Ch21 Accounting For Leases PDF

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CHAPTER 21ACCOUNTING FOR LEASESCHAPTER LEARNING OBJECTIVES Understand the environment related to leasing transactions. Explain the accounting for leases by lessees. Explain the accounting for leases by lessors. Discuss the accounting and reporting for special features of lease arrangements. *5. Desc...

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CHAPTER 21 ACCOUNTING FOR LEASES CHAPTER LEARNING OBJECTIVES 1.

Understand the environment related to leasing transactions.

2.

Explain the accounting for leases by lessees.

3.

Explain the accounting for leases by lessors.

4.

Discuss the accounting and reporting for special features of lease arrangements.

*5.

Describe the lessee’s accounting for sale-leaseback transactions.

Test Bank for Intermediate Accounting, Sixteenth Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

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TRUE-FALSE STATEMENTS 1.1 2.1 3.2 4.4

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9.2 10.6 11.3 12.4

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MULTIPLE CHOICE QUESTIONS 21.1 22.1 23.1 24.1 25.1 26.2 27.2 28.2 29.2 30.1 31.2 32.1 33.1 34.2 35.4 36.3 37.4 38.2

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39.3 40.2 41.4 42.4 43.6 44.4 45.4 46.4 47.4 48.4 49.5 50.5 51.5 52.2 53.2 54.2 55.2 56.2

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57.2 58.4 59.2 60.2 61.2 62.2 63.2 64.2 65.2 66.2 67.2 68.2 69.2 70.2 71.2 72.2 73.2 74.2

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75. 2 76. 3 77. 2 78. 3 79. 6 80. 3 81. 3 82. 1 83. 3 84. 4 85. 4 86. 4 87. 4 88. 4 89. 2 90. 2 91. 2 92. 2

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93. 94.5 95.5 96.2 97.2 98.5 99.5 100.2 101.2 102.4 103.2 104.2 105.2 106.4 107.4 108.5 109.3

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BRIEF EXERCISES 110.2

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EXERCISES 113.1-3

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PROBLEMS 118.2

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Accounting for Leases

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TRUE-FALSE—Conceptual 1.

Leasing equipment reduces the risk of obsolescence to the lessee and in many cases passes the risk of residual value to the lessor.

2.

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

3.

Minimum rental payments are the same as minimum lease payments.

4.

Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.

5.

A capitalized leased asset is always depreciated over the term of the lease by the lessee.

6.

A lessee only reports interest expense on its income statement in a finance lease.

7.

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

8.

In a finance lease, the lessee reports interest expense but not amortization expense on the income statement.

9.

If a lease does not transfer control of the asset over the lease term, the lessor will generally account for the lease as a sales-type lease.

10.

Direct-financing leases involve a third party in addition to the lessee.

11.

Under an operating lease, the lessor records each lease receipt as part interest revenue and part lease revenue.

12.

In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair value of a leased asset.

13.

If it is probable that the expected residual value is less than the guaranteed residual value, the difference should be included in the computation of the lease liability.

14.

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

15.

When a lease has an unguaranteed residual value, the lessor reduces sales revenue and cost of goods sold by the present value of the unguaranteed residual value.

16.

If a lease includes a bargain purchase option, the lessee must increase the present value of the lease payments by the purchase option price.

17.

The basic difference between a direct-financing lease and a sales-type lease relates to the recognition of the profit on the sale.

Test Bank for Intermediate Accounting, Sixteenth Edition 18. 19.

20.

The gross profit amount in a sales-type lease is greater when a guaranteed residual value exists. For operating leases, a lessor defers the initial direct costs and amortizes them as expenses over the term of the lease. In a sale-leaseback arrangement the seller-lessee transfers an asset to the buyer-lessor and then leases the asset back from the buyer-lessor.

True-False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. Item T T F T F

6. 7. 8. 9. 10.

Ans. F T F F T

Item 11. 12. 13. 14. 15.

F F T F T

Ans.Item 16. 17. 18. 19. 20.

Ans. F T F T T

Accounting for Leases

21 - 5

MULTIPLE CHOICE—Conceptual 21.

Which of the following are reasons why a company is involved in leasing to other companies? I. Interest revenue. II. High residual values. III. Tax incentives. IV. Guaranteed bargain purchase options. a. I, II, IV. b. II, III, and IV. c. I, III, and IV. d. I, II, and III.

22.

Which of the following is an advantage of captive leasing companies over the other players in the leasing market? a. They have access to low-cost funds allowing them to purchase assets at lower cost. b. They are good at developing innovative contracts that help avoid accounting problems. c. They provide leasing arrangements for a wider range of products than the parent company’s product line. d. They have the point-of-sale advantage in finding leasing customers.

23.

Which of the following best describes current practice in accounting for leases? a. Leases are not capitalized. b. All long-term leases are capitalized. c. Leases similar to installment purchases are capitalized. d. All leases are capitalized.

24.

While only certain leases are currently accounted for as a sale or purchase, there is theoretical justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that a. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal. b. at the end of the lease the property usually can be purchased by the lessee. c. a lease reflects the purchase or sale of a quantifiable right to the use of property. d. during the life of the lease the lessee can effectively treat the property as if it were owned.

25.

A single lease expense is recognized on the income statement for a. an operating lease. b. a finance lease. c. both a finance lease and an operating lease. d. neither a finance lease or an operating lease.

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26.

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? a. There is no impact as the option does not enter into the transaction until the end of the lease term. b. The lessee must increase the present value of the minimum lease payments by the present value of the option price. c. The lessee must decrease the present value of the minimum lease payments by the present value of the option price. d. The minimum lease payments would be increased by the option price.

Test Bank for Intermediate Accounting, Sixteenth Edition P

27.

The amount to be recorded as the cost of an asset under finance lease is equal to the a. present value of the lease payments. b. present value of the lease payments or the fair value of the asset, whichever is lower. c. present value of the lease payments plus the present value of any unguaranteed residual value. d. carrying value of the asset on the lessor’s books.

28.

The classifications of a lease by the lessee are a. operating and finance leases. b. operating, sales, and finance leases. c. operating and leveraged leases. d. None of these answers are correct.

29.

Which of the following is a correct statement of one of the classification tests? a. The lease transfers ownership of the property to the lessor. b. The lease contains a purchase option. c. The lease term is equal to or more than 75% of the estimated economic life of the leased property. d. The lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

30.

Lease payments include: I. fixed payments. II. variable payments based on an index. III a bargain purchase option. IV. a guaranteed residual value. a. I, II, and III. b. II, III, and IV. c. I, II, and IV. d. I, II, III, and IV.

31.

In computing depreciation of a leased asset where there is no bargain purchase option, the lessee should subtract a. no residual value and depreciate over the term of the lease. b. an unguaranteed residual value and depreciate over the term of the lease. c. a guaranteed residual value and depreciate over the life of the asset. d. an unguaranteed residual value and depreciate over the life of the asset.

32.

In computing the present value of the lease payments, the lessee should a. use its incremental borrowing rate in all cases. b. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. c. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. d. use the implicit rate in all cases.

33.

Which of the following is not one of the lease classification tests? a. Transfer of ownership b. Purchase option c. Lease term d. Collectibility

Accounting for Leases 34.

P

21 - 7

The IASB provides an exception for the required capitalization of all leases by the lessee for a. leases of underlying assets with low value only. b. short-term leases with a term of 12 months or less only. c. leases of underlying assets with low value and short-term leases with a term of 12 months or less. d. None of these are correct.

35.

A lessee with a finance lease containing a bargain purchase option should depreciate the leased asset over the a. asset’s remaining economic life. b. term of the lease. c. life of the asset or the term of the lease, whichever is shorter. d. life of the asset or the term of the lease, whichever is longer.

36.

Which of the following describes the lease term test? a. If the lease term is 75% or more of the economic life, it is a finance lease. b. If the lease term is 90% or more of the economic life, it is a finance lease. c. If there is a bargain purchase option during the lease term, it is a finance lease. d. If the asset has an alternative use during the lease term, it is a finance lease.

37.

Which of the following would be included in the Lease Receivable account? I. Guaranteed residual value. II. Unguaranteed residual value. III. Executory costs IV. Rental payments. a. I and III only. b. II, III, and IV. c. I and II only. d. I, II, and IV.

38.

The lease receivable amount includes the present value of a. rental payments plus the present value of guaranteed and unguaranteed residual values. b. rental payments only. c. rental payments plus the present value of the unguaranteed residual value only. d. rental payments plus the present value of the guaranteed residual value only.

39.

In an operating lease, the lessor records a. depreciation expense only. b. lease revenue only. c. lease expense only. d. depreciation expense and lease revenue.

40.

In a finance lease, the lessee records a. depreciation expense only. b. interest expense only. c. lease expense only. d. depreciation expense and interest expense.

Test Bank for Intermediate Accounting, Sixteenth Edition 41.

When lessors account for residual values related to leased assets, they a. include the residual value in the receivable measurement because it is assumed the residual value will be realized. b. include the unguaranteed residual value in sales revenue. c. recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value. d. reduce the residual value by the executory costs.

42.

The initial direct costs of leasing a. are generally borne by the lessee. b. include incremental costs. c. are expensed in the period of the sale under a sales-type lease. d. include lessor advertising costs.

S

43.

The basic difference between a direct-financing lease and a sales-type lease is the a. manner in which rental receipts are recorded as rental income. b. amount of the depreciation recorded each year by the lessor. c. recognition of the profit on the sale. d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

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44.

A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts? a. The minimum lease payments plus the unguaranteed residual value. b. The sales price less the present value of the residual value. c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value. d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value.

45.

For a sales-type lease, a. the sales price includes the present value of the unguaranteed residual value. b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d. assets are depreciated by the lessor.

46.

The right-of-use asset is increased by a. initial direct costs incurred by the lessee only. b. lease incentives received. c. prepaid lease payments only. d. lease prepayments made by the lessee and initial direct costs incurred by the lessee.

47.

The Lease Liability account should be disclosed as a. a current liability. b. a noncurrent liability. c. current portions in current liabilities and the remainder in noncurrent liabilities. d. deferred credits.

Accounting for Leases

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48.

Additional lease adjustments that affect the measurement of lease assets and liabilities include each of the following except? a. executory costs. b. initial direct costs. c. internal costs. d. lease prepayments and incentives.

*49.

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

a. b. c. d.

Party recording the asset on its books Seller-lessee Purchaser-lessor Purchaser-lessor Seller-lessee

Party recording interest expense Purchaser-lessor Seller-lessee Purchaser-lessor Seller-lessee

*50.

If none of the five lease tests are satisfied in a sale-leaseback transaction, which of the following statements is incorrect? a. The seller-lessee continues to depreciate the asset. b. The purchaser-lessor records a gain. c. The seller-lessee records the lease as an operating lease. d. The seller-lessee recognizes a gain or loss as appropriate.

*51.

When a company sells property and then leases it back, any gain on the sale should usually be a. deferred and recognized as income over the term of the lease. b. recognized as a prior period adjustment. c. recognized at the end of the lease. d. recognized in the current year.

Multiple Choice Answers—Conceptual Item

Ans.

21.d 22.d 23.b 24.c 25.a

Item

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26.b 27.a 28.a 29.c 30.d

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31.a 32.c 33.d 34.c 35.a

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36.a 37.d 38.a 39.c 40.d

Item

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41.a 42.c 43.c 44.b 45.c

Item

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46.d 47.c 48.c *49.d *50.b

Item

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*51.

d

10

Test Bank for Intermediate Accounting, Sixteenth Edition

MULTIPLE CHOICE—Computational 52.

On December 1, 2018, Goetz Corporation leased office space for 10 years at a monthly rental of €80,000. On that date Goetz paid the landlord the following amounts: Rent deposit First month’s rent Last month’s rent Installation of new walls and offices €880,000

€ 80,000 80,000 80,000 640,000

The entire amount of €880,000 was charged to rent expense in 2018. What amount should Goetz have charged to expense for the year ended December 31, 2018? a. €80,000 b. €85,333 c. €165,333 d. €640,000 53.

On January 1, 2018, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of €220,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of €1,342,016 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2018 a. lease expense of €220,000. b. interest expense of €89,468 and depreciation expense of €76,136. c. interest expense of €107,361 and depreciation expense of €89,468. d. interest expense of €91,363 and depreciation expense of €134,202.

Use the following information for questions 54 through 59. (Annuity tables on page 21-30.) On January 1, 2018, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is €6,000,000; however, the book value to Holt is €4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey’s incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes €15,000 of execut...