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Exam 21: Accounting for Leases

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Question 31

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Use the following information for questions. Hull Co.leased equipment to Riggs Company on May 1, 2011.The lease expires on May 1, 2012.Riggs could have bought the equipment from Hull for $3,200,000 instead of leasing it.Hull's accounting records showed a book value for the equipment on May 1, 2011, of $2,800,000.Hull's depreciation on the equipment in 2011 was $360,000.During 2011, Riggs paid $720,000 in rentals to Hull for the 8-month period.Hull incurred maintenance and other related costs under the terms of the lease of $64,000 in 2011.After the lease with Riggs expires, Hull will lease the equipment to another company for two years. -Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2011, should be

A) $296,000.
B) $360,000.
C) $656,000.
D) $720,000.

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

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Question 32

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Metcalf Company leases a machine from Vollmer Corp.under an agreement which meets the criteria to be a finance lease for Metcalf.The six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 per year for maintenance, insurance, and taxes.The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee.The present value of an annuity due of 1 for six years at 10% is 4.79079.The present value of an annuity due of 1 for six years at 8% is 4.99271.Metcalf should record the leased asset at

A) $509,256.
B) $488,661.
C) $434,366.
D) $416,799.

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

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Question 33

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Both a guaranteed and an unguaranteed residual value affect the lessee's computation of amounts capitalized as a leased asset.

Which of the following statements is correct?

Use the following information for questions. Gage Co.purchases land and constructs a service station and car wash for a total of $360,000.At January 2, 2011, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $400,000 and immediately leased from the oil company by Gage.Fair value of the land at time of the sale was $40,000.The lease is a 10-year, noncancelable lease.Gage uses straight-line depreciation for its other various business holdings.The economic life of the facility is 15 years with zero salvage value.Title to the facility and land will pass to Gage at termination of the lease.A partial amortization schedule for this lease is as follows: -From the viewpoint of the lessor, what type of lease is involved above?

Geary Co.leased a machine to Dains Co.Assume the lease payments were made on the basis that the residual value was guaranteed and Geary gets to recognize all the profits, and at the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and liability accounts have the following balances: If, at the end of the lease, the fair value of the residual value is $8,800, what gain or loss should Geary record?

Leasing equipment reduces the risk of obsolescence to the lessee, and passes the risk of residual value to the lessor.

Pisa, Inc.leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception.The lease does not transfer ownership, nor is there a bargain purchase option.The equipment has a 4-year useful life and no residual value.If Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception?

Emporia Corporation is a lessee with a finance lease.The asset is recorded at $450,000 and has an economic life of 8 years.The lease term is 5 years.The asset is expected to have a fair value of $150,000 at the end of 5 years, and a fair value of $50,000 at the end of 8 years.The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term.What amount of depreciation expense would the lessee record for the first year of the lease?

The IASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.

The lessor will recover a greater net investment if the residual value is guaranteed instead of unguaranteed.

Which of the following is an advantage of leasing?

Which of the following would not be included in the Lease Receivable account?

Haystack, Inc.manufactures machinery used in the mining industry.On January 2, 2011 it leased equipment with a cost of $200,000 to Silver Point Co.The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year.The equipment has an expected useful life of 5 years.Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method.The selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co.What is the amount of interest expense recorded by Silver Point Co.for the year ended December 31, 2011?

If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is therefore accounted for as a finance lease, who records the asset on its books and which party records interest expense during the lease period?

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

Use the following information for questions. Alt Corporation enters into an agreement with Yates Rentals Co.on January 1, 2011 for the purpose of leasing a machine to be used in its manufacturing operations.The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option.Payments of $155,213 are due on December 31 of each year. (b) The fair value of the machine on January 1, 2011, is $400,000.The machine has a remaining economic life of 10 years, with no residual value.The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year.Alt does not have knowledge of the 8% implicit rate used by Yates. -Hook Company leased equipment to Emley Company on July 1, 2010, for a one-year period expiring June 30, 2011, for $60,000 a month.On July 1, 2011, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2014, for $75,000 a month.The original cost of the equipment was $4,800,000.The equipment, which has been continually on lease since July 1, 2006, is being depreciated on a straight-line basis over an eight-year period with no residual value.Assuming that both the lease to Emley and the lease to Terry are appropriately recorded as operating leases for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2011?

On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co.with 5 equal annual payments of $40,000 each, payable beginning December 31, 2011.Brick Co.agrees to guarantee the $25,000 residual value of the asset at the end of the lease term.Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%.What journal entry would Brick Co.make at December 31, 2012 to record the second lease payment?

Only the lessor makes the distinction of classifying leases as operating or finance leases.

Use the following information for questions. Yueve's Company is negotiating three leases for store locations Yueve's incremental borrowing rate is 12 percent and the lessor's implicit rate is unkown (it is impracticable to determine) Each store will have an economic useful life of 30 years.lease payments will be made at the end of each year.Based on the data below properly classify each of the leases as an operating lease or a finance lease.The purchase price for each property is listed as an alternative to leasing. -Based on this information, which test(s) does Location B pass for classifying the lease as a finance lease.