accounting for leases ch21.pdf

7/27/2019 ACCOUNTING FOR LEASES ch21.pdf

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CHAPTER 21

ACCOUNTING FOR LEASES

IFRS questions are available at te en! o" tis #a$ter%

TRUE&FALSE'Con#e$tualAns(er No% )es#ri$tion

T 1. Benefits of leasing.F 2. Accounting for long-term leases.F 3. Classifying lease containing purchase option.T 4. Accounting for executory costs.F 5. epreciating a capitali!e" asset.F #. $essee recor"ing of interest expense.T %. Benefit of leasing to lessor.

F &. istinction 'et(een "irect-financing an" sales-type leases.F ). $essors* classification of leases.T 1+. irect-financing leases.F 11. Accounting for operating lease.F 12. Computing annual lease payments.T 13. ,uarantee" resi"ual alue "efinition.F 14. ,uarantee" s. unguarantee" resi"ual alue.T 15. nguarantee" resi"ual alue an" minimum lease payments.F 1#. /et inestment an" guarantee"0unguarantee" resi"ual alue.T 1%. ifference 'et(een "irect-financing an" sales-type leases.F 1&. ,ross profit in sales-type lease.T 1). eie( of estimate" unguarantee" resi"ual alue.

T 2+. FAB reuire" lease "isclosures.

*ULTIPLE CHOICE'Con#e$tualAns(er No% )es#ri$tion

" 21. A"antages of leasing." 22. A"antages of leasing.' 23. Basic principle of lease accounting.c 24. Conceptual support for treating all leases as a sale0purchase.a 25. ssential element of a lease.' 2#. Bargain purchase option an" minimum lease payments.' 2%. Cost amount for a capital lease.a 2&. $ease accounting 'y lessee.

c 2). 6no(le"ge of the capitali!ation criteria." 3+. Components of minimum lease payments." 31. 7"entification of executory costs.c 32. iscount rate use" 'y lessee.a 33. epreciation of a lease" asset 'y lessee.' 34. ffect of a capital lease on lessee8s "e't.a 35. epreciation of a capital lease.a 3#. 7"entification of lease type for lessor." 3%. lements of lease receia'le 'y lessor.a 3&. ecognition of unearne" lease income.c 3). irect-financing lease receia'le.


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

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

Ans(er No% )es#ri$tion" 4+. Thir" party guarantee of resi"ual alue.a 41. $essor*s accounting for resi"ual alue.c 42. Accounting for initial "irect costs.c 43. ifference 'et(een "irect financing an" sales-type lease.' 44. Amount of reenue in sales-type lease.c 45. Accounting for a sales-type lease." 4#. Accounting for initial "irect costs.c 4%. isclosing o'ligations un"er capital leases.c 4&. $easing criteria to aoi" asset capitali!ation." 94). ecor"ing asset an" interest expense in sale-lease'ac: lease.' 95+. Accounting for sale-lease'ac: lease." 951. ,ain0loss recognition in a sale-lease'ac:.

These uestions also appear in the ro'lem-oling urial ,ui"e.

These uestions also appear in the tu"y ,ui"e.9This topic is "ealt (ith in an Appen"ix to the chapter.

*ULTIPLE CHOICE'Co-$utational

Ans(er No% )es#ri$tion' 52. ;perating lease expense for year.c 53. Calculate interest expense an" "epreciation expense for lessee.c 54. Calculate minimum annual lease payment." 55. Calculate total annual lease payment.a 5#. 7"entification of lease type for lessor.

c 5%. 7"entification of lease type for lessee.c 5&. Calculate "epreciation expense for lessee." 5). 7"entification of lease type for lessee.c #+. Calculate lease" asset amount.c #1. Calculate total lease o'ligation.a #2. Compute interest expense for year.' #3. Compute interest expense for year." #4. Calculate lease lia'ility amount.c #5. Compute interest expense an" "epreciation expense for year.c ##. Compute interest expense an" "epreciation expense for year." #%. Compute "epreciation expense for lease (ith transfer of title.a #&. Calculate lease" asset amount.

c #). Compute interest expense for first year." %+. Compute principal re"uction for secon" year.c %1. Calculate "epreciation expense for lessee.' %2. Compute interest expense for first year.c %3. Calculate lease" asset an" lease lia'ility amounts.a %4. Calculate annual lease payments.' %5. 7"entification of lease type for lessee.' %#. xpense recor"e" 'y lessee0operating lease.c %%. Calculate re"uction of lease o'ligation for lessee.a %&. 7"entification of lease type for lessor.c %). Calculate lease receia'le.

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Accounting for $eases

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

Ans(er No% )es#ri$tion" &+. eenues an" expenses recor"e" 'y lessor0operating lease.a &1. ;perating lease expense for year." &2. Calculate expense of an operating lease.a &3. Calculate income from operating lease." &4 .921-11% ale-lease'ac:.

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PRO+LE*S

Ite- )es#ri$tion21-11& $essee accounting@capital lease.21-11) $essee accounting@capital lease.21-12+ $essor accounting@"irect-financing lease.

CHAPTER LEARNING O+4ECTI5ES

1. xplain the nature economic su'stance an" a"antages of lease transactions.

2. escri'e the accounting criteria an" proce"ures for capitali!ing leases 'y the lessee.

3. Contrast the operating an" capitali!ation metho"s of recor"ing leases.

4. 7"entify the classifications of leases for the lessor.

5. escri'e the lessor8s accounting for "irect-financing leases.

#. 7"entify special features of lease arrangements that cause uniue accounting pro'lems.

%. escri'e the effect of resi"ual alues guarantee" an" unguarantee" on leaseaccounting.

&. escri'e the lessor8s accounting for sales-type leases.

). $ist the "isclosure reuirements for leases.

91+. n"erstan" an" apply lease-accounting concepts to arious lease arrangements.

911. escri'e the lessee8s accounting for sale-lease'ac: transactions.

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

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

Learnin. Ob9e#tive 1

1. TF 2. TF 21. C 22. C 23. C 24. C 25. C


3. TF 3+. C 55. C #3. C %+. C %%. C 1+3. C4. TF 31. C 5#. C #4. C %1. C )1. C 1+4. C5. TF 32. C 5&. C #5. C %2. C )#. C 1+5. C

2#. C 33. C 5). C ##. C %3. C )%. C 11+. 2%. C 52. C #+. C #%. C %4. C 1++. C 111. 2&. C 53. C #1. C #&. C %5. C 1+1. C 11&. 2). C 54. C #2. C #). C %#. C 1+2. C 11).


#. TF %. TF 34. C

35. C &1. C &2. C 112. Learnin. Ob9e#tive 6

&. TF 3#. C 5%. C &3. C 11#. ). TF 3%. C %&. C )4. C

Learnin. Ob9e#tive :

1+. TF 3&. C %). C &4. C 113. 12+. 11. TF 3). C &+. C )5. C 114.

Learnin. Ob9e#tive ;

12. TF 13. TF &5. C 11).

Learnin. Ob9e#tive

2+. TF 4%. C 4&. C

Learnin. Ob9e#tive 11?

4). C 51. C )). C 1+). C 11%. 5+. C )&. C 1+&. C 11#.

/ote TF D True-FalseC D ultiple Choice D xercise D ro'lem

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TRUE&FALSE'Con#e$tual

1. $easing euipment re"uces the ris: of o'solescence to the lessee an" passes the ris: ofresi"ual alue to the lessor.

2. The FAB agrees (ith the capitali!ation approach an" reuires companies to capitali!eall long-term leases.

3. A lease that contains a purchase option must 'e capitali!e" 'y the lessee.

4. xecutory costs shoul" 'e exclu"e" 'y the lessee in computing the present alue of theminimum lease payments.

5. A capitali!e" lease" asset is al(ays "epreciate" oer 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 leaseterm.

&. The "istinction 'et(een a "irect-financing lease an" a sales-type lease is the presence ora'sence of a transfer of title.

). $essors classify an" account for all leases that "on*t ualify as sales-type leases asoperating leases.

1+. irect-financing leases are in su'stance the financing of an asset purchase 'y the lessee.

11. n"er the operating metho" the lessor recor"s each rental receipt as part interest

reenue an" part rental reenue.

12. 7n computing the annual lease payments the lessor "e"ucts only a guarantee" resi"ualalue from the fair mar:et alue of a lease" asset.

13. Ehen the lessee agrees to ma:e up any "eficiency 'elo( a state" amount that the lessorreali!es in resi"ual alue that state" amount is the guarantee" resi"ual alue.

14. Both a guarantee" an" an unguarantee" resi"ual alue affect the lessee*s computation ofamounts capitali!e" as a lease" asset.

15. From the lessee*s ie(point an unguarantee" resi"ual alue is the same as no resi"ual

alue in terms of computing the minimum lease payments.

1#. The lessor (ill recoer a greater net inestment if the resi"ual alue is guarantee" instea"of unguarantee".

1%. The primary "ifference 'et(een a "irect-financing lease an" a sales-type lease is themanufacturer*s or "ealer*s gross profit.

1&. The gross profit amount in a sales-type lease is greater (hen a guarantee" resi"ual alueexists.

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1). Companies must perio"ically reie( the estimate" unguarantee" resi"ual alue in asales-type lease.

2+. The FAB reuires lessees an" lessors to "isclose certain information a'out leases intheir financial statements or in the notes.

True&False Ans(ers'Con#e$tualIte- Ans% Ite- Ans% Ite- Ans% Ite- Ans%

1. T #. F 11. F 1#. F2. F %. T 12. F 1%. T3. F &. F 13. T 1&. F4. T ). F 14. F 1). T5. F 1+. T 15. T 2+. T

*ULTIPLE CHOICE'Con#e$tual

21. a?or reasons (hy a company may 'ecome inole" in leasing to other companies is=are>a. interest reenue.'. high resi"ual alues.c. tax incenties.". all of these.

22. Ehich of the follo(ing is an a"antage of leasinga. ;ff-'alance-sheet financing'. $ess costly financing

c. 1++G financing at fixe" rates". All of these

23. Ehich of the follo(ing 'est "escri'es current practice in accounting for leasesa. $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".

24. Ehile only certain leases are currently accounte" for as a sale or purchase there istheoretic ?ustification for consi"ering all leases to 'e sales or purchases. The principalreason that supports this i"ea is that

a. all leases are generally for the economic life of the property an" the resi"ual alue ofthe 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 uantifia'le right to the use of property.". "uring the life of the lease the lessee can effectiely treat the property as if it (ere

o(ne" 'y the lessee.

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25. An essential element of a lease coneyance is that thea. lessor coneys less than his or her total interest in the property.'. lessee proi"es a sin:ing fun" eual 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 eual to the economic life of the lease" property.

2#. Ehat impact "oes a 'argain purchase option hae on the present alue of the minimumlease payments compute" 'y the lesseea. /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 if at the time of the lease agreement it appeare" certain that the lessee (oul"exercise the option at the en" of the lease an" purchase the asset at the option price.

2%. The amount to 'e recor"e" as the cost of an asset un"er capital lease is eual to thea. present alue of the minimum lease payments.'. present alue of the minimum lease payments or the fair alue of the asset (hicheer

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.

2&. The metho"s of accounting for a lease 'y the lessee area. operating an" capital lease metho"s.'. operating sales an" capital lease metho"s.

c. operating an" leerage" lease metho"s.". none of these.

2). Ehich of the follo(ing is a correct statement of one of the capitali!ation criteriaa. The lease transfers o(nership of the property to the lessor.'. The lease contains a purchase option.c. The lease term is eual to or more than %5G of the estimate" economic life of the

lease" property.". The minimum lease payments =exclu"ing executory costs> eual or excee" )+G of the

fair alue of the lease" property.

3+. inimum lease payments may inclu"e a

a. penalty for failure to rene(.'. 'argain purchase option.c. guarantee" resi"ual alue.". any of these.

31. xecutory costs inclu"ea. maintenance.'. property taxes.c. insurance.". all of these.

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32. 7n computing the present alue of the minimum lease payments 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 lessor (hicheer is

higher 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 lessor (hicheer is

lo(er assuming that the implicit rate is :no(n to the lessee.". none of these.

33. 7n computing "epreciation of a lease" asset the lessee shoul" su'tracta. a guarantee" resi"ual alue an" "epreciate oer the term of the lease.'. an unguarantee" resi"ual alue an" "epreciate oer the term of the lease.c. a guarantee" resi"ual alue an" "epreciate oer the life of the asset.". an unguarantee" resi"ual alue an" "epreciate oer the life of the asset.

34. 7n the earlier years of a lease from the lessee8s perspectie the use of thea. capital metho" (ill ena'le the lessee to report higher income compare" to the

operating metho".'. capital metho" (ill cause "e't to increase compare" to the operating metho".c. operating metho" (ill cause income to "ecrease compare" to the capital metho".". operating metho" (ill cause "e't to increase compare" to the capital metho".

35. A lessee (ith a capital lease containing a 'argain purchase option shoul" "epreciate thelease" asset oer thea. asset8s remaining economic life.'. term of the lease.c. life of the asset or the term of the lease (hicheer is shorter.". life of the asset or the term of the lease (hicheer is longer.

3#. Base" solely upon the follo(ing sets of circumstances in"icate" 'elo( (hich set giesrise to a sales-type or "irect-financing lease of a lessor

Transfers ;(nership Contains Bargain Collecti'ility of $ease Any 7mportantBy n" ;f $ease urchase ;ption ayments Assure" ncertainties

a. /o Hes Hes /o'. Hes /o /o /oc. Hes /o /o Hes". /o Hes Hes Hes

3%. Ehich of the follo(ing (oul" not'e inclu"e" in the $ease eceia'le accounta. ,uarantee" resi"ual alue'. nguarantee" resi"ual aluec. A 'argain purchase option". All (oul" 'e inclu"e"

3&. 7n a lease that is appropriately recor"e" as a "irect-financing lease 'y the lessorunearne" incomea. shoul" 'e amorti!e" oer the perio" of the lease using the effectie interest metho".'. shoul" 'e amorti!e" oer the perio" of the lease using the straight-line metho".c. "oes notarise.". shoul" 'e recogni!e" at the lease8s expiration.

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3). 7n or"er to properly recor" a "irect-financing lease the lessor nee"s to :no( ho( tocalculate the lease receia'le. The lease receia'le in a "irect-financing lease is 'est"efine" asa. 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 receia'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.

4+. 7f the resi"ual alue of a lease" asset is guarantee" 'y a thir" partya. 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 inestment to 'e recoere" '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.

41. Ehen lessors account for resi"ual alues relate" to lease" assets theya. 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 reenue.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'oe are true (ith regar" to lessors an" resi"ual alues.

42. The initial "irect costs of leasinga. are generally 'orne 'y the lessee.'. inclu"e incremental costs relate" to internal actiities of leasing 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'oe are true (ith regar" to the initial "irect costs of leasing.

43. The primary "ifference 'et(een a "irect-financing lease an" a sales-type lease is thea. 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.

44. A lessor (ith a sales-type lease inoling an unguarantee" resi"ual alue aaila'le to thelessor at the en" of the lease term (ill report sales reenue in the perio" of inception of

the lease at (hich of the follo(ing amountsa. 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 lessor 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.

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45. For a sales-type leasea. 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.

4#. Ehich of the follo(ing statements is correcta. 7n a "irect-financing lease initial "irect costs are a""e" to the net inestment in the

lease.'. 7n a sales-type lease initial "irect costs are expense" in the year of incurrence.c. For operating leases initial "irect costs are "eferre" an" allocate" oer the lease

term.". All of these.

4%. The $ease $ia'ility account shoul" 'e "isclose" asa. 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.

4&. To aoi" lease" asset capitali!ation companies can "eise lease agreements that fail tosatisfy any of the four leasing criteria. Ehich of the follo(ing is not one of the (ays toaccomplish this goala. $essee uses a higher interest rate than that use" 'y lessor.'. et 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.

94). 7f the lease in a sale-lease'ac: transaction meets one of the four leasing criteria an" istherefore accounte" for as a capital lease (ho recor"s the asset on its 'oo:s an" (hichparty recor"s interest expense "uring the lease perio"

arty recor"ing the arty recor"ingasset on its 'oo:s interest expense

a. eller-lessee urchaser-lessor'. urchaser-lessor eller-lesseec. urchaser-lessor urchaser-lessor". eller-lessee eller-lessee

95+. 7n a sale-lease'ac: transaction (here none of the four leasing criteria are satisfie" (hichof the follo(ing is falsea. The seller-lessee remoes 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'oe are false statements.

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951. Ehen a company sells property an" then leases it 'ac: any gain on the sale shoul"usually 'ea. 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 oer the term of the lease.

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

Ite- Ans% Ite- Ans% Ite- Ans% Ite- Ans% Ite- Ans% Ite- Ans% Ite- Ans%

21. " 2#. ' 31. " 3#. a 41. a 4#. " 951. "

22. " 2%. ' 32. c 3%. " 42. c 4%. c

23. ' 2&. a 33. a 3&. a 43. c 4&. c

24. c 2). c 34. ' 3). c 44. ' 94). "

25. a 3+. " 35. a 4+. " 45. c 95+. '

*ULTIPLE CHOICE'Co-$utational

52. ;n ecem'er 1 2+11 ,oet! Corporation lease" office space for 1+ years at a monthlyrental of I)++++. ;n that "ate ere! pai" the lan"lor" the follo(ing amounts

ent "eposit I )++++First month8s rent )++++$ast month8s rent )++++7nstallation of ne( (alls an" offices 4)5+++

I%#5+++

The entire amount of I%#5+++ (as charge" to rent expense in 2+11. Ehat amount

shoul" ,oet! hae charge" to expense for the year en"e" ecem'er 31 2+11a. I)++++'. I)4125c. I1&4125". I4)5+++

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

;n At the termination of the lease 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 annualrental to insure a 1+G rate of return. The implicit rate of the lessor is :no(n 'y Hancey7nc.

=f> The yearly rental payment inclu"es I1++++ of executory costs relate" to taxes on theproperty.

54. Ehat is the amount of the minimum annual lease payment =oun"e" to the nearest"ollar.>a. I1&&23%'. I4%&23#c. I4&&23#". I4)&23#

55. Ehat is the amount of the total annual lease paymenta. I1&&23%

'. I4%&23%c. I4&&23%". I4)&23%

5#. From the lessee8s ie(point (hat type of lease exists in this casea. ales-type lease'. ale-lease'ac:c. Capital lease". ;perating lease

5%. From the lessor8s ie(point (hat type of lease is inole"a. ales-type lease

'. ale-lease'ac:c. irect-financing lease". ;perating lease

5&. Hancey 7nc. (oul" recor" "epreciation expense on this storage 'uil"ing in 2+11 of=oun"e" to the nearest "ollar.>a. I+.'. I25++++.c. I3+++++.". I4&&23%.

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5). 7f the lease (ere nonrene(a'le there (as no purchase option title to the 'uil"ing "oesnot pass to the lessee at termination of the lease an" the lease (ere only for eight years

(hat type of lease (oul" this 'e for the lesseea. ales-type lease'. irect-financing leasec. ;perating lease". Capital lease

#+. etcalf Company leases a machine from Lollmer Corp. un"er an agreement (hich meetsthe criteria to 'e a capital lease for etcalf. The six-year lease reuires payment ofI1+2+++ at the 'eginning of each year inclu"ing I15+++ per year for maintenanceinsurance an" taxes. The incremental 'orro(ing rate for the lessee is 1+GK the lessor8simplicit rate is &G an" is :no(n 'y the lessee. The present alue of an annuity "ue of 1for 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. etcalf shoul" recor" the lease" asset ata. I5+)25#.'. I4.c. I4343##.". I41#%)).

#1. ;n ecem'er 31 2+11 $ang Corporation lease" a ship from Fort Company for an eight-year perio" expiring ecem'er 3+ 2+1). ual annual payments of I2+++++ are "ue onecem'er 31 of each year 'eginning (ith ecem'er 31 2+11. The lease is properlyclassifie" as a capital lease on $ang 8s 'oo:s. The present alue at ecem'er 31 2+11 ofthe eight lease payments oer the lease term "iscounte" at 1+G is I11%3#&5. Assumingall payments are ma"e on time the amount that shoul" 'e reporte" 'y $ang Corporationas the total o'ligation un"er capital leases on its ecem'er 31 2+12 'alance sheet isa. I1+)1+54.'. I1+++15).c. I&%1+54.

". I12+++++.

se the follo(ing information for uestions #2 an" #3.

;n


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#4. ;n ecem'er 31 2+11 6uhn Corporation lease" a plane from Bell Company for aneight-year perio" expiring ecem'er 3+ 2+1). ual annual payments of I15++++ are"ue on ecem'er 31 of each year 'eginning (ith ecem'er 31 2+11. The lease isproperly classifie" as a capital lease on 6uhn*s 'oo:s. The present alue at ecem'er 312+11 of the eight lease payments oer the lease term "iscounte" at 1+G is I&&+2#4.Assuming the first payment is ma"e on time the amount that shoul" 'e reporte" 'y 6uhnCorporation as the lease lia'ility on its ecem'er 31 2+11 'alance sheet isa. I&&+2#4.'. I&1&2)+.c. I%)223&.". I%3+2#4.

se the follo(ing information for uestions #5 an" ##.

;n


16/43


#&. isa 7nc. lease" euipment from To(er Company un"er a four-year lease reuiring eualannual payments of I+3& (ith the first payment "ue at lease inception. The lease"oes not transfer o(nership nor is there a 'argain purchase option. The euipment has a4-year useful life an" no salage alue. 7f isa 7nc.*s incremental 'orro(ing rate is 1+Gan" the rate implicit in the lease =(hich is :no(n 'y isa 7nc.> is &G (hat is the amountrecor"e" for the lease" asset at the lease inception

L Annuity ue L ;r"inary Annuity&G 4 perio"s 3.5%%1+ 3.312131+G 4 perio"s 3.4&5 3.1#)

a. I3+%%#%'. I2%2%2&c. I2&4)#)". I3+++++

#). isa 7nc. lease" euipment from To(er Company un"er a four-year lease reuiring eualannual payments of I+3& (ith the first payment "ue at lease inception. The lease"oes not transfer o(nership nor is there a 'argain purchase option. The euipment has a

4-year useful life an" no salage alue. isa 7nc.*s incremental 'orro(ing rate is 1+G an"the rate implicit in the lease =(hich is :no(n 'y isa 7nc.> is &G. Assuming that this leaseis properly classifie" as a capital lease (hat is the amount of interest expense recor"e"'y isa 7nc. in the first year of the asset*s life


a. I+'. I24#21c. I1%%3&". I22%)&

%+. isa 7nc. lease" euipment from To(er Company un"er a four-year lease reuiring eualannual payments of I+3& (ith the first payment "ue at lease inception. The lease"oes not transfer o(nership nor is there a 'argain purchase option. The euipment has a4 year useful life an" no salage alue. isa 7nc.*s incremental 'orro(ing rate is 1+G an"the rate implicit in the lease =(hich is :no(n 'y isa 7nc.> is &G. Assuming that this leaseis properly classifie" as a capital lease (hat is the amount of principal re"uction recor"e"

(hen the secon" lease payment is ma"e in Hear 2L Annuity ue L ;r"inary Annuity

&G 4 perio"s 3.5%%1+ 3.312131+G 4 perio"s 3.4&5 3.1#)

a. I+3&

'. I#141%c. I#324+". I#&3++

21 & 1;


17/43


%1. isa 7nc. lease" euipment from To(er Company un"er a four-year lease reuiring eualannual payments of I+3& (ith the first payment "ue at lease inception. The lease"oes not transfer o(nership nor is there a 'argain purchase option. The euipment has a4-year useful life an" no salage alue. isa 7nc.*s incremental 'orro(ing rate is 1+G an"the rate implicit in the lease =(hich is :no(n 'y isa 7nc.> is &G. isa 7nc. uses thestraight-line metho" to "epreciate similar assets. Ehat is the amount of "epreciationexpense recor"e" 'y isa 7nc. in the first year of the asset*s life


a. I+ 'ecause the asset is "epreciate" 'y To(er Company.'. I%1242c. I%#)42". I%5+++

%2. Jaystac: 7nc. manufactures machinery use" in the mining in"ustry. ;n


18/43


%4. Jaystac: 7nc. manufactures machinery use" in the mining in"ustry. ;n The term of the noncancela'le lease is 3 years (ith no rene(al option. ayments ofI155213 are "ue on ecem'er 31 of each year.

='> The fair alue of the machine on 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 hae :no(le"ge of the &Gimplicit rate use" 'y Hates.

=e> 7mme"iately after signing the lease 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(pointa. ;perating lease'. Capital leasec. ales-type lease". irect-financing lease

%#. 7f Alt accounts for the lease as an operating lease (hat expenses (ill 'e recor"e" as aconseuence of the lease "uring the fiscal year en"e" ecem'er 31 2+11a. epreciation xpense'. ent xpensec. 7nterest xpense". epreciation xpense an" 7nterest xpense

%%. 7f the present alue of the future lease payments is I4+++++ at


19/43


%&. From the ie(point of Hates (hat type of lease agreement existsa. ;perating lease'. Capital leasec. ales-type lease". irect-financing lease

%). 7f Hates recor"s this lease as a "irect-financing lease (hat amount (oul" 'e recor"e" as$ease eceia'le at the inception of the leasea. I155213'. I3&5))1c. I4+++++". I4#5#3&

&+. Ehich of the follo(ing lease-relate" reenue an" expense items (oul" 'e recor"e" 'yHates if the lease is accounte" for as an operating leasea. ental eenue'. 7nterest 7ncomec. epreciation xpense". ental eenue an" epreciation xpense

&1. Joo: Company lease" euipment to mley Company on I=45++++>'. I21++++ I=3#++++> I=%5++++>c. I&1++++ I=#++++> I=15++++>". I&1++++ I=##++++> I=45++++>

se the follo(ing information for uestions &2 an" &3.

Jull Co. lease" euipment to iggs Company on ay 1 2+11. At that time the collecti'ility of theminimum lease payments (as notreasona'ly pre"icta'le. The lease expires on ay 1 2+12.iggs coul" hae 'ought the euipment from Jull for I32+++++ instea" of leasing it. Jull8saccounting recor"s sho(e" a 'oo: alue for the euipment on ay 1 2++& of I2&+++++. Jull8s"epreciation on the euipment in 2+11 (as I3#++++. uring 2+11 iggs pai" I%2++++ in

rentals to Jull for the &-month perio". Jull incurre" maintenance an" other relate" costs un"erthe terms of the lease of I#4+++ in 2+11. After the lease (ith iggs expires Jull (ill lease theeuipment to another company for t(o years.

&2. Ignoring income taxes the amount of expense incurre" 'y iggs from this lease for theyear en"e" ecem'er 31 2+11 shoul" 'ea. I2)#+++.'. I3#++++.c. I#5#+++.". I%2++++.

21 & 1>


20/43


&3. The income 'efore income taxes "erie" 'y Jull from this lease for the year en"e"ecem'er 31 2+11 shoul" 'ea. I2)#+++.'. I3#++++.c. I#5#+++.". I%2++++.

&4. ;n


21/43


. ;n


22/43


&&. ,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 profitsan" at the en" of the lease term 'efore the lessee transfers the asset to the lessor thelease" asset an" o'ligation accounts hae the follo(ing 'alances

$ease" euipment un"er capital lease I4+++++

$ess accumulate" "epreciation--capital lease 3&4+++I 1#+++

7nterest paya'le I 152+;'ligations un"er capital leases 144&+

I1#+++

7f at the en" of the lease the fair mar:et alue of the resi"ual alue is I&&++ (hat gainor loss shoul" ,eary recor"a. I#4&+ gain'. I%12+ lossc. I%2++ loss". I&&++ gain

&). Jarter Company lease" machinery to tine Company on


23/43


)1. Assuming that an"s 7nc. uses straight-line "epreciation (hat is the amount of "eprecia-tion an" interest expense that an"s shoul" recor" for the year en"e" ecem'er 312+11a. I225+++ an" I1551#+'. I225+++ an" I1&++++c. I2%++++ an" I1551#+". I2%++++ an" I1&++++

)2. Ehat is the amount of profit on the sale an" the amount of interest income that etroshoul" recor" for the year en"e" ecem'er 31 2+11a. I+ an" I1551#+'. I#+++++ an" I1551#+c. I#+++++ an" I1&++++". I)+++++ an" I3#++++

)3. oman Company lease" euipment from 6oenig Company on


24/43


)5. Ehat is the "iscount rate implicit in the amorti!ation sche"ule presente" a'oea. 12G'. 1+Gc. &G". #G

)#. The total lease-relate" expenses recogni!e" 'y the lessee "uring 2+11 is (hich of thefollo(ing =oun"e" to the nearest "ollar.>a. I#4+++'. I#5+)&c. I%34)+". I#14)+

)%. Ehat is the amount of the lessee8s lia'ility to the lessor after the ecem'er 31 2+12payment =oun"e" to the nearest "ollar.>a. I4+++++'. I3%4)+2c. I34%2)4". I31#)25

9)&. The total lease-relate" income recogni!e" 'y the lessee "uring 2+11 is (hich of thefollo(inga. I -+-'. I2##%c. I4+++". I4++++

9)). ;n


25/43


Future Lalue of ;r"inary Annuity of 1

erio" 5G #G &G 1+G 12G1 1.+++++ 1.+++++ 1.+++++ 1.+++++ 1.+++++2 2.+5+++ 2.+#+++ 2.+&+++ 2.1++++ 2.12+++3 3.1525+ 3.1&3#+ 3.24#4+ 3.31+++ 3.3%44+

4 4.31+13 4.3%4#2 4.5+#11 4.#41++ 4.%%)335 5.525#3 5.#3%+) 5.##+ #.1+51+ #.352&5# #.&+1)1 #.)%532 %.335)2 %.%15#1 &.1151)% &.142+1 &.3)3&4 &.)22&+ ).4&%1% 1+.+&)+1& ).54)11 ).&)%4% 1+.#3##3 11.435&) 12.2))#)) 11.+2#5# 11.4)132 12.4&%5# 13.5%)4& 14.%%5##

1+ 12.5%%&) 13.1&+%) 14.4# 15.)3%43 1%.54&%4

resent Lalue of an ;r"inary Annuity of 1

erio" 5G #G &G 1+G 12G1 .)523& .)434+ .)25)3 .)+)+) .&)2 1.&5)41 1.&333) 1.%&32# 1.%3554 1.#)++5

3 2.%2325 2.#%3+1 2.5%%1+ 2.4&5 2.4+1&34 3.545)5 3.4#511 3.31213 3.1#) 3.+3%355 4.32)4& 4.2123# 3.))2%1 3.%)+%) 3.#+4% 5.+%5#) 4.)1%32 4.#22&& 4.3552# 4.11141% 5.%% 5.5&23& 5.2+#3% 4.&42 4.5#3%#& #.4#321 #.2+)%) 5.%4##4 5.334)3 4.)#%#4) %.1+%&2 #.&+1#) #.24#&) 5.%5)+2 5.32&25

1+ %.%21%3 %.3#++) #.%1++& #.1445% 5.#5+22

*ULTIPLE CHOICE'CPA A!a$te!

1++. $ease A "oes not contain a 'argain purchase option 'ut the lease term is eual to )+percent of the estimate" economic life of the lease" property. $ease B "oes not transfero(nership of the property to the lessee 'y the en" of the lease term 'ut the lease term iseual to %5 percent of the estimate" economic life of the lease" property. Jo( shoul" thelessee classify these leases

$ease A $ease Ba. ;perating lease Capital lease'. ;perating lease ;perating leasec. Capital lease Capital lease". Capital lease ;perating lease

1+1. ;n ecem'er 31 2+11 Burton 7nc. lease" machinery (ith a fair alue of I&4++++ fromCey entals Co. The agreement is a six-year noncancela'le lease reuiring annualpayments of I1#++++ 'eginning ecem'er 31 2+11. The lease is appropriatelyaccounte" 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).

21 & 2:


26/43


7n its ecem'er 31 2+11 'alance sheet Burton shoul" report a lease lia'ility ofa. I#+#52&.'. I#&++++.c. I%51344.". I%##52&.

1+2. ;n ecem'er 31 2+1+ Jarris Co. lease" a machine from Catt 7nc. for a fie-year perio".ual annual payments un"er the lease are I#3++++ =inclu"ing I3++++ annualexecutory costs> an" are "ue on ecem'er 31 of each year. The first payment (as ma"eon ecem'er 31 2+1+ an" the secon" payment (as ma"e on ecem'er 31 2+11. Thefie lease payments are "iscounte" at 1+G oer the lease term. The present alue ofminimum lease payments at the inception of the lease an" 'efore the first annual payment

(as I25+2+++. The lease is appropriately accounte" for as a capital lease 'y Jarris. 7nits ecem'er 31 2+11 'alance sheet Jarris shoul" report a lease lia'ility ofa. I1)+2+++.'. I1&%2+++.c. I1%11&++.". I14)22++.

1+3. A lessee ha" a ten-year capital lease reuiring eual annual payments. The re"uction ofthe lease lia'ility in year 2 shoul" euala. 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.

se the follo(ing information for uestions 1+4 an" 1+5.

;n


27/43


1+#. 7n a lease that is recor"e" as a sales-type lease 'y the lessor interest reenuea. shoul" 'e recogni!e" in full as reenue at the lease8s inception.'. shoul" 'e recogni!e" oer the perio" of the lease using the straight-line metho".c. shoul" 'e recogni!e" oer the perio" of the lease using the effectie interest metho".". "oes notarise.

1+%. Torrey Co. manufactures euipment that is sol" or lease". ;n ecem'er 31 2+11 Torreylease" euipment to alton for a fie-year perio" en"ing ecem'er 31 2+1# at (hich"ate o(nership of the lease" asset (ill 'e transferre" to alton. ual payments un"erthe lease are I22++++ =inclu"ing I2++++ executory costs> an" are "ue on ecem'er 31of each year. The first payment (as ma"e on ecem'er 31 2+11. Collecti'ility of theremaining lease payments is reasona'ly assure" an" Torrey has no material costuncertainties. The normal sales price of the euipment is I%%++++ an" cost is I#+++++.For the year en"e" ecem'er 31 2+11 (hat amount of income shoul" Torrey reali!efrom the lease transactiona. I1%++++'. I22++++c. I23++++". I33++++

91+&.


28/43


)ERI5ATIONS' Co-$utational

No% Ans(er )erivation

52. ' I)++++ P$495,000 1

10 124

D I)4125.

53. c I#%1++& Q .+& D I53#&1 I#%1++& R 15 D I44%34.

54. c I3++++++ R #.1445% D I4&&23# =L of ;r"inary Annuity Ta'le>.

55. " I4&&23# P I1++++ D I4)&23%.

5#. c Conceptual.

5%. a Conceptual FL excee"s cost.

5&. c I3++++++ R 1+ D I3+++++.

5). " &01+ D .& S %5G of economic life.

#+. c =I1+2+++ - I15+++> Q 4.))2%1 D I4343##.

#1. c I11%3#&5 N I2+++++ D I)%3#&5 Q .1+ D I)%3#)I)%3#&5 N =I2+++++ N I)%3#)> D I&%1+54.

#2. a =I2+&4)3 N I5++++> Q .1+ D I15&4).

#3. ' I15&4)3 N =I5++++ - I15&4)>U Q .1+ D I12434.

#4. " I&&+2#4 N I15++++ D I%3+2#4.

#5. c I22%44& Q .1+ D I22%45K =I22%44& N +> R % D I324)3.

##. c I22%44& N =I#++++ N I22%45>U Q .1+ D I1)+1).

#%. " =I45++++ N I5++++> R & D I5++++.

#& a I+3& 3.5%%1+ D I3+%%#%.

#). c I+3& 3.5%%1+ D I3+%%#%

=I3+%%#% N I+3&> .+& D I1%%3&.

%+. " I+3& 3.5%%1+ D I3+%%#%

I+3& N =I3+%%#% N I+3&> .+&U D I#&3++.

%1. c I+3& 3.5%%1+ D I3+%%#%

=I3+%%#% N +> 4 D I%#)42.

%2. ' =I325+++ .)+> 3.))2%1 D I%325)

I%325) 3.))2%1 D I2)25+2

I2)25+2 .+& D I234++.

21 & 2=


29/43


)ERI5ATIONS' Co-$utational 0#ont%

No% Ans(er )erivation%3. c I325+++ N =325+++ .4+> D I1)5+++

I%325) 3.))2%1 D I2)25+2

I2)25+2 N I%325) N =I2)25+2

.+&>U D I242#43.

%4. a =I325+++ .)+> 3.))2%1 D I%325).

%5. ' I155213 Q 2.4&5 D I3&5))1K

I3&5))1@@@@ D )#G S )+G.I4+++++

%#. ' Conceptual.

%%. c I4+++++ N I155213 N =I4+++++ Q .1>U D I2&4%&%.I155213 N =I2&4%&% Q.1> D I12#%34.

%&. a Fails to meet ,roup 77 reuirements.

%). c Fair alue D I4+++++.

&+. " Conceptual.

&1. a Joo: =I#++++ Q #> P =I%5+++ #> N =4&+++++ R &> D I21++++mley =I#++++> Q # D I=3#++++>Terry =I%5+++> Q # D I=45++++>.

&2. " I%2++++.

&3. a I%2++++ N I#4+++ N I3#++++ D I2)#+++.

&4. " =I4++++ 3.))2%1> P =I25+++ .#&5+&> D I1%#&35.

&5. ' I4+++++ N =I4++++ Q .5+##3>U R 4.#+4%& D I&24#5.

. ' =I4++++ 3.))2%1> P =I25+++ .#&5+&> D I1%#&35.

I4++++ N =I1%#&35 .+&> D I25&53.

&%. c =I4++++ 3.))2%1> P =I25+++ .#&5+&> D I1%#&35I4++++ N =I1%#&35 .+&> D I25&53

=I1%#&35 N I25&53> .+& D I12+%) 7nterest exp.

&&. c I&&++ N I1#+++ D =I%2++>.

&). c =I525+++ N I%5+++> Q .+) Q #012 D I2+25+.

)+. c I5#++++ N I4)#+++ D I#4+++K =I5#++++ N I&++++> Q .+) Q #012 D I21#++.

21 & 2>


30/43


)ERI5ATIONS' Co-$utational 0#ont%


)1. a$4,500,000 1

10 24

D I225+++.

=I45+++++ N I#21+++> Q .+4 D I1551#+.

)2. ' I45+++++ N I3)+++++ D I#+++++.=I45+++++ N I#21+++> Q .+4 D I1551#+.

)3. c I1&%5 N I1#5++++ D I211&%5.=I1&%5 N I3+++++> Q .+4 D I#24%5.

)4. c Conceptual.

)5. ' I4++++ I4+++++@@@@ D 1+G or @@@@@ D #.144#9

I4+++++ I#5+)&.13

9#.144# D L factor of or"inary annuity of I1 for 1+ years at 1+G.

)#. " =I4+++++ N I4++++> R 15U P I3%4)+ D I#14)+.

)%. " I31#)25 =ee amorti!ation ta'le.>

9)&. ' =I4+++++ N I3#++++> R 15 D I2##%.

9)). ' I%+++ Q # D I42+++.

)ERI5ATIONS' CPA A!a$te!No% Ans(er )erivation

1++. c Conceptual.

1+1. a =I1#++++ Q 4.%)+&> N I1#++++ D I#+#52&.

1+2. " I25+2+++ N I#3++++ P I3++++ D I1)+2+++ =2+1+>.I1)+2+++ N I#+++++ N =I1)+2+++ Q .1+>U D I14)22++ =2+11>.

1+3. a Conceptual.

1+4. " I)+++++ Q .1+ D I)++++.

1+5. " I)+++++ R 15 D I#++++.

1+#. c Conceptual.

1+%. a I%%++++ N I#+++++ D I1%++++.

91+&. " Conceptual.

21 & 3@


31/43


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


91+). "000,900$

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

EERCISES

E% 21&11@@Capital lease =ssay>.

xplain the proce"ures use" 'y the lessee to account for a capital lease.

Solution 21&11@

Ehen the capital lease metho" is use" 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 ofthe minimum lease payments =exclu"ing executory costs> or =2> the fair alue of the asset at theinception of the lease.

The present alue of the lease payments is compute" using the lessee8s incremental 'orro(ingrate unless the implicit rate use" 'y the lessor is lo(er an" the lessee has :no(le"ge of it.

The effectie-interest metho" is use" to allocate each lease payment 'et(een interest expensean" a re"uction of the lease lia'ility.

7f the lease transfers o(nership or contains a 'argain purchase option the asset is amorti!e" in amanner consistent (ith the lessee8s normal "epreciation policy on assets o(ne" oer theeconomic life of the asset an" allo(ing for resi"ual alue. 7f the lease "oes not transfer o(nershipor contain a 'argain purchase option the lease" asset is amorti!e" oer the lease term.

E% 21&111@Capital lease amorti!ation an" ?ournal entries.

Jughey Co. as lessee recor"s a capital lease of machinery on


32/43


Solution 21&111 =cont.>

='> $ease" achinery........................................................................ 1%+4+++$ease $ia'ility................................................................... 1%+4+++

7nterest xpense.......................................................................... 1%+4++

$ease $ia'ility............................................................................... 1%)#++Cash................................................................................. 35++++

epreciation xpense =%02& Q I1%+4+++>.................................. 42#+++Accumulate" epreciation ............................................... 42#+++

E% 21&112@;perating lease.

aris Co. purchase" a machine on an" ='>.U=a> n"er the operating metho" (hat shoul" 'e the income 'efore income taxes "erie" 'y

aris Co. from this lease for the year en"e" ecem'er 31 2+11='> Ehat shoul" 'e the amount of rent expense incurre" 'y un'ar from this lease for the year

en"e" ecem'er 31 2+11

Solution 21&112

=a> eenue 401011@12031011 =I3+++++ Q )012> I225+++xpenses

epreciation =I2+++++ Q )012> I15++++aintenance etc. 15+++ 1#5+++

7ncome 'efore taxes I #++++

='> ent expense 401011@12031011 =I3+++++ Q )012> D I225+++.

E% 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 lease

Solution 21&113

7n or"er for a lessor to classify a lease as a "irect-financing or a sales-type lease the lease at the"ate of inception must satisfy one or more of the follo(ing ,roup 7 criteria =a ' c an" "> an"'oth of the follo(ing ,roup 77 criteria =a an" '>

,roup 7=a> The lease transfers o(nership of the property to the lessee.='> The lease contains a 'argain purchase option.

21 & 32


33/43


Solution 21&113 =cont.>

=c> The lease term is eual 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> euals orexcee"s )+G of the fair alue of the lease" property.

,roup 77=a> Collecti'ility of the payments reuire" 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.

E% 21&116@irect-financing lease =essay>.

xplain 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 isinclu"e" in the minimum lease payments> as $ease eceia'le an" remoes the asset from the'oo:s.

The lessor recor"s payments receie" as a re"uction in $ease eceia'le an" 7nterest eenue.7nterest reenue is recogni!e" 'y using the effectie-interest metho". The implicit interest rate isapplie" to the "eclining 'alance of the $ease eceia'le 'alance. The implicit rate is the rate ofinterest that (ill "iscount the minimum lease payments =exclu"ing executory costs> an" theunguarantee" resi"ual alue to the fair alue of the asset at the inception of the lease.

E% 21&11:@$essor accounting@sales-type lease.

Jayes Corp. is a manufacturer of truc: trailers. ;n .

21 & 33


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Solution 21&11:=a> 7t is a sales-type lease to the lessor Jayes Corp. Jayes8s =the manufacturer> profit upon

sale is I5++++ (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 lessee the present alue =I5+++++> of theminimum lease payments euals or excee"s )+G =I45++++> of the fair alue of the lease"trailers collecti'ility is reasona'ly assure" an" no important uncertainties surroun" theamount of unreim'ursa'le costs yet to 'e incurre" 'y the lessor. The remaining accountingtreatment is similar to that accor"e" a "irect-financing lease.

='> =I5++++ Q 1+> R 4.#22&& D I1+&15&.

=c> $ease Amorti!ation che"ule =$essor>

$easeAnnual 7nterest on eceia'le $ease

ate $ease ental $ease eceia'le ecoery eceia'le101011 I5+++++12031011 I1+&15& I4++++ I#&15& 431&42

12031012 1+&15& 3454% %3#11 35&23112031013 1+&15& 2& %)5++ 2%&%31

="> .

;n


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?E% 21&11; =cont.>

%. Collecti'ility of the rentals is reasona'ly pre"icta'le an" there are no important uncertaintiessurroun"ing the costs yet to 'e incurre" 'y the lessor.

Instru#tions=a> repare the ?ournal entries for the entire year 2+11 on the 'oo:s of orris Company to

reflect the a'oe sale an" lease transactions =inclu"e a partial amorti!ation sche"ule an"roun" all amounts to the nearest "ollar.>

='> repare the ?ournal entries for the entire year 2+11 on the 'oo:s of $ope! Corporation toreflect the a'oe purchase an" lease transactions.

?Solution 21&11;

=a> orris Company =$essee> $ope! Corporation =$essor>


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?E% 21&11


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PRO+LE*S

Pr% 21&11=@$essee accounting@capital lease.

u'an: Company as lessee enters into a lease agreement on 1. Capitali!e" amountI422#&) Q L of an or"inary annuity for 4 perio"s at &GI422#&) Q 3.31213 D I14+++++

Because the present alue of the lease payments =I14+++++> euals the fair alueI14+++++ of the lease" property it is a capital lease an" must 'e accounte" for un"er thecapital lease metho".

='> 1.


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Solution 21&11= =cont.>

$ease Amorti!ation che"ule

Annual 7nterest on e"uction of Balance ofate $ease ayment npai" ;'ligation $ease ;'ligation $ease ;'ligation

%0101+ I14+++++#03+011 I422#&) I112+++ I31+#&) 1+&)311#03+012 422#&) &%145 335544 %53%#%

3.

4. ecem'er 31 2+11epreciation xpense.............................................................. 4)++++

Accumulate" epreciation@Capital $eases.................. 4)++++=I14+++++ Q 401+> Q #012 plus=I14+++++ Q 301+> Q #012U

7nterest xpense =I&%145 Q #012>........................................... 435%37nterest aya'le............................................................. 435%3

Pr% 21&11>@$essee accounting@capital lease.

6rause Company on Ehat :in" of lease is this to 6rause Company='> Ehat shoul" 'e consi"ere" the lease term=c> Ehat are the minimum lease payments="> Ehat is the present alue of the minimum lease payments =L factor for annuity "ue of 2+

semi-annual payments at &G annual rate 14.133)4K L factor for amount "ue in 2+ interestperio"s at &G annual rate .45#3).> =oun" to nearest "ollar.>

=e> Ehat ?ournal entries (oul" 6rause recor" "uring the first year of the lease =7nclu"e anamorti!ation sche"ule through 101012 an" roun" to the nearest "ollar.>

21 & 3=


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Solution 21&11>

=a> This lease is a capital lease to 6rause Company 'ecause its term =1+ years@seecomputation in ' 'elo(> excee"s %5G of the euipment8s estimate" useful life. 7n a""itionthe present alue =see computation in " 'elo(> of the minimum lease payments =seecomputation in c 'elo(> excee"s )+G of the fair alue of the euipment =I3++++++>.

='> The lease term is/oncancela'le perio" 5 yearsA""itional perio" for (hich termination penalty assures rene(al 4 yearserio" coere" 'y lessor extension option 1 year

1+ years=c> The minimum lease payments are

emi-annual rental payments I 21)+++xecutory costs =1)+++>

2+++++/um'er of payments oer lease term Q 2+

4++++++

esi"ual guarantee 1+++++inimum lease payments I41+++++

="> The present alue of the minimum lease payments isFactor for present alue of an annuity "ue 2+ perio"s 4G 14.133)4emi-annual payments net of executory costs I 2+++++

2&2#%&&Factor for present alue of I1 "ue in 2+ interest perio"s at 4G .45#3)esi"ual guarantee Q 1+++++ 45#3)resent alue of lease payments I2&%242%

=e>


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Solution 21&11> =cont.>

ecem'er 31 2+11epreciation xpense.................................................................. 2&12439

Accumulate" epreciation@Capital $eases..................... 2&1243

7nterest xpense.......................................................................... 1+31%37nterest aya'le . .............................................................. 1+31%3

9=I2&%242% N I#++++> R 1+ D I2&1243.

Pr% 21&12@@$essor accounting@"irect-financing lease.

$ucas 7nc. enters into a lease agreement as lessor on Ehat type of lease is this iscuss.

='> repare a lease amorti!ation sche"ule for the lessor for the first t(o years =2+11-2+12>.=oun" all amounts to nearest "ollar.>=c> repare the ?ournal entries on the 'oo:s of the lessor to recor" the lease agreement to

reflect payments receie" un"er the lease an" to recogni!e income 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 leasefrom the lessee8s point of ie(. The lease contains a 'argain purchase option (hich satisfiesone of the criteria for classification as a "irect-financing lease. The option to 'uy forI)++++++ at the termination of the lease (hen the asset is expecte" to hae a fair alue of

I15++++++ constitutes a 'argain purchase option. A""itionally the payments arecollecti'le an" there are no uncertainties as to future lessor costs.

='> $essor8s $ease Amorti!ation che"uleAnnual 7nterest on $ease eceia'le

ate $ease ental $ease eceia'le ecoery $ease eceia'le101011 I3&++++++12031011 I5%##4259 I3+4++++ I2%2#425 352%35%512031012 5%##425 2&21& 2)4453) 3232)+3#

9I3&++++++ N =I)++++++ Q .54+2%>U R 5.%4##4 D I5%##425.

21 & 6@


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Solution 21&12@ =cont.>

$ease eceia'le....................................................................... 3&++++++

Airplanes......................................................................... 3&++++++

ecem'er 31 2+11Cash........................................................................................... 5%##425$ease eceia'le............................................................ 2%2#4257nterest eenue............................................................. 3+4++++

ecem'er 31 2+12Cash........................................................................................... 5%##425

$ease eceia'le............................................................ 2)4453)7nterest eenue............................................................. 2&21&

21 & 61


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IFRS 8UESTIONSTrueBFalse1. i,AA reuires that companies proi"e a year-'y-year 'rea:out of future noncancela'le

lease payments "ue in years 1 through 5.

2. i,AA for leases is more Wrules-'ase"X than .. ,AA an" inclu"es many 'right-line criteriato "etermine o(nership.

3. The i,AA leasing stan"ar" is the su'?ect of oer 3+ interpretations since its issuance in1)&2.

4. i,AA "oes not proi"e "etaile" gui"ance for leases of natural resources sale-lease'ac:san" leerage" leases.

5. Because i,AA is ery general in its proisions for lease accounting the reuire" "isclosuresfor leases un"er i,AA are more "etaile" an" extensie than those reuire" un"er ..,AA.

Ans(ers to TrueBFalse1. False2. False3. False4. True5. False

*ulti$le Coi#e1. Ehich of the follo(ing statements is true (hen comparing the accounting for leasing

transactions un"er .. ,AA (ith i,AA

a. i,AA reuires that companies proi"e a year-'y-year 'rea:out of future noncancela'lelease payments "ue in years 1 through 5.'. i,AA for leases is more Wrules-'ase"X than .. ,AA an" inclu"es many 'right-line

criteria to "etermine o(nership.c. The i,AA leasing stan"ar" is the su'?ect of oer 3+ interpretations since its issuance in

1)&2.".i,AA "oes not proi"e "etaile" gui"ance for leases of natural resourcessale-lease'ac:s an" leerage" leases.

Ans(er to *ulti$le Coi#e1. "

Sort Ans(er

1. Briefly "escri'e some of the similarities an" "ifferences 'et(een .. ,AA an" i,AA (ithrespect to the accounting for leases.

1. Both .. ,AA an" i,AA share the same o'?ectie of recor"ing leases 'y lessees an"lessors accor"ing to their economic su'stance N that is accor"ing to the "efinitions ofassets an" lia'ilities. $easing (as on the FAB*s initial agen"a in 1)%3 an" ,AA rules

(ere issue" in 1)%# ='efore the conceptual frame(or: (as "eelope">. .. ,AA forleases has 'een the su'?ect of more than 3+ interpretations since its issuance. The i,AAstan"ar" is su'?ect to ?ust three interpretations. ;ne reason for this small num'er of

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interpretations is that i,AA "oes not specifically a""ress a num'er of leasing transactionsthat are coere" 'y .. ,AA. xamples inclu"e lease agreements for natural resourcessale-lease'ac:s real estate leases an" leerage" leases. .. ,AA for leases is muchmore Wrule-'ase"X (ith specific 'right-line criteria to "etermine if a lease arrangementtransfers the ris:s an" re(ar"s of o(nershipK i,AA is more general in its proisions.

2. Briefly "iscuss the 7AB an" FAB efforts to conerge their accounting gui"elines for leases.

2. $ease accounting is one of the areas i"entifie" in the 7AB0FAB emoran"um ofn"erstan"ing an" also a topic recommen"e" 'y the C in its off-'alance-sheet stu"yfor stan"ar"-setting attention. The ?oint pro?ect (ill initially primarily focus on lesseeaccounting. ;ne of the first areas to 'e stu"ie" is WEhat are the assets an" lia'ilities to'e recogni!e" relate" to a lease contractX houl" the focus remain on the lease" item orthe right to use the lease" item This uestion is tie" to the Boar"s* ?oint pro?ect on theconceptual frame(or: N "efining an WassetX an" a Wlia'ilityX.

21 & 63

accounting for leases ch21.pdf

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