Exam 18: Extension: Ol Accounting for Leases Current Standard

Under IFRS, the terms of a lease imply a finance lease if the lessee may extend the lease with a bargain renewal option.

Under U.S. GAAP, the lessee's required disclosures include required lease payments for both operating and capital leases for each of the next five years and the remainder payments in aggregate.

Which of the following statements regarding a bargain purchase option is true?

Crest Industries Crest Industries leased store furnishings from Santa Fe Leasing on January 1 of the current year. Santa Fe had purchased the furnishings from Steelman Enterprises for $700,000. Other information: Lease term 5 years Quarterly Payments \ 45,681 at the beginning of each quarter Life of Asset 5 years Fair value of Asset \ 700,000 Implicit annual interest rate 12\% Incremental rate 12\% There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year. -Refer to Crest Industries: 1. Prepare an amortization schedule for the first year of the lease. 2. Prepare the appropriate journal entries for Crest for the first two payments of the current year and depreciation expense for December 31 of the current year. 3. Show how the lease-related information will be presented on Crest's financial statements at December 31 of the current year.

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson does not know this rate. At what interest rate should the minimum lease payments be computed?

Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $12 million. The lease agreement between SuperByte and Laguna Madre had the follow terms: 1) The lease is noncancellable. 2) The lease has no residual value or bargain purchase option. 3) The lease term is 8 years; payments are made semiannually. 4) Depreciation is recorded each December 31 using the straight-line approach. 5) The economic life of the equipment is 8 years. 6) The lessee's incremental borrowing rate and the implicit interest rate are both 12% annually. 7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1. 8) The fair value of the equipment at the inception of the lease is $16,000,000. Laguna Madre Company would account for this lease as ________.

When there is a bargain purchase option, the leased asset will be depreciated over the life of the lease instead of the life of the asset.

On March 1 of the current year, Stafford Corporation leased equipment under a six-year noncancellable lease. The estimated economic of the equipment is nine years. The fair value of the equipment is $780,000. The lease does not contain a bargain purchase option or a transfer of title. Stafford must classify this lease as a capital lease if the present value of the minimum lease payments is at least ________.

How is an unguaranteed residual value accounted for by the lessee when computing minimum lease payments?

When year-end occurs between payment dates, the lessee must accrue the interest expense and the lessor must accrue interest revenue at the end of the year.

A noncancellable lease contains a bargain purchase option. The fair value of the asset is greater than the lessor's cost. Collectability of the lease payments is reasonably assured, and no material uncertainties about future costs exist. How will the lessor account for the lease?

Typically, the lessee will pay for executory costs, expensing them as incurred.

When a lessor records a sales-type lease, the transaction is similar to ________.

Which of the following is a disclosure that a lessor must make within its financial statements?

Hyde Company leased equipment to Pittman Corporation under a six year lease agreement that qualifies as a direct-finance lease. The asset cost $1,780,000. The lease contains a bargain purchase option that is effective at the end of the sixth year. The asset has an expected economic life of 10 years and is expected to have a residual value of $4000 at the end of the 10th year. Assuming that straight-line depreciation is used, what would be the annual depreciation? (Round your final answer to the nearest whole dollar.)

For an operating lease, the lessee is only required to report rent expense on its income statement.

On March 1 of the current year, Hill Corporation leased sound equipment from McEntire Company. The equipment has a life of 8 years. There is no bargain purchase option or passage of title. For the lease to be considered a capital lease, it must have a term of at least ________.

Companies account for guaranteed residual values in the same way they account for bargain purchase options.

Which of the following is an advantage of leasing an asset for the lessee?

A lessor reports rental revenue if it classifies the leased asset as inventory and reports a gain on leased asset if it classifies the leased asset as property, plant, and equipment.