Deck 18: Accounting for Leases

Question 1

The ________ date is when the lease agreement is signed. The ________ date is the date on which the lessee is allowed to begin using the leased asset.

A) lease inception; lease commencement
B) lease consideration; lease commencement
C) lease inception; lease finalization
D) Both A and B are correct.

Answer 1

A

Question 2

Group I criteria provide guidance to operationalize the concept of ownership and control of an asset. To meet the Group I criteria, a transaction only needs to meet one of the five criteria. List those five criteria.

Answer 2

1. The lease transfers ownership of the leased asset to the lessee at the end of the lease term. If the lease transfers ownership, then the lessee firm has, in essence, purchased the asset.
2. The lessee is given an option to purchase the asset that the lessee is reasonably certain to exercise. For example, it might be reasonably certain that the lessee would exercise a purchase option if the specified purchase price is well below the expected value of the leased asset at the completion of the lease term.
3. The lease term is for a major part of the economic life of the asset. If the lease term provides the lessee the use and control over substantially all of the asset's useful life, then the agreement should be considered equivalent to purchasing the asset.
4. The present value of the sum of the lease payments and any residual value the lessee guarantees to pay (that is not otherwise included in the lease payments) is equal to substantially all of the asset's fair value. The present value computation includes lease payments in the renewal periods, if any. Meeting this criterion implies that the lessee is providing the lessor compensation that is equivalent to the purchase of the asset.
5. The leased asset is of a specialized nature. An asset with a specialized nature has no alternative use to the lessor at the end of the lease term. Because the asset has no alternative use to the lessor, its specialized nature implies that the lessor must have transferred control over the asset to the lessee.

Question 3

In general, the cost of an asset over the life of the lease is lower than if the lessee purchased the asset.

Answer 3

False

Question 4

Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year. The lease payments are $78,000 per year.
The fair value of the leased asset is $290,000.
The lessor's deferred initial direct costs are equal to $24,000.
The lessor's estimate of the unguaranteed residual asset is $115,000.
Based on the above information, what is the implicit rate in the lease for Kataran?

A) 11.48%
B) 21.81%
C) 14.77%
D) 16.54%

Question 5

The initial direct costs cannot be deferred and the lessor must expense initial direct costs at the lease commencement.

Question 6

If the lessor meets any one of the five Group I criteria, then the lessor classifies the lease as a(n) ________. If the lessor meets both of the Group II criteria, but none of the Group I criteria, then the lessor classifies the lease as a(n) ________. If the transaction does not meet either the Group I or Group II criteria, then the lessor classifies the lease as a(n) ________.

A) operating lease; direct financing lease; sales-type lease
B) sales-type lease; direct financing lease; operating lease
C) standalone price lease; sales-type lease; direct financing lease
D) direct financing lease; operating lease; sales-type lease

Question 7

The Group II criteria seem like a simple way to achieve a reporting outcome. FASB wanted lessors to recognize a profit at lease commencement from nonoperating lease treatment due partly to a third-party residual value guarantee.

Question 8

When a company purchases equipment by issuing a long-term note, the interest element of the payment is tax deductible. However, if the company leases equipment, the entire lease payment may be tax deductible.

Question 9

The concept of substance over form can be applied to leases. Which lease terms are most important to understanding the economic substance of the lease contract?

Question 10

Present value of lease payments + Present value of guaranteed or unguaranteed residual asset = Fair value of leased asset + Deferred initial direct costs.

Question 11

Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year.
The lease payments are $68,000 per year.
The fair value of the leased asset is $280,000.
The lessor's deferred initial direct costs are equal to $14,000.
The lessor's estimate of the unguaranteed residual asset is $125,000.
Based on the information above, what is the implicit rate?

Question 12

When there are several assets as part of the lease, only some must be separately identified.

Question 13

Which of the following items are not examples of initial direct lease costs?

A) commissions
B) legal fees resulting from the execution of the lease
C) costs to prepare documents after the execution of the lease
D) All of the above are examples of indirect lease costs.

Question 14

Which of the following assets is always considered a separate lease component in a lease, unless the impact on the financial statements of not separating it from the other asset(s) is insignificant?

A) land
B) services associated with the lease
C) fully depreciated assets
D) All of the above

Question 15

IFRS does not classify leases as operating and financing and does not distinguish two types of leases. Rather, lessee accounting treatment is the same for all leases under IFRS.

Question 16

After identifying a lease, both the lessee and the lessor are required to separate the various lease and nonlease components and allocate consideration to these components.

Question 17

Alpha Company has three components in their lease agreement: the building, the equipment and the maintenance service. Total consideration in the contract is $500,000 per year. Alpha Company has identified the following standalone prices:
$$\begin{array} { | l | r | } \hline { \text { Corapanent } } & \text { Stondalane Prire } \\\hline \text { Building } & \$ 400,000 \\\hline \text { Equipment } & 100,000 \\\hline \text { Maintenance/Service } & \$ 50,000 \\\hline \text { Total } &\$ 550,000 \\\hline\end{array}$$
Calculate the percentages and allocate the consideration to each component.

Question 18

In instances where there is not an observable standalone selling price, the lessor must use an estimate of the standalone selling price and allocate it based on which of the following methods?

A) adjusted market assessment approach
B) expected-cost-plus-a-margin approach
C) residual approach
D) any of the above approaches

Question 19

In cases where the standalone price is highly variable or uncertain, the lessee may use what type of method for determining standalone prices?

A) market method
B) residual method
C) component method
D) Both A and C are correct.

Question 20

Prior to 2019, lessees did not include the right-of-use asset and the lease liability for operating leases on their balance sheets. Both FASB and IASB wrote new standards to require that lessees nearly always report an asset and liability on their balance sheets when they engage in a lease transaction. This accounting results in which of the following?

A) a more reliable estimation of the lease's value
B) a more faithful representation of the rights and obligations arising from leases
C) a better determination on whether the lessor held the risks and rewards of the leased asset's ownership
D) All of the above

Question 21

List the three additional indicators that IFRS recognizes individually or in combination that could lead to classifying a lease as a finance lease.

Question 22

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $78,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,700 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,700, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000. Assuming that this is classified as an operating lease, how much interest expense is recorded in 2019?

A) $1,982
B) $0
C) $2,140
D) $1,554

Question 23

Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $73,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,400 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,400, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 5% and is known by Starboard. Starboard guarantees a residual value of $4,500 and incurs initial direct costs of $1,600. Assuming that this is classified as an operating lease, what is the value of the right-of-use asset at the lease's commencement?

A) $45,027
B) $46,627
C) $59,278
D) $62,804

Question 24

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $80,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,800 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,800, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, how much amortization is recorded on the right-of-use asset in 2019?

A) $11,612
B) $0
C) $13,180
D) $1,568

Question 25

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,900 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,900, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,200. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment?

A) $47,821
B) $45,892
C) $44,692
D) $64,200

Question 26

Leewin Brokerage
Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000.
Assuming that this is classified as an operating lease, what is the amount of the lease liability at January 1, 2019 before the payment?

Question 27

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,900 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,900, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 6% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

A) $10,900
B) $13,300
C) $12,000
D) $11,120

Question 28

Assuming this is an operating lease, what journal entries does Leewin make on January 1, 2019?

Question 29

What journal entry does Leewin make on January 1, 2019 to record the annual lease payment?

Question 30

Which of the following statements is true?

A) The right-of-use asset is increased by prepaid lease payments, but reduced by lease incentives and the lessee's initial direct costs.
B) The right-of-use asset is increased by prepaid lease payments and the lessee's initial direct costs, but reduced by lease incentives.
C) The right-of-use asset is reduced by the lessee's initial direct costs, but increased by lease incentives and prepaid lease payments.
D) The right-of-use asset is reduced by prepaid lease payments and the lessee's initial direct costs, but increased by lease incentives.

Question 31

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $76,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 6% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. In addition to the information provided above, assume that Bumble provided a $6,000 incentive. Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

A) $10,000
B) $12,220
C) $11,100
D) $11,020

Question 32

Measuring the right-of-use asset includes the following components: the lease liability determined as the future value of the remaining lease payments, lease payments the lessee makes to the lessor at or before the commencement date, a reduction for any lease incentives the lessee receives and any initial direct costs the lessee incurs.

Question 33

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $71,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,500. Compute the present value of the lease payments in order to determine if the lease meets the fourth Group I criterion. Calculate the present value of each payment individually. Assuming that this is classified as an operating lease, what is the value of the right-of-use asset at the lease's commencement?

A) $44,518
B) $46,018
C) $57,799
D) $47,799

Question 34

Leewin Brokerage
Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000.

-Based on the above information, record the lessee's journal entry for the payment of initial direct costs.

Question 35

Leewin Brokerage
Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000.

-Based on the above information, what is the journal entry Leewin made to record the initial payment of $10,000?

Question 36

Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

Question 37

On the balance sheet, the lease liability is measured as ________.

A) the present value of the lease payments plus the present value of the guaranteed residual value if the lessee guarantees it(if any)
B) the present value of the lease payments less the present value of the guaranteed residual value (if any)
C) the future value of the lease payments plus the future value of the guaranteed residual value (if any)
D) the present value of the lease payments plus the future value of the guaranteed residual value (if any)

Question 38

Leewin Brokerage
Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000.

-Based on the above information, calculate the right-of-use asset on January 1, 2019.

Question 39

Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $73,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,300 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,300, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Starboard. Starboard guarantees a residual value of $3,000 and incurs initial direct costs of $1,700. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment?

A) $47,688
B) $50,154
C) $45,854
D) $60,100

Question 40

For an operating lease, the lessee will record a(n) ________ and an associated lease liability on the balance sheet.

A) intangible asset
B) capital adjustment
C) contra-liability account
D) right-of-use asset

Question 41

On January 1, 2018, Jones AutoWorld, Inc. leases an SUV to Mains Company. The lease term is 4 years with no renewal options and the economic life of the SUV is 7 years. The fair value of the automobile is $65,000 and Jones' cost or carrying value is also $65,000. There are no lease incentives. The lease calls for monthly payments of $800 at the end of each month. Mains incurs initial direct costs of $2,400 on January 1, 2018. The implicit rate in the lease is 5%. There is no transfer of ownership at the end of the lease term. Lease payment collection is probable.
To determine whether Jones, the lessor, should classify the lease as operating, direct financing, or sales-type, we assess both Group I and Group II criteria. Complete the below table and draw a conclusion about how the lease should be classified.
$\begin{array}{|l|l|c|}\hline\text{ Group I Criteria } &\text{ Met?}&\text { Explanation } \\\hline \text{Transfer of ownership? }& \\\hline\text{ Purchase option likely to be exercised? }& \\\hline \text{Lease term major part of economic life?} & \\\hline \text{Present value substantial part of fair value? }& \\\hline\text{ Asset is specialized? }& \\\hline & \\\hline \text{Group II Criteria} & \\\hline\text{ Present value including third-party guarantees} & \\\text{substantially all of fair value? }& \\\hline\text{ Lease payment collection probable?} &\\\hline\end{array}$

Question 42

Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

Question 43

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $8,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 6%. Initial direct costs of $1,400 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $63,468. Collection of all lease payments is reasonably assured. What is the amount of the lease liability recorded by Nace at the lease's commencement?

A) $58,881
B) $62,414
C) $63,468
D) $64,868

Question 44

Incentive Industries
Incentive Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. Bumble provides Incentive Industries with a lease incentive in the amount of $6,000 to terminate another lease. The lease commences on January 1, 2019, and Incentive will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Incentive made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Incentive. Incentive incurs initial direct costs of $2,000.

-Based on the above information, calculate the right-of-use asset on January 1, 2019.

Question 45

Each period of a finance lease, the lessee records a lease expense that includes which of the following?

A) Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred.
B) Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred; and changes in variable lease payments that depend on an index or rate.
C) Neither A nor B is correct.
D) Both A and B are correct.

Question 46

What journal entries does Incentive make on January 1? Assume this is an operating lease.

Question 47

What journal entry does Incentive make on January 1, 2019 to record the annual lease payment?

Question 48

Prepare the journal entry required on December 31, 2019. Assume this is an operating lease.

Question 49

Lexus Company rents a copier from Heavenly Co on January 1, 2017. Under the terms of the agreement, Lexus Company will pay rentals of $7,000 per month for a 6-month period. Lexus Company will make these payments at the beginning of every month, beginning on January 1, 2017. Lexus Company elects to apply the exemption for short-term leases. That is, Lexus Company makes a policy election not to record the lease liability and the right-of-use asset. What journal entry will Lexus Company make each month to record the rental payments?

Question 50

Prepare the journal entry required on December 31, 2019. Assume this is an operating lease.

Question 51

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured. What is the proper classification of the lease to Nace?

A) Sales-type lease
B) Finance lease
C) Operating lease
D) Either A or B

Question 52

Assuming that this is classified as an operating lease, create an amortization table for periodic interest and reduction in the liability.
Periodic Interest and Reduction in the Liability
$$\begin{array} { | l | l | l | l | l | } \hline& & & \text { Reduction in } & \\& \text { Payment } & \text { Interest } & \text { Lease Liability } & \text { Balance } \\\hline & & & & \\\hline \text { Lease commencement: } 1 / 1 / 2019 & & & & \\\hline 1 / 1 / 2020 & & & & \\\hline 1 / 1 / 2021 & & & & \\\hline 1 / 1 / 2022 & & & & \\\hline 1 / 1 / 2023 & & & & \\\hline\end{array}$$

Question 53

For both finance and operating leases, if the residual value is guaranteed by a third party or is unguaranteed, then the residual value does not impact the lessee's accounting treatment.

Question 54

Assuming that this is classified as an operating lease, create an amortization table for periodic interest and reduction in the liability.
Periodic Interest and Reduction in the Liability
$$\begin{array} { | l | l | l | l | l | } \hline & \text { Payment } & \text { Interest } & \text { Reduction } & \text { Balance } \\\hline & & & & \\\hline \text { Lease commencement: } 1 / 1 / 2019 & & & & \\\hline 1 / 1 / 2020 & & & & \\\hline 1 / 1 / 2021 & & & & \\\hline 1 / 1 / 2022 & & & & \\\hline 1 / 1 / 2023 & & & & \\\hline\end{array}$$

Question 55

Starboard Industries
Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Starboard. Starboard guarantees a residual value of $5,000 and incurs initial direct costs of $2,000.

-Based on the above information, calculate the right-of-use asset on January 1, 2019.

Question 56

Starboard Industries
Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Starboard. Starboard guarantees a residual value of $5,000 and incurs initial direct costs of $2,000.

-Assuming this is an operating lease, what journal entries does Starboard make on January 1, 2019?

Question 57

Starboard Industries
Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Starboard. Starboard guarantees a residual value of $5,000 and incurs initial direct costs of $2,000.
Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment?

Question 58

Incentive Industries
Incentive Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $75,000 under a 5-year lease on December 20, 2018. Bumble provides Incentive Industries with a lease incentive in the amount of $6,000 to terminate another lease. The lease commences on January 1, 2019, and Incentive will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Incentive made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Incentive. Incentive incurs initial direct costs of $2,000.
Assuming that this is classified as an operating lease, what is the amount of the lease liability at on January 1, 2019 before the lease payment?

Question 59

Incentive Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair
Assuming that this is classified as an operating lease, create an amortization table for the right-of-use asset?
Amortization of Right-of-Use Asset
$$\begin{array} { | l | l | l | l | } \hline & \text { Lease Expense } & \text { Interest } & \begin{array} { c } \text { Amortization of Right- } \\\text { of-Use Asset }\end{array} \\\hline 12 / 31 / 2019 & & & \\\hline 12 / 31 / 2020 & & & \\\hline 12 / 31 / 2021 & & & \\\hline 12 / 31 / 2022 & & & \\\hline 12 / 31 / 2023 & & & \\\hline \text { Total } & & & \\\hline\end{array}$$

Question 60

Assuming that this is classified as an operating lease, create an amortization table for the right-of-use asset.
Amortization of Right-of-Use Asset
$$\begin{array} { | l | l | l | l | } \hline & \text { Lease Expense } & \text { Interest } & \begin{array} { c } \text { Amortization of Right- } \\\text { of-Use Asset }\end{array} \\\hline 12 / 31 / 2019 & & & \\\hline 12 / 31 / 2020 & & & \\\hline 12 / 31 / 2021 & & & \\\hline 12 / 31 / 2022 & & & \\\hline 12 / 31 / 2023 & & & \\\hline \text { Total } & & & \\\hline\end{array}$$

Question 61

Describe the accounting for a finance lease by the lessee if the lessee provides a residual value guarantee.

Question 62

For a finance lease, what are the components of lease expense recorded by the lessee?

Question 63

Nace Manufacturing Company
Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured.

-What is the value of the right-of-use asset to Nace at the lease's commencement?

Question 64

For lessors of sales-type leases, cost of goods sold is equal to the carrying value of the leased asset less the present value of any unguaranteed residual asset plus any deferred initial direct costs paid by the lessor.

Question 65

Since IFRS makes an exception for leased assets that have low values, reporters may account for leased assets with values of less than $5,000 as a rental agreement rather than recognizing a right-of-use asset and a lease liability. For example, suppose a company leases a $4,800 computer for 2.5 years. How does IFRS differ from how U.S. GAAP would record this?

Question 66

Nace Manufacturing Company
Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured.
What is the proper classification of the lease to Nace?

Question 67

Nice Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $9,500, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have a $2,000 residual value at the end of the lease term on December 31, 2028, which is guaranteed by Nice. Nice's incremental borrowing rate is 7%. Initial direct costs of $2,500 are incurred on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $64,012. Collection of all lease payments is reasonably assured. What is the amount of the lease liability recorded by Nice at the lease's commencement?

A) $67,741
B) $72,412
C) $74,912
D) $22,500

Question 68

Based on the above information, prepare Nice Manufacturing's journal entries at the commencement of the lease, January 1 and December 31, 2019 payments, and amortization of the right-of-use asset.

Question 69

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 9%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $29,035. Collection of all lease payments is reasonably assured. What is the value of the right-of-use asset to Nace at the lease's commencement?

A) $30,035
B) $26,981
C) $26,671
D) $28,981

Question 70

Based on the information provided above, what are the journal entries on the lease termination date of December 31, 2028, assuming that Nice does not have to pay the guaranteed residual value.

Question 71

Based on the above information, prepare an amortization table for the Nice Manufacturing's lease liability.
$$\begin{array} { | l | l | l | l | l | } \hline & \text { Payment } & \text { Interest } & \text { Reduction } & \text { Balance } \\\hline \text { Commencement } & & & & \\\hline \text { 1-Jan-19 } & & & & \\\hline \text { B1-Dec-19 } & & & & \\\hline \text { 31-Dec-20 } & & & & \\\hline \text { 31-Dec-21 } & & & & \\\hline \text { 31-Dec-22 } & & & & \\\hline \text { 31-Dec-23 } & & & & \\\hline \text { 31-Dec-24 } & & & & \\\hline \text { 31-Dec-25 } & & & & \\\hline \text { 31-Dec-27 } & & & & \\\hline \text { 31-Dec-28 } & & & & \\\hline\end{array}$$

Question 72

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $7,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $46,813. Collection of all lease payments is reasonably assured. What is the amortization of the right-of-use asset recorded in 2019 and 2020, respectively?

A) $7,000; $2,737
B) $4,676; $4,676
C) $4,480; $2,520
D) $5,033; $4,480

Question 73

Nice Manufacturing Company
Nice Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $8,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have a $5,000 residual value at the end of the lease term on December 31, 2028, which is guaranteed by Nice. Nice's incremental borrowing rate is 9%. Initial direct costs of $2,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured.

-What is the value of the right-of-use asset to Nice at the lease's commencement?

Question 74

Nice Manufacturing Company
Nice Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $8,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have a $5,000 residual value at the end of the lease term on December 31, 2028, which is guaranteed by Nice. Nice's incremental borrowing rate is 9%. Initial direct costs of $2,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured.
What is the amount of the lease liability recorded by Nice at the lease's commencement?

Question 75

Nace Manufacturing Company
Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured.
What is the amount of the lease liability recorded by Nace at the lease's commencement?

Question 76

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $6,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 10%. Initial direct costs of $1,100 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $41,608. Collection of all lease payments is reasonably assured. What is the reduction in the lease liability recorded with the first and second lease payments, respectively?

A) $6,000; $2,545
B) $4,165; $4,165
C) $36,499; $2,350
D) $4,055; $3,650

Question 77

With respect to lessees, how do IFRS and U.S. GAAP differ in the accounting treatment of operating and finance leases?

Question 78

Based on the above information, prepare an amortization table for the Nace Manufacturing's lease liability.
$$\begin{array} { | l | l | l | l | l | } \hline & \text { Payment } & \text { Interest } & \text { Reduction } & \text { Balance } \\\hline \text { Commencement } & & & & \\\hline \text { 1-Jan-19 } & & & & \\\hline \text {31-Dec-19 } & & & & \\\hline \text { 31-Dec-20 } & & & & \\\hline \text { 31-Dec-21 } & & & & \\\hline \text { 31-Dec-22 } & & & & \\\hline \text { 31-Dec-23 } & & & & \\\hline \text { 31-Dec-24 } & & & & \\\hline \text { 31-Dec-25 } & & & & \\\hline \text { 31-Dec-26 } & & & & \\\hline \text { 31-Dec-27 } & & & & \\\hline\end{array}$$

Question 79

Based on the information provided above, what are the journal entries on the lease termination date of December 31, 2028, assuming that Nice must pay the guaranteed residual value.

Question 80

Based on the above information, prepare Nace Manufacturing's journal entries at the commencement of the lease, January 1 and December 31, 2019 payments, and amortization of the right-of-use asset.