate implicit in the lease =(hich is :no(n 'y 5isaA 7nc.> is &G. Assuming that this lease is properly classifie" as a capital leaseA (hat is the amount of interest expense recor"e" 'y 5isaA 7nc. in the first year of the asset*s lifeF 5L Annuity ue 5L ;r"inary Annuity &GA 4 perio"s 3.5%%1+ 3.31213 1+GA 4 perio"s 3.4&#&5 3.1#)&# a. '. c. ". I+ I24A#21 I1%A%3& I22A%)&

%+.

5isaA 7nc. lease" e3uipment from To(er Company un"er a four-year lease re3uiring e3ual annual payments of I&#A+3&A (ith the first payment "ue at lease inception. The lease "oes not transfer o(nershipA nor is there a 'argain purchase option. The e3uipment has a 4 year useful life an" no sal-age -alue. 5isaA 7nc.*s incremental 'orro(ing rate is 1+G an" the rate implicit in the lease =(hich is :no(n 'y 5isaA 7nc.> is &G. Assuming that this lease is properly classifie" as a capital leaseA (hat is the amount of principal re"uction recor"e" (hen the secon" lease payment is ma"e in Hear 2F 5L Annuity ue 5L ;r"inary Annuity &GA 4 perio"s 3.5%%1+ 3.31213 1+GA 4 perio"s 3.4&#&5 3.1#)&# a. '. c. ". I&#A+3& I#1A41% I#3A24+ I#&A3++

Accounting for $eases %1.

21 & 1<

5isaA 7nc. lease" e3uipment from To(er Company un"er a four-year lease re3uiring e3ual annual payments of I&#A+3&A (ith the first payment "ue at lease inception. The lease "oes not transfer o(nershipA nor is there a 'argain purchase option. The e3uipment has a 4-year useful life an" no sal-age -alue. 5isaA 7nc.*s incremental 'orro(ing rate is 1+G an" the rate implicit in the lease =(hich is :no(n 'y 5isaA 7nc.> is &G. 5isaA 7nc. uses the straight-line metho" to "epreciate similar assets. Ehat is the amount of "epreciation expense recor"e" 'y 5isaA 7nc. in the first year of the asset*s lifeF 5L Annuity ue 5L ;r"inary Annuity &GA 4 perio"s 3.5%%1+ 3.31213 1+GA 4 perio"s 3.4&#&5 3.1#)&# a. '. c. ". I+ 'ecause the asset is "epreciate" 'y To(er Company. I%1A242 I%#A)42 I%5A+++

%2.

Jaystac:A 7nc. manufactures machinery use" in the mining in"ustry. ;n <anuary 2A 2+11 it lease" e3uipment (ith a cost of I2++A+++ to 2il-er 5oint Co. The 5-year lease calls for a 1+G "o(n payment an" e3ual annual payments at the en" of each year. The e3uipment has an expecte" useful life of 5 years. 2il-er 5oint*s incremental 'orro(ing rate is 1+GA an" it "epreciates similar e3uipment using the "ou'le-"eclining 'alance metho". The selling price of the e3uipment is I325A+++A an" the rate implicit in the lease is &GA (hich is :no(n to 2il-er 5oint Co. Ehat is the amount of interest expense recor"e" 'y 2il-er 5oint Co. for the year en"e" ecem'er 31A 2+11F 5L Annuity ue 5L ;r"inary Annuity 5L 2ingle 2um &GA 5 perio"s 4.31213 3.))2%1 .#&5+& 1+GA 5 perio"s 4.1#)&# 3.%)+%) .#2+)2 a. '. c. ". I2)A25+ I23A4++ I2#A+++ I32A5++

%3.

Jaystac:A 7nc. manufactures machinery use" in the mining in"ustry. ;n <anuary 2A 2+11 it lease" e3uipment (ith a cost of I2++A+++ to 2il-er 5oint Co. The 5-year lease calls for a 1+G "o(n payment an" e3ual annual payments of I%3A25) at the en" of each year. The e3uipment has an expecte" useful life of 5 years. 2il-er 5oint*s incremental 'orro(ing rate is 1+GA an" it "epreciates similar e3uipment using the "ou'le-"eclining 'alance metho". The selling price of the e3uipment is I325A+++A an" the rate implicit in the lease is &GA (hich is :no(n to 2il-er 5oint Co. Ehat is the 'oo: -alue of the lease" asset at ecem'er 31A 2+11A an" (hat is the 'alance in the $ease $ia'ility accountF Boo: Lalue of $ease" Asset I325A+++ I2#+A+++ I1)5A+++ I2+&A+++ Balance in $ease $ia'ilityMMMMMMMM I21)A243 I24&A4)1 I242A#43 I24&A4)1

a. '. c. ".

21 & 1= Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition %4. Jaystac:A 7nc. manufactures machinery use" in the mining in"ustry. ;n <anuary 2A 2+11 it lease" e3uipment (ith a cost of I2++A+++ to 2il-er 5oint Co. The 5-year lease calls for a 1+G "o(n payment an" e3ual annual payments at the en" of each year. The e3uipment has an expecte" useful life of 5 years. 7f the selling price of the e3uipment is I325A+++A an" the rate implicit in the lease is &GA (hat are the e3ual annual paymentsF 5L Annuity ue 5L ;r"inary Annuity 5L 2ingle 2um &GA 5 perio"s 4.31213 3.))2%1 .#&5+& 1+GA 5 perio"s 4.1#)&# 3.%)+%) .#2+)2 a. '. c. ". I%3A25) I#%A&31 I%5A&22 I&1A3)&

.se the follo(ing information for 3uestions %5 through &+. =Annuity ta'les on page 21-25.> Alt Corporation enters into an agreement (ith Hates 1entals Co. on <anuary 1A 2+11 for the purpose of leasing a machine to 'e use" in its manufacturing operations. The follo(ing "ata pertain to the agreementC =a> The term of the noncancela'le lease is 3 years (ith no rene(al option. 5ayments of I155A213 are "ue on ecem'er 31 of each year. ='> The fair -alue of the machine on <anuary 1A 2+11A is I4++A+++. The machine has a remaining economic life of 1+ yearsA (ith no sal-age -alue. The machine re-erts to the lessor upon the termination of the lease. =c> Alt "epreciates all machinery it o(ns on a straight-line 'asis. ="> Alt8s incremental 'orro(ing rate is 1+G per year. Alt "oes not ha-e :no(le"ge of the &G implicit rate use" 'y Hates. =e> 7mme"iately after signing the leaseA Hates fin"s out that Alt Corp. is the "efen"ant in a suit (hich is sufficiently material to ma:e collecti'ility of future lease payments "ou'tful. %5. Ehat type of lease is this from Alt Corporation8s -ie(pointF a. ;perating lease '. Capital lease c. 2ales-type lease ". irect-financing lease 7f Alt accounts for the lease as an operating leaseA (hat expenses (ill 'e recor"e" as a conse3uence of the lease "uring the fiscal year en"e" ecem'er 31A 2+11F a. epreciation 4xpense '. 1ent 4xpense c. 7nterest 4xpense ". epreciation 4xpense an" 7nterest 4xpense 7f the present -alue of the future lease payments is I4++A+++ at <anuary 1A 2+11A (hat is the amount of the re"uction in the lease lia'ility for Alt Corp. in the secon" full year of the lease if Alt Corp. accounts for the lease as a capital leaseF =1oun"e" to the nearest "ollar.> a. I115A213 '. I123A213 c. I12#A%34 ". I133A+%+

%#.

%%.

Accounting for $eases %&. From the -ie(point of HatesA (hat type of lease agreement existsF a. ;perating lease '. Capital lease c. 2ales-type lease ". irect-financing lease

21 & 1>

%).

7f Hates recor"s this lease as a "irect-financing leaseA (hat amount (oul" 'e recor"e" as $ease 1ecei-a'le at the inception of the leaseF a. I155A213 '. I3&5A))1 c. I4++A+++ ". I4#5A#3& Ehich of the follo(ing lease-relate" re-enue an" expense items (oul" 'e recor"e" 'y Hates if the lease is accounte" for as an operating leaseF a. 1ental 1e-enue '. 7nterest 7ncome c. epreciation 4xpense ". 1ental 1e-enue an" epreciation 4xpense Joo: Company lease" e3uipment to 4mley Company on <uly 1A 2+1+A for a one-year perio" expiring <une 3+A 2+11A for I#+A+++ a month. ;n <uly 1A 2+11A Joo: lease" this piece of e3uipment to Terry Company for a three-year perio" expiring <une 3+A 2+14A for I%5A+++ a month. The original cost of the e3uipment (as I4A&++A+++. The e3uipmentA (hich has 'een continually on lease since <uly 1A 2++#A is 'eing "epreciate" on a straightline 'asis o-er an eight-year perio" (ith no sal-age -alue. Assuming that 'oth the lease to 4mley an" the lease to Terry are appropriately recor"e" as operating leases for accounting purposesA (hat is the amount of income =expense> 'efore income taxes that each (oul" recor" as a result of the a'o-e facts for the year en"e" ecem'er 31A 2+11F Joo: 4mley Terry a. I21+A+++ I=3#+A+++> I=45+A+++> '. I21+A+++ I=3#+A+++> I=%5+A+++> c. I&1+A+++ I=#+A+++> I=15+A+++> ". I&1+A+++ I=##+A+++> I=45+A+++>

&+.

&1.

.se the follo(ing information for 3uestions &2 an" &3. Jull Co. lease" e3uipment to 1iggs Company on Bay 1A 2+11. At that time the collecti'ility of the minimum lease payments (as not reasona'ly pre"icta'le. The lease expires on Bay 1A 2+12. 1iggs coul" ha-e 'ought the e3uipment from Jull for I3A2++A+++ instea" of leasing it. Jull8s accounting recor"s sho(e" a 'oo: -alue for the e3uipment on Bay 1A 2++&A of I2A&++A+++. Jull8s "epreciation on the e3uipment in 2+11 (as I3#+A+++. uring 2+11A 1iggs pai" I%2+A+++ in rentals to Jull for the &-month perio". Jull incurre" maintenance an" other relate" costs un"er the terms of the lease of I#4A+++ in 2+11. After the lease (ith 1iggs expiresA Jull (ill lease the e3uipment to another company for t(o years. &2. Ignoring income taxesA the amount of expense incurre" 'y 1iggs from this lease for the year en"e" ecem'er 31A 2+11A shoul" 'e a. I2)#A+++. '. I3#+A+++. c. I#5#A+++. ". I%2+A+++.

21 & 2@ Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition &3. The income 'efore income taxes "eri-e" 'y Jull from this lease for the year en"e" ecem'er 31A 2+11A shoul" 'e a. I2)#A+++. '. I3#+A+++. c. I#5#A+++. ". I%2+A+++. ;n <anuary 2A 2+11A ,ol" 2tar $easing Company leases e3uipment to Bric: Co. (ith 5 e3ual annual payments of I4+A+++ eachA paya'le 'eginning ecem'er 31A 2+11. Bric: Co. agrees to guarantee the I25A+++ resi"ual -alue of the asset at the en" of the lease term. Bric:*s incremental 'orro(ing rate is 1+GA ho(e-er it :no(s that ,ol" 2tar*s implicit interest rate is &G. Ehat ?ournal entry (oul" ,ol" 2tar ma:e at <anuary 2A 2+11 assuming this is a "irectNfinancing leaseF &GA 5 perio"s 1+GA 5 perio"s a. $ease 1ecei-a'le 43uipment '. $ease 1ecei-a'le $oss 43uipment c. $ease 1ecei-a'le 43uipment ". $ease 1ecei-a'le 43uipment &5. 5L Annuity ue 4.31213 4.1#)&# 225A+++ 225A+++ 15)A%+& #5A2)2 225A+++ 1#%A155 1#%A155 1%#A&35 1%#A&35 5L ;r"inary Annuity 3.))2%1 3.%)+%) 5L 2ingle 2um .#&5+& .#2+)2

&4.

Bays Company has a machine (ith a cost of I4++A+++ (hich also is its fair mar:et -alue on the "ate the machine is lease" to 5ar: Company. The lease is for # years an" the machine is estimate" to ha-e an unguarantee" resi"ual -alue of I4+A+++. 7f the lessor8s interest rate implicit in the lease is 12GA the six 'eginning-of-the-year lease payments (oul" 'e a. I)2A3#1. '. I&2A4#5. c. I%&A1&+. ". I##A##%.

Accounting for $eases &#.

21 & 21

;n <anuary 2A 2+11A ,ol" 2tar $easing Company leases e3uipment to Bric: Co. (ith 5 e3ual annual payments of I4+A+++ eachA paya'le 'eginning ecem'er 31A 2+11. Bric: Co. agrees to guarantee the I25A+++ resi"ual -alue of the asset at the en" of the lease term. Bric:*s incremental 'orro(ing rate is 1+GA ho(e-er it :no(s that ,ol" 2tar*s implicit interest rate is &G. Ehat ?ournal entry (oul" Bric: Co. ma:e at ecem'er 31A 2+11 to recor" the first lease paymentF 5L Annuity ue 5L ;r"inary Annuity 5L 2ingle 2um &GA 5 perio"s 4.31213 3.))2%1 .#&5+& 1+GA 5 perio"s 4.1#)&# 3.%)+%) .#2+)2 a. $ease $ia'ility Cash '. $ease $ia'ility 7nterest 4xpense Cash c. $ease $ia'ility 7nterest 4xpense Cash ". $ease $ia'ility 7nterest 4xpense Cash 4+A+++ 4+A+++ 25A&53 14A14% 4+A+++ 23A2&5 1#A%15 4+A+++ &A2&5 1#A%15 25A+++

&%.

;n <anuary 2A 2+1+A ,ol" 2tar $easing Company leases e3uipment to Bric: Co. (ith 5 e3ual annual payments of I4+A+++ eachA paya'le 'eginning ecem'er 31A 2+1+. Bric: Co. agrees to guarantee the I25A+++ resi"ual -alue of the asset at the en" of the lease term. Bric:*s incremental 'orro(ing rate is 1+GA ho(e-er it :no(s that ,ol" 2tar*s implicit interest rate is &G. Ehat ?ournal entry (oul" Bric: Co. ma:e at ecem'er 31A 2+11 to recor" the secon" lease paymentF 5L Annuity ue 5L ;r"inary Annuity 5L 2ingle 2um &GA 5 perio"s 4.31213 3.))2%1 .#&5+& 1+GA 5 perio"s 4.1#)&# 3.%)+%) .#2+)2 a. $ease $ia'ility Cash 4+A+++ 4+A+++

'. $ease $ia'ility 25A#13 7nterest 4xpense 14A3&% Cash 4+A+++ c. $ease $ia'ility 2%A)21 7nterest 4xpense 12A+%) Cash 4+A+++ ". $ease $ia'ility 23A%#+ 7nterest 4xpense 1#A24+ Cash 4+A+++

21 & 22 Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition &&. ,eary Co. lease" a machine to ains Co. Assume the lease payments (ere ma"e on the 'asis that the resi"ual -alue (as guarantee" an" ,eary gets to recogni!e all the profitsA an" at the en" of the lease termA 'efore the lessee transfers the asset to the lessorA the lease" asset an" o'ligation accounts ha-e the follo(ing 'alancesC $ease" e3uipment un"er capital lease $ess accumulate" "epreciation--capital lease 7nterest paya'le ;'ligations un"er capital leases I4++A+++ 3&4A+++ I 1#A+++ I 1A52+ 14A4&+ I1#A+++

&).

7fA at the en" of the leaseA the fair mar:et -alue of the resi"ual -alue is I&A&++A (hat gain or loss shoul" ,eary recor"F a. I#A4&+ gain '. I%A12+ loss c. I%A2++ loss ". I&A&++ gain Jarter Company lease" machinery to 2tine Company on <uly 1A 2+11A for a ten-year perio" expiring <une 3+A 2+21. 43ual annual payments un"er the lease are I%5A+++ an" are "ue on <uly 1 of each year. The first payment (as ma"e on <uly 1A 2+11. The rate of interest use" 'y Jarter an" 2tine is )G. The cash selling price of the machinery is I525A+++ an" the cost of the machinery on Jarter8s accounting recor"s (as I4#5A+++. Assuming that the lease is appropriately recor"e" as a sale for accounting purposes 'y JarterA (hat amount of interest re-enue (oul" Jarter recor" for the year en"e" ecem'er 31A 2+11F a. I4%A25+ '. I4+A5++ c. I2+A25+ ". I+ 5ye Company lease" e3uipment to the 5olan Company on <uly 1A 2+11A for a ten-year perio" expiring <une 3+A 2+21. 43ual annual payments un"er the lease are I&+A+++ an" are "ue on <uly 1 of each year. The first payment (as ma"e on <uly 1A 2+11. The rate of interest contemplate" 'y 5ye an" 5olan is )G. The cash selling price of the e3uipment is I5#+A+++ an" the cost of the e3uipment on 5ye8s accounting recor"s (as I4)#A+++. Assuming that the lease is appropriately recor"e" as a sale for accounting purposes 'y 4'yA (hat is the amount of profit on the sale an" the interest re-enue that 5ye (oul" recor" for the year en"e" ecem'er 31A 2+11F a. I#4A+++ an" I5+A4++ '. I#4A+++ an" I43A2++ c. I#4A+++ an" I21A#++ ". I+ an" I+

)+.

.se the follo(ing information for 3uestions )1 an" )2. Betro CompanyA a "ealer in machinery an" e3uipmentA lease" e3uipment to 2an"sA 7nc.A on <uly 1A 2+11. The lease is appropriately accounte" for as a sale 'y Betro an" as a purchase 'y 2an"s. The lease is for a 1+-year perio" =the useful life of the asset> expiring <une 3+A 2+21. The first of 1+ e3ual annual payments of I#21A+++ (as ma"e on <uly 1A 2+11. Betro ha" purchase" the e3uipment for I3A)++A+++ on <anuary 1A 2+11A an" esta'lishe" a list selling price of I5A4++A+++ on the e3uipment. Assume that the present -alue at <uly 1A 2+11A of the rent payments o-er the lease term "iscounte" at &G =the appropriate interest rate> (as I4A5++A+++.

Accounting for $eases )1.

21 & 23

Assuming that 2an"sA 7nc. uses straight-line "epreciationA (hat is the amount of "epreciation an" interest expense that 2an"s shoul" recor" for the year en"e" ecem'er 31A 2+11F a. I225A+++ an" I155A1#+ '. I225A+++ an" I1&+A+++ c. I2%+A+++ an" I155A1#+ ". I2%+A+++ an" I1&+A+++ Ehat is the amount of profit on the sale an" the amount of interest income that Betro shoul" recor" for the year en"e" ecem'er 31A 2+11F a. I+ an" I155A1#+ '. I#++A+++ an" I155A1#+ c. I#++A+++ an" I1&+A+++ ". I)++A+++ an" I3#+A+++ 1oman Company lease" e3uipment from 6oenig Company on <uly 1A 2+11A for an eightyear perio" expiring <une 3+A 2+1). 43ual annual payments un"er the lease are I3++A+++ an" are "ue on <uly 1 of each year. The first payment (as ma"e on <uly 1A 2+11. The rate of interest contemplate" 'y 1oman an" $ennon is &G. The cash selling price of the e3uipment is I1A&#1A&%5 an" the cost of the e3uipment on 6oenig8s accounting recor"s (as I1A#5+A+++. Assuming that the lease is appropriately recor"e" as a sale for accounting purposes 'y 6oenigA (hat is the amount of profit on the sale an" the interest income that $ennon (oul" recor" for the year en"e" ecem'er 31A 2+11F a. I+ an" I+ '. I+ an" I#2A4%5 c. I211A&%5 an" I#2A4%5 ". I211A&%5 an" I%4A4%5

)2.

)3.

.se the follo(ing information for 3uestions )4 through )&. ,age Co. purchases lan" an" constructs a ser-ice station an" car (ash for a total of I3#+A+++. At <anuary 2A 2+1+A (hen construction is complete"A the facility an" lan" on (hich it (as constructe" are sol" to a ma?or oil company for I4++A+++ an" imme"iately lease" from the oil company 'y ,age. Fair -alue of the lan" at time of the sale (as I4+A+++. The lease is a 1+-yearA noncancela'le lease. ,age uses straight-line "epreciation for its other -arious 'usiness hol"ings. The economic life of the facility is 15 years (ith !ero sal-age -alue. Title to the facility an" lan" (ill pass to ,age at termination of the lease. A partial amorti!ation sche"ule for this lease is as follo(sC 5ayments 7nterest Amorti!ation Balance <an. 2A 2+1+ I4++A+++.++ ec. 31A 2+1+ I#5A+)&.13 I4+A+++.++ I25A+)&.13 3%4A)+1.&% ec. 31A 2+11 #5A+)&.13 3%A4)+.1) 2%A#+%.)4 34%A2)3.)3 ec. 31A 2+12 #5A+)&.13 34A%2).3) 3+A3#&.%4 31#A)25.1) )4. From the -ie(point of the lessorA (hat type of lease is in-ol-e" a'o-eF a. 2ales-type lease '. 2ale-lease'ac: c. irect-financing lease ". ;perating lease

21 & 26 Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition )5. Ehat is the "iscount rate implicit in the amorti!ation sche"ule presente" a'o-eF a. 12G '. 1+G c. &G ". #G The total lease-relate" expenses recogni!e" 'y the lessee "uring 2+11 is (hich of the follo(ingF =1oun"e" to the nearest "ollar.> a. I#4A+++ '. I#5A+)& c. I%3A4)+ ". I#1A4)+ Ehat is the amount of the lessee8s lia'ility to the lessor after the paymentF =1oun"e" to the nearest "ollar.> a. I4++A+++ '. I3%4A)+2 c. I34%A2)4 ". I31#A)25 ecem'er 31A 2+12

)#.

)%.

9)&.

The total lease-relate" income recogni!e" 'y the lessee "uring 2+11 is (hich of the follo(ingF a. I -+'. I2A##% c. I4A+++ ". I4+A+++ ;n <une 3+A 2+11A Fal: Co. sol" e3uipment to an unaffiliate" company for I%++A+++. The e3uipment ha" a 'oo: -alue of I#3+A+++ an" a remaining useful life of 1+ years. That same "ayA Fal: lease" 'ac: the e3uipment at I%A+++ per month for 5 years (ith no option to rene( the lease or repurchase the e3uipment. Fal:8s rent expense for this e3uipment for the year en"e" ecem'er 31A 2+11A shoul" 'e a. I&4A+++. '. I42A+++. c. I35A+++. ". I2&A+++.

9)).

*ulti$le C oi#e Ans(ers'Co-$utational


Ite-

52. 53. 54. 55. 5#. 5%. 5&.

Ans % '

Ite-

Ans%

Ite-

Ans%

Ite-

Ans%

Ite-

Ans%

Ite-

Ans%

Ite-

Ans%

c c " c a c

5). #+. #1. #2. #3. #4. #5.

" c c a ' " c

##. #%. #&. #). %+. %1. %2.

c " a c " c '

%3. %4. %5. %#. %%. %&. %).

c a ' ' c a c

&+. &1. &2. &3. &4. &5. &#.

" a " a " ' '

&%. &&. &). )+. )1. )2. )3.

c c c c a ' c

)4. )5. )#. )%. 9)&. 9)).

c ' " " ' '

Accounting for $eases Future Lalue of ;r"inary Annuity of 1 5erio" 1 2 3 4 5 # % & ) 1+ 5G 1.+++++ 2.+5+++ 3.1525+ 4.31+13 5.525#3 #.&+1)1 &.142+1 ).54)11 11.+2#5# 12.5%%&) #G 1.+++++ 2.+#+++ 3.1&3#+ 4.3%4#2 5.#3%+) #.)%532 &.3)3&4 ).&)%4% 11.4)132 13.1&+%) &G 1.+++++ 2.+&+++ 3.24#4+ 4.5+#11 5.&###+ %.335)2 &.)22&+ 1+.#3##3 12.4&%5# 14.4&#5# 1+G 1.+++++ 2.1++++ 3.31+++ 4.#41++ #.1+51+ %.%15#1 ).4&%1% 11.435&) 13.5%)4& 15.)3%43 12G 1.+++++ 2.12+++ 3.3%44+ 4.%%)33 #.352&5 &.1151) 1+.+&)+1 12.2))#) 14.%%5## 1%.54&%4

21 & 2:

5resent Lalue of an ;r"inary Annuity of 1 5erio" 1 2 3 4 5 # % & ) 1+ 5G .)523& 1.&5)41 2.%2325 3.545)5 4.32)4& 5.+%5#) 5.%&#3% #.4#321 %.1+%&2 %.%21%3 #G .)434+ 1.&333) 2.#%3+1 3.4#511 4.2123# 4.)1%32 5.5&23& #.2+)%) #.&+1#) %.3#++) &G .)25)3 1.%&32# 2.5%%1+ 3.31213 3.))2%1 4.#22&& 5.2+#3% 5.%4##4 #.24#&) #.%1++& 1+G .)+)+) 1.%3554 2.4&#&5 3.1#)&# 3.%)+%) 4.3552# 4.&#&42 5.334)3 5.%5)+2 #.1445% 12G .&)2&# 1.#)++5 2.4+1&3 3.+3%35 3.#+4%& 4.11141 4.5#3%# 4.)#%#4 5.32&25 5.#5+22

*ULTIPLE CHOICE'CPA A!a$te!


1++. $ease A "oes not contain a 'argain purchase optionA 'ut the lease term is e3ual to )+ percent of the estimate" economic life of the lease" property. $ease B "oes not transfer o(nership of the property to the lessee 'y the en" of the lease termA 'ut the lease term is e3ual to %5 percent of the estimate" economic life of the lease" property. Jo( shoul" the lessee classify these leasesF $ease A $ease B a. ;perating lease Capital lease '. ;perating lease ;perating lease c. Capital lease Capital lease ". Capital lease ;perating lease ;n ecem'er 31A 2+11A BurtonA 7nc. lease" machinery (ith a fair -alue of I&4+A+++ from Cey 1entals Co. The agreement is a six-year noncancela'le lease re3uiring annual payments of I1#+A+++ 'eginning ecem'er 31A 2+11. The lease is appropriately accounte" for 'y Burton as a capital lease. Burton8s incremental 'orro(ing rate is 11G. Burton :no(s the interest rate implicit in the lease payments is 1+G. The present -alue of an annuity "ue of 1 for # years at 1+G is 4.%)+&. The present -alue of an annuity "ue of 1 for # years at 11G is 4.#)5).

1+1.

21 & 2; Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition 7n its ecem'er 31A 2+11 'alance sheetA Burton shoul" report a lease lia'ility of a. I#+#A52&. '. I#&+A+++. c. I%51A344. ". I%##A52&. 1+2. ;n ecem'er 31A 2+1+A Jarris Co. lease" a machine from CattA 7nc. for a fi-e-year perio". 43ual annual payments un"er the lease are I#3+A+++ =inclu"ing I3+A+++ annual executory costs> an" are "ue on ecem'er 31 of each year. The first payment (as ma"e on ecem'er 31A 2+1+A an" the secon" payment (as ma"e on ecem'er 31A 2+11. The fi-e lease payments are "iscounte" at 1+G o-er the lease term. The present -alue of minimum lease payments at the inception of the lease an" 'efore the first annual payment (as I2A5+2A+++. The lease is appropriately accounte" for as a capital lease 'y Jarris. 7n its ecem'er 31A 2+11 'alance sheetA Jarris shoul" report a lease lia'ility of a. I1A)+2A+++. '. I1A&%2A+++. c. I1A%11A&++. ". I1A4)2A2++. A lessee ha" a ten-year capital lease re3uiring e3ual annual payments. The re"uction of the lease lia'ility in year 2 shoul" e3ual a. the current lia'ility sho(n for the lease at the en" of year 1. '. the current lia'ility sho(n for the lease at the en" of year 2. c. the re"uction of the lease lia'ility in year 1. ". one-tenth of the original lease lia'ility.

1+3.

.se the follo(ing information for 3uestions 1+4 an" 1+5. ;n <anuary 2A 2+11A Jernan"e!A 7nc. signe" a ten-year noncancela'le lease for a hea-y "uty "rill press. The lease stipulate" annual payments of I15+A+++ starting at the en" of the first yearA (ith title passing to Jernan"e! at the expiration of the lease. Jernan"e! treate" this transaction as a capital lease. The "rill press has an estimate" useful life of 15 yearsA (ith no sal-age -alue. Jernan"e! uses straight-line "epreciation for all of its plant assets. Aggregate lease payments (ere "etermine" to ha-e a present -alue of I)++A+++A 'ase" on implicit interest of 1+G. 1+4. 7n its 2+11 income statementA (hat amount of interest expense shoul" Jernan"e! report from this lease transactionF a. I+ '. I5#A25+ c. I%5A+++ ". I)+A+++ 7n its 2+11 income statementA (hat amount of "epreciation expense shoul" Jernan"e! report from this lease transactionF a. I15+A+++ '. I1++A+++ c. I)+A+++ ". I#+A+++

1+5.

Accounting for $eases 1+#.

21 & 2<

7n a lease that is recor"e" as a sales-type lease 'y the lessorA interest re-enue a. shoul" 'e recogni!e" in full as re-enue at the lease8s inception. '. shoul" 'e recogni!e" o-er the perio" of the lease using the straight-line metho". c. shoul" 'e recogni!e" o-er the perio" of the lease using the effecti-e interest metho". ". "oes not arise. Torrey Co. manufactures e3uipment that is sol" or lease". ;n ecem'er 31A 2+11A Torrey lease" e3uipment to alton for a fi-e-year perio" en"ing ecem'er 31A 2+1#A at (hich "ate o(nership of the lease" asset (ill 'e transferre" to alton. 43ual payments un"er the lease are I22+A+++ =inclu"ing I2+A+++ executory costs> an" are "ue on ecem'er 31 of each year. The first payment (as ma"e on ecem'er 31A 2+11. Collecti'ility of the remaining lease payments is reasona'ly assure"A an" Torrey has no material cost uncertainties. The normal sales price of the e3uipment is I%%+A+++A an" cost is I#++A+++. For the year en"e" ecem'er 31A 2+11A (hat amount of income shoul" Torrey reali!e from the lease transactionF a. I1%+A+++ '. I22+A+++ c. I23+A+++ ". I33+A+++

1+%.

91+&. <amar Co. sol" its hea"3uarters 'uil"ing at a gainA an" simultaneously lease" 'ac: the 'uil"ing. The lease (as reporte" as a capital lease. At the time of the saleA the gain shoul" 'e reporte" as a. operating income. '. an extraor"inary itemA net of income tax. c. a separate component of stoc:hol"ers8 e3uity. ". a "eferre" gain. 91+). ;n ecem'er 31A 2+11A Ja"en Corp. sol" a machine to 1yan an" simultaneously lease" it 'ac: for one year. 5ertinent information at this "ate follo(sC 2ales price Carrying amount 5resent -alue of reasona'le lease rentals =I%A5++ for 12 months O 12G> 4stimate" remaining useful life I)++A+++ &25A+++ &5A+++ 12 years

7n Ja"en*s ecem'er 31A 2+11 'alance sheetA the "eferre" profit from the sale of this machine shoul" 'e a. I&5A+++. '. I%5A+++. c. I1+A+++. ". I+.

*ulti$le C oi#e Ans(ers'CPA A!a$te!


IteAns% IteAns% IteAns% IteAns% IteAns%

1++. 1+1.

c a

1+2. 1+3.

" a

1+4. 1+5.

" "

1+#. 1+%.

c a

91+& . 91+)

" "

21 & 2= Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition

)ERI5ATIONS ' Co-$utational


No% Ans(er
52. 53. 54. 55. 5#. 5%. 5&. 5). #+. #1. #2. #3. #4. #5. ##. #%. #& #). ' c c " c a c " c c a ' " c c " a c

)erivation $495, 000 1 4 I)+A+++ P D I)4A125. 12 10


I#%1A++& Q .+& D I53A#&1A I#%1A++& R 15 D I44A%34. I3A+++A+++ R #.1445% D I4&&A23# =5L of ;r"inary Annuity Ta'le>. I4&&A23# P I1+A+++ D I4)&A23%. Conceptual. ConceptualA FL excee"s cost. I3A+++A+++ R 1+ D I3++A+++. &01+ D .& S %5G of economic life. =I1+2A+++ - I15A+++> Q 4.))2%1 D I434A3##. I1A1%3A#&5 N I2++A+++ D I)%3A#&5 Q .1+ D I)%A3#) I)%3A#&5 N =I2++A+++ N I)%A3#)> D I&%1A+54. =I2+&A4)3 N I5+A+++> Q .1+ D I15A&4). TI15&A4)3 N =I5+A+++ - I15A&4)>U Q .1+ D I12A434. I&&+A2#4 N I15+A+++ D I%3+A2#4. I22%A44& Q .1+ D I22A%45K =I22%A44& N +> R % D I32A4)3. TI22%A44& N =I#+A+++ N I22A%45>U Q .1+ D I1)A+1). =I45+A+++ N I5+A+++> R & D I5+A+++. I&#A+3& 3.5%%1+ D I3+%A%#%. I&#A+3& 3.5%%1+ D I3+%A%#% =I3+%A%#% N I&#A+3&> .+& D I1%A%3&. I&#A+3& 3.5%%1+ D I3+%A%#% I&#A+3& N T=I3+%A%#% N I&#A+3&> .+&U D I#&A3++. I&#A+3& 3.5%%1+ D I3+%A%#% =I3+%A%#% N +> 4 D I%#A)42. =I325A+++ .)+> 3.))2%1 D I%3A25) I%3A25) 3.))2%1 D I2)2A5+2 I2)2A5+2 .+& D I23A4++.

%+.

"

%1.

%2.

'

Accounting for $eases

21 & 2>

)ERI5ATIONS ' Co-$utational 0#ont%1


No% Ans(er
%3. c

)erivation
I325A+++ N =325A+++ .4+> D I1)5A+++ I%3A25) 3.))2%1 D I2)2A5+2 I2)2A5+2 N TI%3A25) N =I2)2A5+2 .+&>U D I242A#43. =I325A+++ .)+> 3.))2%1 D I%3A25). I155A213 Q 2.4&#&5 D I3&5A))1K I3&5A))1 @@@@ D )#G S )+G. I4++A+++

%4. %5.

a '

%#. %%. %&. %). &+. &1.

' c a c " a

Conceptual. I4++A+++ N TI155A213 N =I4++A+++ Q .1>U D I2&4A%&%. I155A213 N =I2&4A%&% Q.1> D I12#A%34. Fails to meet ,roup 77 re3uirements. Fair -alue D I4++A+++. Conceptual. Joo:C 4mleyC TerryC I%2+A+++. I%2+A+++ N I#4A+++ N I3#+A+++ D I2)#A+++. =I4+A+++ 3.))2%1> P =I25A+++ .#&5+&> D I1%#A&35. TI4++A+++ N =I4+A+++ Q .5+##3>U R 4.#+4%& D I&2A4#5. =I4+A+++ 3.))2%1> P =I25A+++ .#&5+&> D I1%#A&35. I4+A+++ N =I1%#A&35 .+&> D I25A&53. =I4+A+++ 3.))2%1> P =I25A+++ .#&5+&> D I1%#A&35 I4+A+++ N =I1%#A&35 .+&> D I25A&53 =I1%#A&35 N I25A&53> .+& D I12A+%) 7nterest exp. I&A&++ N I1#A+++ D =I%A2++>. =I525A+++ N I%5A+++> Q .+) Q #012 D I2+A25+. I5#+A+++ N I4)#A+++ D I#4A+++K =I5#+A+++ N I&+A+++> Q .+) Q #012 D I21A#++. =I#+A+++ Q #> P =I%5A+++ #> N =4A&++A+++ R &> D I21+A+++ =I#+A+++> Q # D I=3#+A+++> =I%5A+++> Q # D I=45+A+++>.

&2. &3. &4. &5. &#.

" a " ' '

&%.

&&. &). )+.

c c c

21 & 3@ Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition

)ERI5ATIONS ' Co-$utational 0#ont%1


No% Ans(er
)1. a

)erivation $4, 500, 000 1 4 D I225A+++. 2 10


=I4A5++A+++ N I#21A+++> Q .+4 D I155A1#+. I4A5++A+++ N I3A)++A+++ D I#++A+++. =I4A5++A+++ N I#21A+++> Q .+4 D I155A1#+. I1A&#1A&%5 N I1A#5+A+++ D I211A&%5. =I1A&#1A&%5 N I3++A+++> Q .+4 D I#2A4%5. Conceptual. I4+A+++ I4++A+++ @@@@ D 1+G or @@@@@ D #.144#9 I4++A+++ I#5A+)&.13 9#.144# D 5L factor of or"inary annuity of I1 for 1+ years at 1+G.

)2. )3. )4. )5.

' c c '

)#. )%. 9)&. 9)).

" " ' '

T=I4++A+++ N I4+A+++> R 15U P I3%A4)+ D I#1A4)+. I31#A)25 =2ee amorti!ation ta'le.> =I4++A+++ N I3#+A+++> R 15 D I2A##%. I%A+++ Q # D I42A+++.

)ERI5ATIONS ' CPA A!a$te!


No% Ans(er
1++. 1+1. 1+2. 1+3. 1+4. 1+5. 1+#. 1+%. 91+&. c a " a " " c a "

)erivation
Conceptual. =I1#+A+++ Q 4.%)+&> N I1#+A+++ D I#+#A52&. I2A5+2A+++ N I#3+A+++ P I3+A+++ D I1A)+2A+++ =2+1+>. I1A)+2A+++ N TI#++A+++ N =I1A)+2A+++ Q .1+>U D I1A4)2A2++ =2+11>. Conceptual. I)++A+++ Q .1+ D I)+A+++. I)++A+++ R 15 D I#+A+++. Conceptual. I%%+A+++ N I#++A+++ D I1%+A+++. Conceptual.

Accounting for $eases

21 & 31

)ERI5ATIONS ' CPA A!a$te! 0#ont%1


No% Ans(er
91+). "

)erivation $85,000 D ).44GA V 1+G of FL of asset it is a minor lease'ac:. $900,000

E2ERCISES
EA% 21&11@@Capital lease =4ssay>. 4xplain the proce"ures use" 'y the lessee to account for a capital lease. Solution 21&11@ Ehen the capital lease metho" is use"A the lessee treats the lease transactions as if the asset (ere 'eing purchase". The asset an" lia'ility are recor"e" at the lo(er of =1> the present -alue of the minimum lease payments =exclu"ing executory costs> or =2> the fair -alue of the asset at the inception of the lease. The present -alue of the lease payments is compute" using the lessee8s incremental 'orro(ing rateA unless the implicit rate use" 'y the lessor is lo(er an" the lessee has :no(le"ge of it. The effecti-e-interest metho" is use" to allocate each lease payment 'et(een interest expense an" a re"uction of the lease lia'ility. 7f the lease transfers o(nership or contains a 'argain purchase optionA the asset is amorti!e" in a manner consistent (ith the lessee8s normal "epreciation policy on assets o(ne"A o-er the economic life of the asset an" allo(ing for resi"ual -alue. 7f the lease "oes not transfer o(nership or contain a 'argain purchase optionA the lease" asset is amorti!e" o-er the lease term. EA% 21&111@Capital lease amorti!ation an" ?ournal entries. Jughey Co. as lessee recor"s a capital lease of machinery on <anuary 1A 2+11. The se-en annual lease payments of I35+A+++ are ma"e at the en" of each year. The present -alue of the lease payments at 1+G is I1A%+4A+++. Jughey uses the effecti-e-interest metho" of amorti!ation an" sum-of-the-years8-"igits "epreciation =no resi"ual -alue>. Instru#tions =1oun" to the nearest "ollar.> =a> 5repare an amorti!ation ta'le for 2+11 an" 2+12. ='> 5repare all of Jughey8s ?ournal entries for 2+11. Solution 21&111 =a> ate 101011 12031011 12031012 Annual 5ayments I35+A+++ 35+A+++ 1+G 7nterest I1%+A4++ 152A44+ 1e"uction ;f $ia'ility I1%)A#++ 1)%A5#+ $ease $ia'ility I1A%+4A+++ 1A524A4++ 1A32#A&4+

21 & 32 Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition Solution 21&111 =cont.> ='> $ease" Bachinery........................................................................ 1A%+4A+++ $ease $ia'ility................................................................... 7nterest 4xpense.......................................................................... $ease $ia'ility............................................................................... Cash................................................................................. epreciation 4xpense =%02& Q I1A%+4A+++>.................................. Accumulate" epreciation ............................................... EA% 21&112@;perating lease. Baris Co. purchase" a machine on <anuary 1A 2+11A for I1A+++A+++ for the express purpose of leasing it. The machine is expecte" to ha-e a fi-e-year lifeA no sal-age -alueA an" 'e "epreciate" on a straight-line monthly 'asis. ;n April 1A 2+11A un"er a cancela'le leaseA Baris lease" the machine to un'ar Company for I3++A+++ a year for a four-year perio" en"ing Barch 31A 2+15. Baris incurre" total maintenance an" other relate" costs un"er the pro-isions of the lease of I15A+++ relating to the year en"e" ecem'er 31A 2+11. Jarley pai" I3++A+++ to Baris on April 1A 2+11. Instru#tions TAssume the operating metho" is appropriate for parts =a> an" ='>.U =a> .n"er the operating metho"A (hat shoul" 'e the income 'efore income taxes "eri-e" 'y Baris Co. from this lease for the year en"e" ecem'er 31A 2+11F ='> Ehat shoul" 'e the amount of rent expense incurre" 'y un'ar from this lease for the year en"e" ecem'er 31A 2+11F Solution 21&112 =a> 1e-enue 401011@12031011 =I3++A+++ Q )012> 4xpensesC epreciation =I2++A+++ Q )012> BaintenanceA etc. 7ncome 'efore taxes I225A+++ I15+A+++ 15A+++ 1#5A+++ I #+A+++ 1%+A4++ 1%)A#++ 35+A+++ 42#A+++ 42#A+++ 1A%+4A+++

='>

1ent expenseA 401011@12031011 =I3++A+++ Q )012> D I225A+++.

EA% 21&113@$ease criteria for classification 'y lessor. Ehat are the criteria that must 'e satisfie" for a lessor to classify a lease as a "irect-financing or sales-type leaseF Solution 21&113 7n or"er for a lessor to classify a lease as a "irect-financing or a sales-type leaseA the lease at the "ate of inception must satisfy one or more of the follo(ing ,roup 7 criteria =aA 'A cA an" "> an" 'oth of the follo(ing ,roup 77 criteria =a an" '>C ,roup 7 =a> The lease transfers o(nership of the property to the lessee. ='> The lease contains a 'argain purchase option.

Accounting for $eases Solution 21&113 =cont.>

21 & 33

=c> The lease term is e3ual to %5G or more of the estimate" economic life of the lease" property. ="> The present -alue of the minimum lease payments =exclu"ing executory costs> e3uals or excee"s )+G of the fair -alue of the lease" property. ,roup 77 =a> Collecti'ility of the payments re3uire" from the lessee is reasona'ly pre"icta'le. ='> /o important uncertainties surroun" the amount of unreim'ursa'le costs yet to 'e incurre" 'y the lessor un"er the lease. EA% 21&116@ irect-financing lease =essay>. 4xplain the proce"ures use" to account for a "irect-financing lease. Solution 21&116 The lessor recor"s the present -alue of the minimum lease payments =exclu"ing executory costs> plus the present -alue of the unguarantee" resi"ual -alue =a guarantee" resi"ual -alue is inclu"e" in the minimum lease payments> as $ease 1ecei-a'le an" remo-es the asset from the 'oo:s. The lessor recor"s payments recei-e" as a re"uction in $ease 1ecei-a'le an" 7nterest 1e-enue. 7nterest re-enue is recogni!e" 'y using the effecti-e-interest metho". The implicit interest rate is applie" to the "eclining 'alance of the $ease 1ecei-a'le 'alance. The implicit rate is the rate of interest that (ill "iscount the minimum lease payments =exclu"ing executory costs> an" the unguarantee" resi"ual -alue to the fair -alue of the asset at the inception of the lease. EA% 21&11:@$essor accounting@sales-type lease. Jayes Corp. is a manufacturer of truc: trailers. ;n <anuary 1A 2+11A Jayes Corp. leases ten trailers to $ester Company un"er a six-year noncancela'le lease agreement. The follo(ing information a'out the lease an" the trailers is pro-i"e"C 1. 2. 3. 4. 43ual annual payments that are "ue on ecem'er 31 each year pro-i"e Jayes Corp. (ith an &G return on net in-estment =present -alue factor for # perio"s at &G is 4.#22&&>. Titles to the trailers pass to $ester at the en" of the lease. The fair -alue of each trailer is I5+A+++. The cost of each trailer to Jayes Corp. is I45A+++. 4ach trailer has an expecte" useful life of nine years. Collecti'ility of the lease payments is reasona'ly pre"icta'le an" there are no important uncertainties surroun"ing the amount of costs yet to 'e incurre" 'y Jayes Corp.

Instru#tions =a> Ehat type of lease is this for the lessorF iscuss. ='> Calculate the annual lease payment. =1oun" to nearest "ollar.> =c> 5repare a lease amorti!ation sche"ule for Jayes Corp. for the first three years. ="> 5repare the ?ournal entries for the lessor for 2+11 an" 2+12 to recor" the lease agreementA the receipt of the lease rentalsA an" the recognition of income =assume the use of a perpetual in-entory metho" an" roun" all amounts to the nearest "ollar>.

21 & 36 Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition Solution 21&11: =a> 7t is a sales-type lease to the lessorA Jayes Corp. Jayes8s =the manufacturer> profit upon sale is I5+A+++A (hich is recogni!e" in the year of sale =2+11>. 7t is not an operating lease 'ecause title to the assets passes to the lesseeA the present -alue =I5++A+++> of the minimum lease payments e3uals or excee"s )+G =I45+A+++> of the fair -alue of the lease" trailersA collecti'ility is reasona'ly assure"A an" no important uncertainties surroun" the amount of unreim'ursa'le costs yet to 'e incurre" 'y the lessor. The remaining accounting treatment is similar to that accor"e" a "irect-financing lease. ='> =c> =I5+A+++ Q 1+> R 4.#22&& D I1+&A15&. $ease Amorti!ation 2che"ule =$essor> Annual $ease 1ental I1+&A15& 1+&A15& 1+&A15& 7nterest on $ease 1ecei-a'le I4+A+++ 34A54% 2&A#5& $ease 1ecei-a'le 1eco-ery I#&A15& %3A#11 %)A5++ $ease 1ecei-a'le I5++A+++ 431A&42 35&A231 2%&A%31 5++A+++ 45+A+++ 5++A+++ 45+A+++ 1+&A15& #&A15& 4+A+++ 1+&A15& %3A#11 34A54%

ate 101011 12031011 12031012 12031013 =">

<anuary 1A 2+11 $ease 1ecei-a'le......................................................................... Cost of ,oo"s 2ol"...................................................................... 2ales 1e-enue................................................................. 7n-entory........................................................................... ecem'er 31A 2+11 Cash............................................................................................. $ease 1ecei-a'le............................................................. 7nterest 1e-enue.............................................................. ecem'er 31A 2+12 Cash............................................................................................. $ease 1ecei-a'le............................................................. 7nterest 1e-enue..............................................................

?EA% 21&11;@$essee an" lessor accounting =sale-lease'ac:>. ;n <anuary 1A 2+11A Borris Company sells lan" to $ope! Corporation for I#A+++A+++A an" imme"iately leases the lan" 'ac:. The follo(ing information relates to this transactionC 1. The term of the noncancela'le lease is 2+ years an" the title transfers to Borris Company at the en" of the lease term. 2. The lan" has a cost 'asis of I5A+4+A+++ to Borris. 3. The lease agreement calls for e3ual rental payments of I#11A112 at the en" of each year. 4. The lan" has a fair mar:et -alue of I#A+++A+++ on <anuary 1A 2+11. 5. The incremental 'orro(ing rate of Borris Company is 1+G. Borris is a(are that $ope! Corporation set the annual rentals to ensure a rate of return of &G. #. Borris Company pays all executory costs (hich total I255A+++ in 2+11.

Accounting for $eases ?EA% 21&11; =cont.>

21 & 3:

%. Collecti'ility of the rentals is reasona'ly pre"icta'leA an" there are no important uncertainties surroun"ing the costs yet to 'e incurre" 'y the lessor. Instru#tions =a> 5repare the ?ournal entries for the entire year 2+11 on the 'oo:s of Borris Company to reflect the a'o-e sale an" lease transactions =inclu"e a partial amorti!ation sche"ule an" roun" all amounts to the nearest "ollar.> ='> 5repare the ?ournal entries for the entire year 2+11 on the 'oo:s of $ope! Corporation to reflect the a'o-e purchase an" lease transactions. ?Solution 21&11; =a> Borris Company =$essee> <anuary 1A 2+11 Cash............................................................................................. #A+++A+++ $an".................................................................................. .nearne" 5rofit on 2ale-$ease'ac:................................. $ease" $an" .n"er Capital $eases............................................. #A+++A+++ $ease $ia'ility................................................................... Throughout 2+11 4xecutory Costs =7nsurance an" Taxes>....................................... 255A+++ Accounts 5aya'le an" Cash............................................. ecem'er 31A 2+11 .nearne" 5rofit on 2ale-$ease'ac:............................................. 1e-enue from 2ale-$ease'ac: =I)#+A+++ R 2+>............... 7nterest 4xpense.......................................................................... $ease $ia'ility............................................................................... Cash................................................................................. 5artial $ease Amorti!ation 2che"ule ate 101011 12031011 ='> Annual $ease 5ayment I#11A112 7nterest &G I4&+A+++ 1e"uction of $ease ;'ligation I131A112 Balance I#A+++A+++ 5A&#&A&&&

5A+4+A+++ )#+A+++ #A+++A+++

255A+++

4&A+++ 4&A+++ 4&+A+++ 131A112 #11A112

$ope! Corporation =$essor> <anuary 1A 2+11 $an"............................................................................................. #A+++A+++ Cash................................................................................. $ease 1ecei-a'le......................................................................... #A+++A+++ $an".................................................................................. ecem'er 31A 2+11 Cash............................................................................................. $ease 1ecei-a'le............................................................. 7nterest 1e-enue.............................................................. #11A112

#A+++A+++ #A+++A+++

131A112 4&+A+++

21 & 3; Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition ?EA% 21&11<@2ale-lease'ac:. ;n <anuary 1A 2+11A Jester Co. sells machinery to Bec: Corp. at its fair -alue of I4&+A+++ an" leases it 'ac:. The machinery ha" a carrying -alue of I42+A+++A the lease is for 1+ years an" the implicit rate is 1+G. The lease payments of I%1A+++ start on <anuary 1A 2+11. Jester uses straight-line "epreciation an" there is no resi"ual -alue. Instru#tions =a> 5repare all of Jester8s entries for 2+11. ='> 5repare all of Bec:8s entries for 2+11. ?Solution 21&11< =a> Jester Co. =$essee> <anuary 1A 2+11 Cash............................................................................................. Bachinery......................................................................... .nearne" 5rofit on 2ale-$ease'ac:................................. $ease" Bachinery........................................................................ $ease $ia'ility................................................................... $ease $ia'ility............................................................................... Cash................................................................................. ecem'er 31A 2+11 epreciation 4xpense.................................................................. Accumulate" epreciation@Capital $ease....................... .nearne" 5rofit on 2ale-$ease'ac:............................................. epreciation 4xpense....................................................... 7nterest 4xpense T1+G Q =I4&+A+++ N I%1A+++>U.......................... 7nterest 5aya'le................................................................ ='> Bec: Corp. =$essor> <anuary 1A 2+11 Bachinery..................................................................................... Cash................................................................................. $ease 1ecei-a'le......................................................................... Bachinery......................................................................... Cash............................................................................................. $ease 1ecei-a'le............................................................. ecem'er 31A 2+11 7nterest 1ecei-a'le....................................................................... 7nterest 1e-enue..............................................................

4&+A+++ 42+A+++ #+A+++ 4&+A+++ 4&+A+++ %1A+++ %1A+++ 4&A+++ 4&A+++ #A+++ #A+++ 4+A)++ 4+A)++

4&+A+++ 4&+A+++ 4&+A+++ 4&+A+++ %1A+++ %1A+++ 4+A)++ 4+A)++

Accounting for $eases

21 & 3<

PRO+LE*S
Pr% 21&11=@$essee accounting@capital lease. 4u'an: CompanyA as lesseeA enters into a lease agreement on <uly 1A 2+1+A for e3uipment. The follo(ing "ata are rele-ant to the lease agreementC 1. The term of the noncancela'le lease is 4 yearsA (ith no rene(al option. 5ayments of I422A#&) are "ue on <une 3+ of each year. 2. The fair -alue of the e3uipment on <uly 1A 2+1+ is I1A4++A+++. The e3uipment has an economic life of # years (ith no sal-age -alue. 3. 4u'an: "epreciates similar machinery it o(ns on the sum-of-the-years8-"igits 'asis. 4. The lessee pays all executory costs. 5. 4u'an:8s incremental 'orro(ing rate is 1+G per year. The lessee is a(are that the lessor use" an implicit rate of &G in computing the lease payments =present -alue factor for 4 perio"s at &GA 3.31213K at 1+GA 3.1#)&#. Instru#tions =a> 7n"icate the type of lease 4u'an: Company has entere" into an" (hat accounting treatment is applica'le. ='> 5repare the ?ournal entries on 4u'an:8s 'oo:s that relate to the lease agreement for the follo(ing "atesC =1oun" all amounts to the nearest "ollar. 7nclu"e a partial amorti!ation sche"ule.> 1. <uly 1A 2+1+. 2. ecem'er 31A 2+1+. 3. <une 3+A 2+11. 4. ecem'er 31A 2+11. Solution 21&11= =a> Capitali!e" amountC I422A#&) Q 5L of an or"inary annuity for 4 perio"s at &G I422A#&) Q 3.31213 D I1A4++A+++ Because the present -alue of the lease payments =I1A4++A+++> e3uals the fair -alueA I1A4++A+++A of the lease" propertyA it is a capital lease an" must 'e accounte" for un"er the capital lease metho". ='> 1. <uly 1A 2+1+ $ease" 43uipment .n"er Capital $eases............................... 1A4++A+++ $ease $ia'ility............................................................. ecem'er 31A 2+1+ epreciation 4xpense............................................................. Accumulate" epreciation@Capital $eases T=I1A4++A+++ Q 401+> Q #012U................................... 7nterest 4xpense =I112A+++ Q #012>........................................ 7nterest 5aya'le.......................................................... 2&+A+++ 2&+A+++ 5#A+++ 5#A+++

1A4++A+++

2.

21 & 3= Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition Solution 21&11= =cont.> $ease Amorti!ation 2che"ule ate %0101+ #03+011 #03+012 3. Annual $ease 5ayment I422A#&) 422A#&) 7nterest on .npai" ;'ligation I112A+++ &%A145 1e"uction of $ease ;'ligation I31+A#&) 335A544 Balance of $ease ;'ligation I1A4++A+++ 1A+&)A311 %53A%#%

<une 3+A 2+11 7nterest 4xpense...................................................................... $ease $ia'ility.......................................................................... Cash.............................................................................. =7nterest paya'le entry assume" to ha-e 'een re-erse" 101011> ecem'er 31A 2+11 epreciation 4xpense.............................................................. Accumulate" epreciation@Capital $eases.................. T=I1A4++A+++ Q 401+> Q #012 plus =I1A4++A+++ Q 301+> Q #012U 7nterest 4xpense =I&%A145 Q #012>........................................... 7nterest 5aya'le.............................................................

112A+++ 31+A#&) 422A#&)

4.

4)+A+++ 4)+A+++

43A5%3 43A5%3

Pr% 21&11>@$essee accounting@capital lease. 6rause Company on <anuary 1A 2+11A enters into a fi-e-year noncancela'le leaseA (ith four rene(al options of one year eachA for e3uipment ha-ing an estimate" useful life of 1+ years an" a fair -alue to the lessorA aly Corp.A at the inception of the lease of I3A+++A+++. 6rause8s incremental 'orro(ing rate is &G. 6rause uses the straight-line metho" to "epreciate its assets. The lease contains the follo(ing pro-isionsC 1. 1ental payments of I21)A+++ inclu"ing I1)A+++ for property taxesA paya'le at the 'eginning of each six-month perio". 2. A termination penalty assuring rene(al of the lease for a perio" of four years after expiration of the initial lease term. 3. An option allo(ing the lessor to exten" the lease one year 'eyon" the last rene(al exercise" 'y the lessee. 4. A guarantee 'y 6rause Company that aly Corp. (ill reali!e I1++A+++ from selling the asset at the expiration of the lease. Jo(e-erA the actual resi"ual -alue is expecte" to 'e I#+A+++. Instru#tions =a> Ehat :in" of lease is this to 6rause CompanyF ='> Ehat shoul" 'e consi"ere" the lease termF =c> Ehat are the minimum lease paymentsF ="> Ehat is the present -alue of the minimum lease paymentsF =5L factor for annuity "ue of 2+ semi-annual payments at &G annual rateA 14.133)4K 5L factor for amount "ue in 2+ interest perio"s at &G annual rateA .45#3).> =1oun" to nearest "ollar.> =e> Ehat ?ournal entries (oul" 6rause recor" "uring the first year of the leaseF =7nclu"e an amorti!ation sche"ule through 101012 an" roun" to the nearest "ollar.>

Accounting for $eases Solution 21&11> =a>

21 & 3>

This lease is a capital lease to 6rause Company 'ecause its term =1+ years@see computation in ' 'elo(> excee"s %5G of the e3uipment8s estimate" useful life. 7n a""itionA the present -alue =see computation in " 'elo(> of the minimum lease payments =see computation in c 'elo(> excee"s )+G of the fair -alue of the e3uipment =I3A+++A+++>. The lease term isC /oncancela'le perio" A""itional perio" for (hich termination penalty assures rene(al 5erio" co-ere" 'y lessor extension option The minimum lease payments areC 2emi-annual rental payments 4xecutory costs /um'er of payments o-er lease term 1esi"ual guarantee Binimum lease payments 5 4 1 1+ years years year years

='>

=c>

I 21)A+++ =1)A+++> 2++A+++ Q 2+ 4A+++A+++ 1++A+++ I4A1++A+++ 14.133)4 I 2++A+++ 2A&2#A%&& 45A#3) I2A&%2A42%

=">

The present -alue of the minimum lease payments isC Factor for present -alue of an annuity "ueA 2+ perio"sA 4G 2emi-annual paymentsA net of executory costs Factor for present -alue of I1 "ue in 2+ interest perio"s at 4G .45#3) 1esi"ual guarantee Q 1++A+++ 5resent -alue of lease payments

=e>

<anuary 1A 2+11 $ease" 43uipment .n"er Capital $eases.................................... 2A&%2A42% $ease $ia'ility................................................................... <anuary 1A 2+11 $eases $ia'ility............................................................................. 5roperty Taxes............................................................................. Cash................................................................................. <uly 1A 2+11 $ease $ia'ility............................................................................... 5roperty Taxes ............................................................................ 7nterest 4xpense .......................................................................... Cash................................................................................. 2++A+++ 1)A+++

2A&%2A42%

21)A+++ )3A1+3 1)A+++ 1+#A&)% 21)A+++

ate 7nitial 5L 101011 %01011 101012

$ease Amorti!ation 2che"ule 2emi-Annual 7nterest 1e"uction of $ease 5ayment 4G $ease ;'ligation I2++A+++ 2++A+++ 2++A+++ @ 1+#A&)% 1+3A1%3 I2++A+++ )3A1+3 )#A&2%

Balance I2A&%2A42% 2A#%2A42% 2A5%)A324 2A4&2A4)%

21 & 6@ Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition Solution 21&11> =cont.> ecem'er 31A 2+11 epreciation 4xpense.................................................................. Accumulate" epreciation@Capital $eases..................... 7nterest 4xpense.......................................................................... 7nterest 5aya'le ............................................................... 9=I2A&%2A42% N I#+A+++> R 1+ D I2&1A243. Pr% 21&12@@$essor accounting@"irect-financing lease. $ucasA 7nc. enters into a lease agreement as lessor on <anuary 1A 2+11A to lease an airplane to /ational Airlines. The term of the noncancela'le lease is eight years an" payments are re3uire" at the en" of each year. The follo(ing information relates to this agreementC 1. /ational Airlines has the option to purchase the airplane for I)A+++A+++ (hen the lease expires at (hich time the fair -alue is expecte" to 'e I15A+++A+++. 2. The airplane has a cost of I3&A+++A+++ to $ucasA an estimate" useful life of fourteen yearsA an" a sal-age -alue of !ero at the en" of that time ="ue to technological o'solescence>. 3. /ational Airlines (ill pay all executory costs relate" to the lease" airplane. 4. Annual year-en" lease payments of I5A%##A425 allo( $ucas to earn an &G return on its in-estment. 5. Collecti'ility of the payments is reasona'ly pre"icta'leA an" there are no important uncertainties surroun"ing the costs yet to 'e incurre" 'y $ucas. Instru#tions =a> Ehat type of lease is thisF iscuss. ='> 5repare a lease amorti!ation sche"ule for the lessor for the first t(o years =2+11-2+12>. =1oun" all amounts to nearest "ollar.> =c> 5repare the ?ournal entries on the 'oo:s of the lessor to recor" the lease agreementA to reflect payments recei-e" un"er the leaseA an" to recogni!e incomeA for the years 2+11 an" 2+12. Solution 21&12@ =a> The lease is a "irect-financing type lease from the lessor8s point of -ie( or a capital lease from the lessee8s point of -ie(. The lease contains a 'argain purchase option (hich satisfies one of the criteria for classification as a "irect-financing lease. The option to 'uy for I)A+++A+++ at the termination of the lease (hen the asset is expecte" to ha-e a fair -alue of I15A+++A+++ constitutes a 'argain purchase option. A""itionallyA the payments are collecti'leA an" there are no uncertainties as to future lessor costs. $essor8s $ease Amorti!ation 2che"ule Annual 7nterest on $ease 1ecei-a'le $ease 1ental $ease 1ecei-a'le 1eco-ery $ease 1ecei-a'le I3&A+++A+++ I5A%##A4259 I3A+4+A+++ I2A%2#A425 35A2%3A5%5 5A%##A425 2A&21A&&# 2A)44A53) 32A32)A+3# 2&1A2439 2&1A243 1+3A1%3 1+3A1%3

='> ate 101011 12031011 12031012

9TI3&A+++A+++ N =I)A+++A+++ Q .54+2%>U R 5.%4##4 D I5A%##A425.

Accounting for $eases Solution 21&12@ =cont.> =c>

21 & 61

<anuary 1A 2+11 $ease 1ecei-a'le....................................................................... 3&A+++A+++ Airplanes......................................................................... 3&A+++A+++ ecem'er 31A 2+11 Cash........................................................................................... 5A%##A425 $ease 1ecei-a'le............................................................ 7nterest 1e-enue............................................................. ecem'er 31A 2+12 Cash........................................................................................... 5A%##A425 $ease 1ecei-a'le............................................................ 7nterest 1e-enue.............................................................

2A%2#A425 3A+4+A+++

2A)44A53) 2A&21A&&#

21 & 62 Test +an, "or Inter-e!iate A##ountin./ T irteent E!ition

IFRS 8UESTIONS
TrueBFalse 1. i,AA5 re3uires that companies pro-i"e a year-'y-year 'rea:out of future noncancela'le lease payments "ue in years 1 through 5. 2. i,AA5 for leases is more Wrules-'ase"X than ..2. ,AA5 an" inclu"es many 'right-line criteria to "etermine o(nership. 3. The i,AA5 leasing stan"ar" is the su'?ect of o-er 3+ interpretations since its issuance in 1)&2. 4. i,AA5 "oes not pro-i"e "etaile" gui"ance for leases of natural resourcesA sale-lease'ac:sA an" le-erage" leases. 5. Because i,AA5 is -ery general in its pro-isions for lease accountingA the re3uire" "isclosures for leases un"er i,AA5 are more "etaile" an" extensi-e than those re3uire" un"er ..2. ,AA5. Ans(ers to TrueBFalseC 1. False 2. False 3. False 4. True 5. False *ulti$le C oi#e 1. Ehich of the follo(ing statements is true (hen comparing the accounting for leasing transactions un"er ..2. ,AA5 (ith i,AA5F a. i,AA5 re3uires that companies pro-i"e a year-'y-year 'rea:out of future noncancela'le lease payments "ue in years 1 through 5. '. i,AA5 for leases is more Wrules-'ase"X than ..2. ,AA5 an" inclu"es many 'right-line criteria to "etermine o(nership. c. The i,AA5 leasing stan"ar" is the su'?ect of o-er 3+ interpretations since its issuance in 1)&2. ".i,AA5 "oes not pro-i"e "etaile" gui"ance for leases of natural resourcesAsalelease'ac:sA an" le-erage" leases. Ans(er to *ulti$le C oi#eC 1. " S ort Ans(er 1. Briefly "escri'e some of the similarities an" "ifferences 'et(een ..2. ,AA5 an" i,AA5 (ith respect to the accounting for leases. 1. Both ..2. ,AA5 an" i,AA5 share the same o'?ecti-e of recor"ing leases 'y lessees an" lessors accor"ing to their economic su'stance N that isA accor"ing to the "efinitions of assets an" lia'ilities. $easing (as on the FA2B*s initial agen"a in 1)%3 an" ,AA5 rules (ere issue" in 1)%# ='efore the conceptual frame(or: (as "e-elope">. ..2. ,AA5 for leases has 'een the su'?ect of more than 3+ interpretations since its issuance. The i,AA5 stan"ar" is su'?ect to ?ust three interpretations. ;ne reason for this small num'er of

Accounting for $eases

21 & 63

interpretations is that i,AA5 "oes not specifically a""ress a num'er of leasing transactions that are co-ere" 'y ..2. ,AA5. 4xamples inclu"e lease agreements for natural resourcesA sale-lease'ac:sA real estate leasesA an" le-erage" leases. ..2. ,AA5 for leases is much more Wrule-'ase"X (ith specific 'right-line criteria to "etermine if a lease arrangement transfers the ris:s an" re(ar"s of o(nershipK i,AA5 is more general in its pro-isions. 2. Briefly "iscuss the 7A2B an" FA2B efforts to con-erge their accounting gui"elines for leases. 2. $ease accounting is one of the areas i"entifie" in the 7A2B0FA2B Bemoran"um of .n"erstan"ing an" also a topic recommen"e" 'y the 24C in its off-'alance-sheet stu"y for stan"ar"-setting attention. The ?oint pro?ect (ill initially primarily focus on lessee accounting. ;ne of the first areas to 'e stu"ie" isA WEhat are the assets an" lia'ilities to 'e recogni!e" relate" to a lease contractFX 2houl" the focus remain on the lease" item or the right to use the lease" itemF This 3uestion is tie" to the Boar"s* ?oint pro?ect on the conceptual frame(or: N "efining an WassetX an" a Wlia'ilityX.

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