Test Bank, Intermediate Accounting, 14

th
ed. 59
CHAPTER 15
Leases
MULTIPLE CHOICE QUESTIONS
Theory/Definitiona Q!e"tion"
1 GAAP basis for recognizing some leases as purchases
!haracteristics of an operating lease
" Present #alue criteria for capital lease
4 Accounting for rental pa$ments under operating leases
% !apital #ersus operating lease&&use of present #alue
' Lease term criteria for capital lease
( !apital lease&&recording initial liabilit$ of lessee
) *epreciation term for leased machine
+ ,eduction of liabilit$ on lessee-s books
1. Three t$pes of period costs associated /ith lessee and capital lease
11 0ffect of minimum lease pa$ments on net liabilit$
1 Treatment of guaranteed residual #alues b$ lessee
1" Amortization of capital lease asset
14 1tems included in minimum lease pa$ments
1% Treatment of bargain purchase option
1' !haracteristics of sales&t$pe lease
1( Treatment of initial direct costs b$ lessor
1) Treatment b$ lessee of e2ual monthl$ rental pa$ments
1+ !lassification of leases&&capital or operating
. Treatment of gain on rental
1 !apitalization and amortization of building and land
Accounting for residual #alues b$ lessor
" Treatment of lease /ith no bargain purchase option
4 3ature of e4ecutor$ costs
% Guaranteed residual #alues
' *efinition of lease term
( !omposition of minimum lease pa$ment
) Lease disclosure re2uirements
+ Lease disclosure re2uirements
". 1nternational accounting standards for leases
"1 Lessee treatment of leases in#ol#ing real estate
" ,eal estate lease&&fair market #alue of land greater than % 5 of total fair
#alue
#$ !hapter 1% Leases
"" ,eal estate lease&&fair market #alue of land less than %5 of total fair #alue
"4 6ale&leaseback transactions
Co%&!tationa Q!e"tion"
7 "% !omputation of total present #alue and first $ear interest e4pense for lease
"' !omputation of lease liabilit$ on noncancelable lease
"( !omputation of interest re#enue of lease
") !omputation of lease liabilit$ /ith discounted lease pa$ments
"+ !omputation of profit and interest income amounts
4. !omputation of interest e4pense on noncancelable lease
41 !omputation of capital lease liabilit$ amount
4 !omputation of income from leased e2uipment
4" !omputation of present #alue amount to classif$ asset as capital lease
44 !omputation of deferred re#enue from leaseback
4% !omputation of booked amount for e2uipment lease
4' !omputation of net rental income on lease
4( !omputation of interest e4pense for capital lease
4) !omputation of income on lease transactions
4+ !omputation of amortization e4pense
%. !omputation of amount of rent e4pense on lease
%1 !omputation of total capital lease liabilit$
% !lassification of leases under international accounting standards
7This question requires the use of present value tables to solve.
PRO'LEMS
1 8ournalize lease transactions for lessee and lessor
8ournalize lease transactions for lease
" 8ournalize lease transaction, pa$ments, and interest re#enue
4 8ournalize lease transaction, manufacturer-s profit, interest re#enue
% 8ournalize lease pa$ments /ith bargain purchase option
' 8ournalize noncancelable lease
( *etermine /hether lease should be capital or operating
) Prepare lease amortization schedule
+ Prepare partial balance sheet for lease
1. 8ournalize sale and leaseback
11 0conomics of leasing for the lessee
1 0conomics of leasing for the lessor
Test Bank, Intermediate Accounting, 14
th
ed. #1
MULTIPLE CHOICE QUESTIONS
a 1. Generall$ accepted accounting principles re2uire that certain lease
L9 agreements be accounted for as purchases. The theoretical basis for this
treatment is that a lease of this t$pe
a. effecti#el$ con#e$s all of the benefits and risks incident to the o/nership
of propert$.
b. is an e4ample of form o#er substance.
c. pro#ides the use of the leased asset to the lessee for a limited period of
time.
d. must be recorded in accordance /ith the concept of cause and effect.
d . :hich of the follo/ing statements characterizes an operating lease;
L9 a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to the leased asset.
c. The lessor transfers title of the leased propert$ to the lessee for the
duration of the lease term.
d. The lessor records depreciation and lease re#enue.
b ". 9ne of the four general criteria for a capital lease is that the present #alue
at
L94 the beginning of the lease term of the minimum lease pa$ments e2uals or
e4ceeds
a. the propert$-s fair market #alue.
b. +. percent of the propert$-s fair market #alue.
c. (% percent of the propert$-s fair market #alue.
d. %. percent of the propert$-s fair market #alue.
d 4. 1n a lease that is recorded as an operating lease b$ the lessee, the e2ual
L9% monthl$ rental pa$ments should be
a. allocated bet/een interest e4pense and depreciation e4pense.
b. allocated bet/een a reduction in the liabilit$ for leased assets and
interest e4pense.
c. recorded as a reduction in the liabilit$ for leased assets.
d. recorded as rental e4pense.
a %. The present #alue of the minimum lease pa$ments should be used b$ the
L94 lessee in the determination of a<n=
!apital 9perating
Lease Liabilit$ Lease Liabilit$
a. >es 3o
b. >es >es
c. 3o >es
d. 3o 3o
#( !hapter 1% Leases
c '. 9ne of the four general criteria for a capital lease specifies that the lease
term
L94 be e2ual to or greater than
a. the estimated economic life of the propert$.
b. +. percent of the estimated economic life of the propert$.
c. (% percent of the estimated economic life of the propert$.
d. %. percent of the estimated economic life of the propert$.
c (. ?or a capital lease, the amount recorded initiall$ b$ the lessee as a liabilit$
L9% should
a. e4ceed the present #alue at the beginning of the lease term of minimum
lease pa$ments during the lease term.
b. e4ceed the total of the minimum lease pa$ments during the lease term.
c. not e4ceed the fair #alue of the leased propert$ at the inception of the
lease.
d. e2ual the total of the minimum lease pa$ments during the lease term.
c ). 8ohnson 1nstitute leased a ne/ machine ha#ing an e4pected useful life of
1
L9% $ears. The noncancelable lease term is 1. $ears, and 8ohnson ma$
e4ercise a purchase option at the end of the noncancelable term. The
machine should be capitalized b$ 8ohnson and depreciated o#er
a. + $ears.
b. 1 $ears.
c. 1. $ears.
d. 1. or 1 $ears at 8ohnson@s option.
d +. The lessee@s balance sheet liabilit$ for a capital lease /ould be periodicall$
L9% reduced b$ the
a. minimum lease pa$ment.
b. minimum lease pa$ment plus the amortization of the related asset.
c. minimum lease pa$ment less the amortization of the related asset.
d. minimum lease pa$ment less the portion of the minimum lease pa$ment
allocable to interest.
a 1.. :hat are the three t$pes of period costs that a lessee e4periences /ith
capital
L9% leases;
a. 1nterest e4pense, amortization e4pense, e4ecutor$ costs
b. Amortization e4pense, e4ecutor$ costs, lease e4pense
c. 04ecutor$ costs, interest e4pense, lease e4pense
d. Lease e4pense, e4ecutor$ costs, initial costs
Test Bank, Intermediate Accounting, 14
th
ed. #)
c 11. An eight&$ear capital lease specifies e2ual minimum annual lease
pa$ments.
L9% Part of this pa$ment represents interest and part represents a reduction in
the net lease liabilit$. The portion of the minimum lease pa$ment in the
fourth $ear applicable to the reduction of the net lease liabilit$ should be
a. the same as in the third $ear.
b. less than in the third $ear.
c. less than in the fifth $ear.
d. more than in the fifth $ear.
d 1. :hich of the follo/ing statements concerning guaranteed residual #alues is
L9% appropriate for the lessee;
a. The asset and related liabilit$ should be increased b$ the amount of the
residual #alue.
b. The asset and related liabilit$ should be decreased b$ the amount of the
residual #alue.
c. The asset and related liabilit$ should be decreased b$ the present #alue
of the residual #alue.
d. The asset and related liabilit$ should be increased b$ the present #alue
of the residual #alue.
c 1". 8ohntech 1nc. leased a ne/ machine ha#ing an e4pected useful life of ".
$ears
L9% from !arbide !o. Terms of the noncancelable %&$ear lease /ere that
8ohntech /ould gain title to the propert$ upon pa$ment of a sum e2ual to
the fair market #alue of the machine at the termination of the lease.
8ohntech accounted for the lease as a capital lease and recorded an asset
and a liabilit$ in the financial records. The asset recorded under this lease
should properl$ be amortized o#er
a. % $ears <the period of actual o/nership=.
b. .% $ears <(% percent of the ".&$ear asset life=.
c. % $ears <the term of the lease=.
d. ". $ears <the total asset life=.
c 14. :hich one of the follo/ing items is not part of the minimum lease pa$ments
L9% from the standpoint of the lessee;
a. The minimum rental pa$ments called for b$ the lease
b. An$ guarantee the lessee is re2uired to make at the end of the lease
term regarding an$ deficienc$ from a specified minimum
c. An$ estimated residual #alue at the end of the lease term
#* !hapter 1% Leases
d. An$ pa$ment the lessee must make at the end of the lease term to
purchase the leased propert$ under a bargain purchase option
c 1%. A lease contains a bargain purchase option. 1n determining the lessee@s
L9% capitalizable cost at the beginning of the lease term, the pa$ment called for
b$ the bargain purchase option /ould be
a. subtracted at its present #alue.
b. added at its e4ercise #alue.
c. added at its present #alue.
d. subtracted at its e4ercise price.
c 1'. :hich of the follo/ing statements characterizes a sales&t$pe lease;
L9' a. The lessor recognizes onl$ interest re#enue o#er the life of the asset.
b. The lessor recognizes onl$ interest re#enue o#er the lease term.
c. The lessor recognizes a dealer@s profit at lease inception and interest
re#enue o#er the lease term.
d. The lessor recognizes a dealer@s profit at lease inception and interest
re#enue o#er the asset life.
b 1(. 1nitial direct costs incurred b$ a lessor in consummating a sales&t$pe lease
are
L9' a. charged to unearned income in the first period of the lease term.
b. charged to cost of sales in the first period of the lease term.
c. deferred and allocated o#er the lease term in proportion to the
recognition of rent re#enue.
d. deferred and allocated o#er the lease term on a straight&line basis.
d 1). 02ual monthl$ rental pa$ments for a particular lease should be charged to
L9% ,ental 04pense b$ the lessee for /hich of the follo/ing;
!apital Lease 9perating Lease
a. >es 3o
b. >es >es
c. 3o 3o
d. 3o >es
b 1+. Lease > does not contain a bargain purchase option, but the lease term is
L94 e2ual to +. percent of the estimated economic life of the leased propert$.
Lease A does not transfer o/nership of the propert$ to the lessee b$ the
end of the lease term, but the lease term is e2ual to (% percent of the
estimated economic life of the leased propert$. Bo/ should the lessee
classif$ these leases;
Lease > Lease A
Test Bank, Intermediate Accounting, 14
th
ed. #5
a. !apital lease 9perating lease
b. !apital lease !apital lease
c. 9perating lease !apital lease
d. 9perating lease 9perating lease
c .. C D 8 !onstruction built an office building at a cost of E%..,.... C D 8 sold
L9+ this building to Catson at a material gain and then leased it back from
Catson for a stipulated annual rental. This gain should be
a. recognized in full as an ordinar$ item in the $ear of the transaction.
b. recognized in full as an e4traordinar$ item in the $ear of the
transaction.
c. deferred and amortized proportionatel$ o#er the life of the lease.
d. treated as a reduction in the obligation under the capital lease.
c 1. 1f a lease in#ol#es both land and buildings and a bargain purchase option is
L91. reasonabl$ assured, then
a. both /ill be capitalized and amortized.
b. buildings are capitalized and amortizedF land is an operating lease.
c. buildings are capitalized and amortizedF land is capitalized and left at
cost.
d. both are operating leases since criteria " and 4 are not met.
d . :hich of the follo/ing statements characterizes lessor accounting for
residual
L9' #alues;
a. Guaranteed residual #alues are included in the gross in#estment
amount, but unguaranteed residual #alues are e4cluded from the gross
in#estment.
b. Gnguaranteed residual #alues are included in the gross in#estment
amount, but guaranteed residual #alues are e4cluded from the gross
in#estment.
c. Guaranteed residual #alues and unguaranteed residual #alues are
e4cluded from the gross in#estment.
d. Guaranteed residual #alues and unguaranteed residual #alues are
included in the gross in#estment.
a ". *raper !orp. leased a ne/ building and land from Ba$lor Leasing 1nc. for
%
L94 $ears. At the inception of the lease the building and land ha#e fair market
#alues of E..,... and E%,..., respecti#el$. The building has an
e4pected economic life of ". $ears. :hich of the follo/ing statements is
correct regarding *raper@s treatment of the lease;
## !hapter 1% Leases
a. *raper should treat the lease as a capital lease e#en though there is no
bargain purchase option and no automatic transfer of o/nership at the
termination of the lease.
b. *raper should treat the lease as a capital lease onl$ if there is either a
bargain purchase option or an automatic transfer of o/nership at the
termination of the lease.
c. *raper should treat the lease as a capital lease pro#ided that the land
and building are recorded in separate asset accounts and accounted for
separatel$.
d. *raper should treat the lease as a capital lease onl$ if Ba$lor treats the
transaction as a le#eraged lease.
d 4. :hich of the follo/ing /ould be considered an e4ecutor$ cost;
L9" a. Cinimum lease pa$ments.
b. 1nterest e4pense incurred.
c. Bargain purchase option.
d. Caintenance costs.
c %. 1f the residual #alue of a leased asset is greater than the amount
guaranteed
L9" b$ the lessee
a. the lessee pa$s the lessor for the difference.
b. the lessee recognizes a gain at the end of the lease term.
c. the lessee has no obligation related to the residual #alue.
d. the lessee pa$s the lessor for the difference.
b '. :hich of the follo/ing is true regarding the lease term;
L9" a. The lease term does not include all periods co#ered b$ bargain rene/al
options.
b. The lease term includes all periods for /hich failure to rene/ imposes a
penalt$ sufficientl$ high that the lessee probabl$ /ill rene/.
c. The lease term ma$ e4tend be$ond the date a bargain purchase option
becomes e4ercisable.
d. The lease term does not include all periods representing rene/als or
e4tensions of the lease at the lessor@s option.
b (. ?rom the standpoint of the lessee, the minimum lease pa$ment includes all
L9" of the follo/ing e4cept
a. the guaranteed residual #alue.
b. the lessee@s obligation to pa$ e4ecutor$ costs.
c. the bargain purchase option.
d. an$ pa$ment that the lessee must make upon failure to e4tend or rene/
the lease.
Test Bank, Intermediate Accounting, 14
th
ed. #+
d ). :hich of the follo/ing is <are= not correct regarding disclosure
re2uirements
L9( lessees;
1. ?or capital leases, future minimum lease pa$ments in the aggregate and
for each of the succeeding fi#e $ears must be disclosed.
11. ?or operating leases /ith initial or remaining lease terms in e4cess of
one $ear, future minimum rental pa$ments in the aggregate and for each
of the fi#e succeeding fiscal $ears must be disclosed.
111. ?or capital leases, future minimum lease pa$ments for each of the
succeeding fi#e $ears must be disclosed.
1H. ?or operating leases /ith initial or remaining lease terms in e4cess of
one $ear, future minimum lease pa$ments for each of the fi#e
succeeding fiscal $ears must be disclosed.
a. 1 onl$.
b. 11 onl$.
c. Both 1 and 11.
d. Both 111 and 1H.
a +. :hich of the follo/ing is not a re2uired disclosure for lessors;
L9( a. Total of minimum sublease rentals to be recei#ed in the future under
noncancelable subleases.
b. Gnearned interest re#enue;
c. Gnguaranteed residual #alues accruing to the benefit of the lessor.
d. A general description of the lessor@s leasing arrangements.
a ".. 1n order for a lease to be considered a finance <or capital= lease,
international
L9) accounting standards re2uire that a lease agreement
a. transfers substantiall$ all risks and re/ards incident to o/nership of an
asset to the lessee.
b. contains a pro#ision re2uiring transfer of title to the lessee b$ the end of
the lease term.
c. pro#ides that the term of the lease contract be longer than one $ear.
d. pro#ides for a bargain purchase option.
a "1. ?or leases in#ol#ing real estate, the lessee treats the lease as a capital
lease
L91. if the lease agreement pro#ides for a transfer of title or a bargain purchase
option. The lessee also /ould
a. record the building and land separatel$.
b. record the building and land separatel$ onl$ if the land is less than %5
of the total fair market #alue of the leased propert$.
#, !hapter 1% Leases
c. record the building and land separatel$ onl$ if the fair market #alue of
the land e2uals or e4ceeds % percent of the total fair market #alue of
the lease propert$.
d. classif$ the building as a capital lease and the land as an operating
lease.
b ". A lease agreement for land and a building does not pro#ide for transfer of
title or a bargain purchase option. The fair market #alue of the land is
greater than or e2ual to % percent of the fair market #alue of the leased
propert$. 1n this situation, the lessee /ould
a. treat both the land and building as an operating lease.
b. allocate a portion of the minimum lease pa$ments to the land and the
remainder to the building to determine if the present #alue of the lease
pa$ments allocated to the building /as +. percent of more of the fair
#alue of the building at the beginning of the lease.
c. treat the land and building as a single unit using the building life as the
basis for the economic life test.
d. al/a$s treat the building as a capital lease and the land as an operating
lease.
a "". A lease agreement does not pro#ide for transfer of title or a bargain
purchase option. The additional t/o criteria for lessors
relating to the collectibilit$ of lease pa$ments and unreimbursable costs
to be incurred b$ the lessor ha#e been met. The fair market #alue of the
land is less than % percent of the total fair market of the leased propert$.
1n this situation, the lessor /ould
a. treat the lease of the land and building as an operating lease if neither
the economic life test <using the life of the building= nor the present
#alue of the minimum lease pa$ments test is met.
b. treat the lease as a sales&t$pe capital lease for the building and an
operating lease for the land if either the economic life test or the present
#alue of the minimum lease pa$ments test is met.
c. treat the lease as a direct&financing&t$pe lease for the building and an
operating lease for the land if either the economic life test or present
#alue of the minimum lease pa$ments test is met.
d. /ould not appl$ the economic life or present #alue of the minimum lease
pa$ments test to a lease agreement in#ol#ing real estate.
Test Bank, Intermediate Accounting, 14
th
ed. #9
c "4. 9n 8anuar$ 1, .., a seller&lessee sells a /arehouse to a bu$er&lessor.
L9+ The fair #alue of the /arehouse is greater than the book #alue. There is no
transfer of title or bargain purchase option. 1n conIunction /ith the sale of
the /arehouse, the seller&lessee and the bu$er&lessor enter into a fi#e&$ear
lease <a sale&leaseback=. Bo/ should the seller&lessee treat the gain;
a. Gains to lessees resulting from sale&leaseback transactions are al/a$s
deferred.
b. Gains to lessees resulting from sale&leaseback transactions are al/a$s
recognized.
c. Gains to lessees resulting from sale&leaseback transactions are
recognized onl$ /hen the present #alue of the lease pa$ments is less
than or e2ual to 1. percent of the fair #alue of the asset sold.
d. Gains to lessees resulting from sale&leaseback transactions are
recognized onl$ /hen the present #alue of the lease pa$ments is less
than or e2ual to % percent of the fair #alue of the asset sold.
a "%. 6tate ,epairs ac2uires e2uipment under a noncancelable lease at an
annual
L9% rental of E4%,..., pa$able in ad#ance for fi#e $ears. After fi#e $ears, there
is a bargain purchase option of E(%,.... The appropriate interest rate is 1
percent. :hat is the total present #alue of the lease and the first $ear@s
interest e4pense;
a. E4,"4 and E1,%.)
b. E4,"4 and E',+.)
c. E.4,((1 and E1,%.)
d. E.4,((1 and E1+,1("
a "'. 6tockton, 1nc. leased machiner$ /ith a fair #alue of E%.,... from La$ton
L9% Cachine !o. on *ecember "1, ... The contract is a si4&$ear noncancel&
able lease /ith an implicit interest rate of 1. percent. The lease re2uires
annual pa$ments of E%.,... beginning *ecember "1, ... 6tockton
appropriatel$ accounted for the lease as a capital lease. 6tockton-s
incremental borro/ing rate is 1 percent. Assuming the present #alue of an
annuit$ due of 1 for ' $ears at 1. percent is 4.(+.) and the present #alue
of an annuit$ due of 1 for ' $ears at 1 percent is 4.'.4), /hat is the lease
liabilit$ that 6tockton should report on the balance sheet at *ecember "1,
..;
a. E1)+,%4.
b. E..,...
+$ !hapter 1% Leases
c. E".,4.
d. E"+,%4.
d "(. Ba4ter !ompan$ leased e2uipment to ?ritz 1nc. on 8anuar$ 1, ... The
lease
L9' is for an eight&$ear period e4piring *ecember "1, ..+. The first of eight
e2ual annual pa$ments of E+..,... /as made on 8anuar$ 1, ... Ba4ter
had purchased the e2uipment on *ecember +, ..1, for E4,)..,.... The
lease is appropriatel$ accounted for as a sales&t$pe lease b$ Ba4ter.
Assume that the present #alue at 8anuar$ 1, .., of all rent pa$ments
o#er the lease term discounted at a 1. percent interest rate /as
E%,).,.... :hat amount of interest re#enue should Ba4ter record in .."
<the second $ear of the lease period= as a result of the lease;
a. E4+.,...
b. E4).,...
c. E4"),...
d. E"+1,)..
a "). 8ordan !o. leased a machine on *ecember "1, ... Annual pa$ments
under
L9% the lease are E11.,... </hich includes E1.,... annual e4ecutor$ costs=
and are due on *ecember "1 each $ear, for a ten&$ear period. The first
pa$ment /as made on *ecember "1, .., and the second pa$ment /as
made on *ecember "1, ..". According to the agreement, the lease
pa$ments are discounted at 1. percent o#er the lease term. Assume the
present #alue of minimum lease pa$ments at the inception of the lease and
before the first annual pa$ment /as E'1%,... and 8ordan appropriatel$
classified the lease as a capital lease. :hat is the lease liabilit$ 8ordan
should report in its *ecember "1, ..", balance sheet;
a. E4'',%..
b. E%1%,...
c. E%"4,1%.
d. E%(',%..
Test Bank, Intermediate Accounting, 14
th
ed. +1
b "+. Aerotech 1nc., a dealer in machiner$ and e2uipment, leased e2uipment to
L9' Jualit$ Products on 8ul$ 1, ... The lease is appropriatel$ accounted for
as a sale b$ Aerotech and as a purchase b$ Jualit$. The lease is for a ten&
$ear period <the useful life of the asset= e4piring 8une "., .1. The first of
ten e2ual annual pa$ments of E%.,... /as made on 8ul$ 1, ...
Aerotech had purchased the e2uipment for E1,""(,%.. on 8anuar$ 1, ..,
and established a list selling price of E1,')(,%.. on the e2uipment.
Assume that the present #alue at 8ul$ 1, .., of the rent pa$ments o#er
the lease term discounted at 1 percent <the appropriate interest rate= /as
E1,%),%... :hat is the amount of profit on the sale and the amount of
interest income that Aerotech should record for the $ear ended *ecember
"1, ..;
a. E4%,... and E+4,+%.
b. E4%,... and E(+,+%.
c. E"%.,... and E(+,+%.
d. E"%.,... and E+4,+%.
c 4.. 9n 8anuar$ 1, .., 6hak, 1nc. signed a noncancelable lease for a sneaker
L9% shining machine. The machine has an estimated useful life of nine $ears.
The term of the lease is a si4&$ear term /ith title passing to 6hak at the end
of the lease. The agreement called for annual pa$ments of E4.,... starting
at the end of the first $ear. Assume aggregate lease pa$ments /ere
determined to ha#e a present #alue of E..,..., based on implicit interest
of 1 percent. :hat amount of interest e4pense should 6hak report in its
.. income statement from this lease transaction;
a. E.
b. E1',...
c. E4,...
d. E"","""
a 41. 0pson *istributing leased a machine for a period of eight $ears, contracting
L9% to pa$ E..,... at the beginning of the lease term on *ecember "1, ..,
and E..,... annuall$ on *ecember "1 for each of the ne4t se#en $ears.
The present #alue of the eight rent pa$ments o#er the lease term,
appropriatel$ discounted at 1. percent, is E1,1(4,.... 9n its *ecember
"1, ..", balance sheet, 0pson should report a liabilit$ under capital lease
of
a. E)(1,4...
b. E)(','...
c. E+(4,....
d. E1,.+1,4...
+( !hapter 1% Leases
c 4. 6lice !ompan$ manufactures e2uipment that the$ sell or lease. 9n
*ecember
L9' "1, .., 6lice leased e2uipment to Book !ompan$ for a fi#e&$ear period
after /hich o/nership of the leased asset /ill be transferred to Book. The
lease calls for e2ual annual pa$ments of E%.,..., due on *ecember "1 of
each $ear. The first pa$ment /as made on *ecember "1, ... The
normal sales price of the e2uipment is E.,..., and cost is E1(',.... ?or
the $ear ended *ecember "1, .., /hat amount of income should 6lice
report from the lease transaction;
a. E1.,...
b. E".,...
c. E44,...
d. E(4,...
c 4". 9n Carch 1, ..", 6turd$ !orp. became the lessee of ne/ e2uipment
under
L94 a noncancelable si4&$ear lease. The total estimated economic life of this
e2uipment is ten $ears. The fair #alue of this e2uipment on Carch 1, ..",
/as E1..,.... The lease does not meet the criteria for classification as a
capital lease /ith respect to transfer of o/nership of the leased asset, or
bargain purchase option, or lease term. 3e#ertheless, 6turd$ must classif$
this lease as a capital lease if, at inception of the lease, the present #alue
of the minimum lease pa$ments <e4cluding e4ecutor$ costs= is e2ual to at
least
a. E'(,%...
b. E(%,....
c. E+.,....
d. E1..,....
d 44. 9n *ecember "1, .., *i#ot !ompan$ sold a machine to *ri#e !ompan$
and
L9+ simultaneousl$ leased it back for one $ear. The machine has an estimated
remaining useful life of 1. $ears. The present #alue of the indi#idual lease
pa$ments at the date of sale is E%,.... The sales price /as E(%,... and
at the time of sale the book #alue of the machine on *i#ot@s records /as
E4%,.... :hat amount of deferred re#enue from the sale of this machine
should *i#ot sho/ on its *ecember "1, .. balance sheet;
a. E.
b. E%,...
c. E%,...
d. E".,...
Test Bank, Intermediate Accounting, 14
th
ed. +)
b 4%. 9n *ecember "1, ..", Gephardt 0nterprises leased e2uipment from B D
B
L9% 02uipment ,ental. Pertinent lease transaction data are as follo/sK
The estimated se#en&$ear useful e2uipment life coincides /ith the lease
term.
The first of the se#en e2ual annual E..,... lease pa$ments /as paid
on *ecember "1, ..".
B D B@s implicit interest rate of 1 percent is kno/n to Gephardt.
Gephardt@s incremental borro/ing rate is 14 percent.
Present #alues of an annuit$ of 1 in ad#ance for se#en periods are %.11
at 1 percent and 4.)+ at 14 percent.
Gephardt should record the e2uipment on the books at
a. E1,4..,....
b. E1,.,....
c. E+(),....
d. E..
b 4'. 9n 8anuar$ 1, .., !ollins !ompan$ leased a /arehouse to !uthbert
under
L9' an operating lease for ten $ears at E).,... per $ear, pa$able the first da$
of each lease $ear. !ollins paid E"',... to a real estate broker as a
finder@s fee. The /arehouse is depreciated at E.,... per $ear. *uring
.., !ollins incurred insurance and propert$ ta4 e4pense totaling
E1%,.... !ollins@ net rental income for .. should be
a. E+,....
b. E41,4...
c. E44,....
d. E4%,....
c 4(. 9n 8anuar$ 1, T/i4 !ompan$ as lessee signed a ten&$ear noncancelable
L9% lease for a machine /ith annual pa$ments of E'.,.... The first pa$ment
/as also made on 8anuar$ 1. T/i4 appropriatel$ treated this transaction as
a capital lease. The ten lease pa$ments ha#e a present #alue of E4.%,...
at 8anuar$ 1, based on implicit interest of 1. percent. ?or the first $ear,
T/i4 should record interest e4pense of
a. E..
b. E',....
c. E"4,%...
d. E4.,%...
+* !hapter 1% Leases
c 4). Bazard 1nc. manufactures e2uipment that is sold or leased. 9n *ecember
"1,
L9' .., Bazard leased e2uipment to ,obards for a fi#e&$ear period e4piring
*ecember "1, ..(, at /hich date o/nership of the leased asset /ill be
transferred to ,obards. 02ual E4.,... pa$ments under the lease are due
on *ecember "1 of each $ear. The first pa$ment /as made on *ecember
"1, ... !ollectibilit$ of the remaining lease pa$ments is reasonabl$
assured, and Bazard has no material cost uncertainties. The normal sales
price of the e2uipment is E1%4,... and cost is E1.,.... ?or the $ear
ended *ecember "1, .., ho/ much income should Bazard recognize
from the lease transaction;
a. E4',...
b. E4.,...
c. E"4,...
d. E),...
c 4+. 9n 8anuar$ 1, Gregor$ !ompan$ signed a ten&$ear noncancelable lease
for
L9% a ne/ machine, re2uiring E4.,... annual pa$ments at the beginning of
each $ear. The machine has a useful life of 1% $ears, /ith no sal#age
#alue. Title passes to Gregor$ at the lease e4piration date. Gregor$ uses
straight&line depreciation for all of its plant assets. Aggregate lease
pa$ments ha#e a present #alue on 8anuar$ 1 of E%,..., based on an
appropriate rate of interest. ?or the first $ear, Gregor$ should record
depreciation <amortization= e4pense for the leased machine at
a. E4.,....
b. E%,...
c. E1',)...
d. E14,1"".
b %.. 9n *ecember 1, .., Blake 1nc. signed an operating lease for a
/arehouse
L9% for ten $ears at E4,... per $ear. Gpon e4ecution of the lease, Blake paid
E4),... co#ering rent for the first t/o $ears. Bo/ much should be sho/n
in Blake@s income statement for the $ear ended *ecember "1, .., as rent
e4pense;
a. E.
b. E,...
c. E4,...
d. E4),...
Test Bank, Intermediate Accounting, 14
th
ed. +5
c %1. 9n *ecember "1, .., !ooke !ompan$ leased a machine under a capital
L9% lease for a period of ten $ears, contracting to pa$ E1..,... on signing the
lease and E1..,... annuall$ on *ecember "1 of the ne4t nine $ears. The
present #alue at *ecember "1, .., of the ten lease pa$ments o#er the
lease term discounted at 1. percent /as E'(',.... At *ecember "1, ..",
!ooke@s total capital lease liabilit$ is
a. E4)',....
b. E%1),....
c. E%"",'...
d. E'.(,+'..
b %. Lease > does not contain a bargain purchase option, but the lease term is
L9) e2ual to +. percent of the estimated economic life of the leased propert$.
Lease A does not transfer o/nership of the propert$ to the lessee b$ the
end of the lease term, but the lease term is e2ual to (% percent of the
estimated economic life of the leased propert$. :hat is the most likel$
classification of these leases under currentl$ e4isting international
standards of accounting for leases;
Lease > Lease A
a. !apital lease 9perating lease
b. !apital lease !apital lease
c. 9perating lease !apital lease
d. 9perating lease 9perating lease
PRO'LEMS
Problem 1
9n 8ul$ 1, .., Ba/ke$e A#iation leased t/o helicopters from Bonnicutt Aircraft
for an initial period of 1 months /ith a pro#ision for a continuation on a month&to&
month basis. The lease is properl$ classified as an operating lease. Lease
pa$ments are to be made as follo/sK
?irst t/o months...............................................................E1%,... per month
6econd three months....................................................... 1,... per month
Third three months........................................................... 1.,... per month
Last four months.............................................................. ),... per month
After the first $ear, the rent continues at E',... per month. Pro#ide the entries
re2uired to record the lease pa$ments for the first $ear on the books of
+# !hapter 1% Leases
<1= Ba/ke$e A#iation.
<= Bonnicutt Aircraft.
Solution 1
L9%, L9'
<1= Ba/ke$e A#iation <Lessee=
..
8ul$, Aug. Prepaid ,ent...................................... 4,"""
,ent 04pense <L<E1%,...= M "<E1,...= M
"<E1.,...= M 4<E),...=N O 1=....................... 1.,''(
!ash.............................................. 1%,...
6ept., 9ct., 3o#. Prepaid ,ent...................................... 1,"""
,ent 04pense..................................... 1.,''(
!ash.............................................. 1,...
..
*ec. ,ent 04pense..................................... 1.,''(
.." !ash.............................................. 1.,...
8an., ?eb. Prepaid ,ent................................. ''(
.."
Car., Apr. ,ent 04pense..................................... 1.,''(
Ca$, 8une !ash.............................................. ),...
Prepaid ,ent................................. ,''(
<= Bonnicutt Aircraft <Lessor=
..
8ul$, Aug. !ash................................................... 1%,...
Gnearned ,ent ,e#enue.............. 4,"""
,ent ,e#enue............................... 1.,''(
6ept., 9ct. !ash................................................... 1,...
3o#. Gnearned ,ent ,e#enue.............. 1,"""
,ent ,e#enue............................... 1.,''(
..
*ec. !ash................................................... 1.,...
.." Gnearned ,ent ,e#enue................... ''(
8an., ?eb. ,ent ,e#enue............................... 1.,''(
.."
Car., Apr. !ash................................................... ),...
Test Bank, Intermediate Accounting, 14
th
ed. ++
Ca$, 8une Gnearned ,ent ,e#enue................... ,''(
,ent ,e#enue............................... 1.,''(
Problem 2
9n 8anuar$ , .., the :ilco4 6tudios leased si4 computers for use in the
engineering department. The lease period is for 1" $ears and the estimated
economic life of the leased propert$ is 1% $ears. The lease does not contain
automatic title transfer or a bargain purchase option. Lease pa$ments are E+,...
per $ear, pa$able each *ecember "1. The incremental borro/ing rate for :ilco4 is
1 percent and the implicit interest rate <kno/n b$ :ilco4= is 1. percent. The
compan$ uses straight&line depreciation for this t$pe of e2uipment.
Pro#ide the necessar$ Iournal entries to record the transactions for :ilco4 for the
period 8anuar$ , .. through *ecember "1, ..".
Solution 2
L9%
PH
n
P ,<PHA?
nOi
=
PH
n
P E+,...<Table 1H 1"O1.5=
PH
n
P E+,...<(.1."4=
PH
n
P E'",+"1
..
8an. Leased 02uipment................................................ '",+"1
9bligations under !apital Lease..................... '",+"1
*ec. "1 Amortization 04pense <E'",+"1O1"=.......................... 4,+1)
Accumulated Amortization............................... 4,+1)
9bligations under !apital Lease.......................... ,'.(
1nterest 04pense <E'",+"1 4 1.5=............................. ',"+"
!ash. ............................................................... +,...
.."
*ec. "1 Amortization 04pense........................................... 4,+1)
Accumulated Amortization............................... 4,+1)
9bligations under !apital Lease.......................... ,)')
1nterest 04pense L<E'",+"1 & E,'.(= 4 1.5N................ ',1"
!ash .............................................................. +,...
!ash. ............................................................... +,...
+, !hapter 1% Leases
Problem 3
:ashington ?inancing, 1nc. purchased a packing machine to lease to Pu$allup
?ruits. The lease 2ualifies as a direct financing lease and re2uires lease pa$ments
of E%),)'. per $ear, pa$able in ad#ance, o#er a ten&$ear period. There is no
e4pected residual #alue. The fair market #alue of the packing machine is
E"".,...&&the same amount paid b$ :ashington to purchase the asset. The lease
term begins on 8anuar$ 1, ...
Pro#ide the Iournal entries re2uired on :ashington@s books to
<1= record the lease transaction and the first lease pa$ment.
<= recognize interest re#enue at the end of the first $ear. :ashington uses a
calendar&$ear accounting period. <,ound all computations to the nearest
dollar.=
Solution 3
L9'
<1= ..
8an. 1 Lease Pa$ments ,ecei#able........................... %)),'..
02uipment Purchased for Lease................ "".,...
Gnearned 1nterest ,e#enue....................... %),'..
!ash................................................................. %),)'.
Lease Pa$ments ,ecei#able..................... %),)'.
<= *ec. "1 Gnearned 1nterest ,e#enue............................ 4",")
1nterest ,e#enue........................................ 4",")
L<E%)),'.. & E%),)'. & E%),'..= 4 1'57N
7 !omputation of implicit interest rateK
E"".,...OE%),)'. P %.'.'%
%.'.'% & 1..... P 4.'.'% for + periods
?rom Table 1H, the rate is 1'5
Problem 4
8ason 1nc. uses leases as a means of selling its e2uipment. 9n 8anuar$ 1, ..,
the compan$ leased a machine to 8erem$ Canufacturing 1nc. The cost of the
machine to 8ason /as E(),4%.. The fair market #alue </hich /as the sales price=
/as E1.1,1)4 at the time of the lease. Annual lease pa$ments are E1",%.. and
are pa$able in ad#ance for 1 $ears. At the end of the lease term, title to the
machine /ill pass to 8erem$ Canufacturing.
<1= Pro#ide the entries re2uired on 8ason@s books to record the lease and the first
pa$ment.
<= !ompute the manufacturer@s profit to be recognized b$ 8ason in the first $ear of
the lease.
<"= Pro#ide the entr$ re2uired on 8ason@s books to recognize interest re#enue at
the end of the first $ear. <,ound computations to the nearest dollar.=
Solution 4
L9'
<1= ..
8an. 1 Lease Pa$ments ,ecei#able <E1",%.. 4 1=....... 1',...
!ost of Goods 6old......................................... (),4%.
?inished Goods 1n#entor$.......................... (),4%.
Gnearned 1nterest ,e#enue....................... '.,)1'
6ales........................................................... 1.1,1)4
!ash................................................................. 1",%..
Lease Pa$ments ,ecei#able..................... 1",%..
<= 6ales price of machine.................................................... E1.1,1)4
!ost to manufacture......................................................... (),4%.
Canufacturer@s profit........................................................ E ,("4
<"= ..
*ec. "1 Gnearned 1nterest ,e#enue............................ ),(')
1nterest ,e#enue........................................ ),(')
L<E1',... & E1",%.. & E'.,)1'= 4 .1.7N
7 !omputation of implicit interest rateK
E1.1,1)4OE1",%.. P (.4+%1
(.4+%1 & 1..... P '.4+%1 for 11 periods.
?rom Table 1H, the rate is 1.5.
Problem 5
9n 8anuar$ 1, .., ?ranklin 1ndustries leased e2uipment on an eight&$ear term at
E1%,... annual rental pa$ments, paid in ad#ance. There is a bargain purchase
option on *ecember "1, ..+ <end of lease=, of E4,.... The economic life of the
e2uipment is estimated to be 1% $ears. The interest rate is 1 percent.
<1= Gi#e the necessar$ entries for .. assuming all pa$ments after the initial
pa$ment are made on *ecember "1.
<= Gi#e the entr$ at *ecember "1, ..+, assuming the option is permitted to
lapse and that there is no residual #alue because of obsolescence. Assume
..+ amortization and interest entries ha#e been made.
Solution 5
L9%
<1= ..
8an. 1 Leased 02uipment........................................... +",1%1
9bligations under !apital Lease............... +",1%1
L<E1%,... 4 %.%'")= M <E4,... 4 .4."+=N
9bligations under !apital Lease..................... 1%,...
!ash. .......................................................... 1%,...
*ec. "1 Amortization 04pense <E+",1%.O1%=.................... ',1.
Accumulated Amortization.......................... ',1.
1nterest 04pense <E(),1%. 4 15=........................ +,"()
9bligations under !apital Lease..................... %,'
!ash. .......................................................... 1%,...
<= ..+
*ec. "1 Loss from ?ailure to 04ercise Bargain
Purchase 9ption.............................................. 1+,4(1
9bligations under !apital Lease..................... 4,...
Accumulated Amortization <E',1. 4 )=............... 4+,').
Leased 02uipment..................................... +",1%1
Problem 6
?are/ell 1nc. leases e2uipment to its customers under noncancelable leases. 9n
8anuar$ 1, .., ?are/ell leased e2uipment costing E4..,... to 3orman !o., for
nine $ears. The rental cost /as E44,... pa$able in ad#ance semiannuall$
<8anuar$ 1 and 8ul$ 1=, plus E,... semiannuall$ for e4ecutor$ costs. The
e2uipment had an estimated life of 1% $ears and sold for E%"",.% /ith an
estimated unguaranteed residual #alue of E).,.... The implicit interest rate is 1
percent.
Prepare all Iournal entries for .. on ?are/ell@s and 3orman@s books. ,ound all
calculations to the nearest dollar. Gse straight&line depreciation.
Solution 6
L9%, L9'
?are/ell@s Books <Lessor=
..
8an. 1 Lease Pa$ments ,ecei#able L<E44,... 4 1)=
M E).,...NQ......................................................... )(,...
!ost of Goods 6old <E4..,... & ),.4=............... "(1,+('
?inished Goods 1n#entor$.......................... 4..,...
Gnearned 1nterest ,e#enue....................... ""),+(%
6ales ......................................................... %.%,..1
E44,... 4 11.4((" P E%.%,..1
E).,... 4 ."%." P ),.4
E%"",.%
!ash................................................................. 4',...
Lease Pa$ments ,ecei#able..................... 44,...
04ecutor$ !osts......................................... ,...
8ul$ 1 !ash................................................................. 4',...
Lease Pa$ments ,ecei#able..................... 44,...
04ecutor$ !osts......................................... ,...
8ul$ 1 Gnearned 1nterest ,e#enue............................ +,"4
1nterest ,e#enue L<E%"",.% & E44,...= 4 ..'N. . . +,"4
*ec. "1 Gnearned 1nterest ,e#enue............................ ),4'
1nterest ,e#enue L<E4)+,.% & E44,... M +,"4= 4 ..'N ),4'
3orman@s Books <Lessee=
..
8an. 1 Leased 02uipment........................................... %.%,..1
9bligations under !apital Leases.............. %.%,..1
Lease 04pense................................................ ,...
9bligations under !apital Leases................... 44,...
!ash........................................................... 4',...
8ul$ 1 1nterest 04pense L<E%.%,..1 & E44,...= 4 ...'N........ (,''.
9bligations under !apital Leases................... 1',"4.
Lease 04pense................................................ ,...
!ash........................................................... 4',...
*ec. "1 Amortization 04pense...................................... %',111
Accumulated Amortization <E%.%,..1O+=........ %',111
1nterest 04pense.............................................. ',').
1nterest Pa$able L<E4'1,..1 & E1',"4.= 4 ..'N..... ',').
Problem 7
Benri ,etail 6tores is negotiating three leases for store locations. Benri@s
incremental borro/ing rate is 1 percent. 0ach store /ill ha#e an economic useful
life of ". $ears. Lease pa$ments /ill be made at the end of each $ear. Based on
the data belo/, properl$ classif$ each of the leases as an operating lease or a
capital lease. The purchase price for each propert$ is listed as an alternati#e to
leasing.
Location Lease Term Lease Pa$ment Purchase Price
Location A ' $ears E1,%..,... E1,...,...
Location B . $ears 1,"..,... 1.,...,...
Location ! . $ears 1,4..,... 1%,...,...
*etermine /hether each of the leases should be classified b$ Benri as an
operating lease or a capital lease. 6ho/ computations and reasons to support
$our ans/ers.
<1= Location A
<= Location B
<"= Location !
Solution 7
L9%
<1= Location AK !apital lease
!omputationsK
' $earsO". $ears P )'.(5 of useful life, so the third criterion <(%5 of
useful life= is met.
E1,%..,... pa$ment 4 (.)+%( P E11,)4",%%. <present #alue of minimum
lease pa$ments=. E11,)4",%%.OE1,...,... P +).(5 of ?.H., so the fourth
criterion <+.5 of ?.H.= is also met.
<= Location BK !apital lease
!omputationsK
. $earsO". $ears P ''.(5 of useful life, so the third criterion <(%5 of
useful life= is not met.
E1,"..,... pa$ment 4 (.4'+4 P E+,(1.,. <present #alue of minimum
lease pa$ments=. E+,(1.,.OE1.,...,... P +(.15 of ?.H., so the fourth
criterion <+.5 of ?.H.= is met.
<"= Location !K 9perating lease
!omputationsK
. $earsO". $ears P ''.(5 of useful life, so the third criterion <(%5 of
useful life= is not met.
E1,4..,... pa$ment 4 (.4'+4 P E1.,4%(,1'. <present #alue of minimum
lease pa$ments=. E1.,4%(,1'.OE1%,...,... P '+.(5 of ?.H., so the fourth
criterion <+.5 of ?.H.= is also not met.

Problem 8
6tandard *istributing entered into a leasing agreement /ith , D * ,ental. The
lease 2ualifies as a capital lease and calls for pa$ments of E%,... for % $ears /ith
the first pa$ment being made on 8anuar$ 1, .., and subse2uent pa$ments
being made on *ecember "1 of each $ear. 6tandard@s incremental borro/ing rate
is 1 percent.
Prepare a schedule amortizing 6tandard@s lease obligation.
Solution 8
L9%
1nterest Lease
*ate Pa$ment 04pense Principal 9bligation
1O1O.. E.,1)( 7
1O1O.. E%,... E%,... 1%,1)(
1O"1O.. %,... E1,) ",1() 1,..+
1O"1O.." %,... 1,441 ",%%+ ),4%.
1O"1O..4 %,... 1,.14 ",+)' 4,4'4
1O"1O..% %,... %"' 4,4'4 .
7 E%,... 4 4.."(" P E.,1)(
Problem 9
8ohnson Canufacturing entered into a noncancelable lease for an office building
on 8anuar$ 1, ... The lease calls for pa$ments of E4,... a $ear for eight
$ears. The first pa$ment is due on 8anuar$ 1, .., /ith the other pa$ments due
on *ecember "1 of each $ear. 8ohnson has an incremental borro/ing rate of )
percent. The building is amortized b$ 8ohnson o#er eight $ears using the straight&
line method and assuming no sal#age #alue.
Prepare a partial balance sheet for 8ohnson for the $ear ending *ecember "1,
.., disclosing the asset and the liabilit$ related to the leased building.
Solution 9
L9(
AssetK
!ostK E4,... 4 '..'4 P E14),+%4
Annual amortizationK E14),+%4 O ) $ears P E1),'1+
Liabilit$K
<E14),+%4 & E4,...= 4 ..) P E+,++' interest portion of 1O"1O. pa$ment
E4,... & E+,++' P E14,..4 principal portion of 1O"1O. pa$ment
E4,... & <LE14),+%4 & E4,... & E14,..4N 4 ..)= P E1%,14 principal portion of
1O"1O.." pa$ment
8ohnson Canufacturing
Balance 6heet <partial=
*ecember "1, ..
Land, buildings, and e2uipmentK
Leased building................................................................................ E
14),+%4
Less accumulated amortization........................................................
1),'1+
E
1".,""%
!urrent liabilitiesK
9bligations under capital lease&&current portion............................. 1%,14
3oncurrent liabilitiesK
9bligations under capital lease&&e4clusi#e of amount
included in current liabilities.................................................. +%,)'
Problem 10
9n 8anuar$ 1, .., :ashington !ompan$ sold machiner$ costing E411,(%., at
the fair market #alue and then immediatel$ leased the machiner$ back for E..,...
$earl$, pa$able in ad#ance. The life of the machiner$ and the lease /as fi#e $ears.
The implicit rate is 1 percent.
,ecord all entries for .. on :ashington@s books. The fair market #alue and the
present #alue of the lease pa$ments are e2ual.
Solution 10
L9+
..
8an. 1 !ash <E..,... 4 4.."("=...................................... ).(,4'.
Cachiner$................................................... 411,(%.
Gnearned Profit on 6ale&Leaseback.......... "+%,(1.
8an 1 Leased Cachiner$........................................... ).(,4'.
9bligations under !apital Leases.............. '.(,4'.
!ash........................................................... ..,...
*ec. "1 Amortization 04pense...................................... 1'1,4+
Accumulated Amortization <E).(,4'.O%=........ 1'1,4+
1nterest 04pense <E'.(,4'. 4 ..1=...................... (,)+%
9bligations under !apital Leases................... 1(,1.%
!ash .......................................................... ..,...
*ec. "1 Gnearned Profit on 6ale&Leaseback............... (+,14
,e#enue on 6ale&Leaseback <E"+%,(1.O%=. . . (+,14
Problem 11
George Barmon is the president of the Gtah :estern ,ailroad !ompan$. The Gtah
:estern is a bridge line that recei#es traffic from the Gnion Pacific ,ailroad and the
Burlington 3orthern railroads at 6alt Lake !it$, Gtah, and hauls the freight to *en#er,
!olorado, for connections /ith other lines to points east. ,ecentl$, traffic on the Gtah
:estern has increased dramaticall$ and the railroad is in need of additional
locomoti#es to haul its trains. Accordingl$, George is considering leasing locomoti#es
to meet the demands of this increase in traffic until ne/ engines can be ordered if the
surge subsides. As the controller of the railroad, George has asked $ou to ad#ise him
as to the disad#antages associated /ith leasing generall$.
Solution 11
L91
*isad#antages of leasing for a lessee include the follo/ingK
,# !hapter 1% Leases
1. Leases allo/ a lessee to obtain 1..5 financing at fi4ed interest rates. The larger
amount financed means that the compan$ /ill pa$ higher interest in terms of the total
dollar outla$.
. Leasing read$&to&use e2uipment rather than custom built e2uipment ma$ result in
lo/er 2ualit$ product or ser#ices, /hich ma$ result in lost sales for the lessee. 1n
the case of the railroad, the compan$ ma$ /ish to lease si4&a4le, ",... horsepo/er
locomoti#es /ith the po/er and speed needed to meet e4isting customer schedules
/hen such e2uipment is not a#ailable. Another possibilit$ is that onl$ older units
ma$ be a#ailable and older e2uipment ma$ be subIect to more do/ntime from
breakdo/ns. ,eplacement parts for the older units ma$ need to be purchased if the
railroad does not carr$ an$thing comparable in its parts in#entor$.
". 3o guarantee e4ists that the e2uipment the compan$ <lessee= /ants /ill be
a#ailable /hen needed. 6easonal or other t$pes of patterns that result in the need
to lease ma$ be common to all firms in an industr$. The demand for e2uipment also
ma$ mean that leasing companies /ill increase interest rates charged.
4. 6hort&term leasing rates are generall$ higher than long&term rates in order to
protect the lessor from obsolescence.
%. Ta4 benefits associated /ith leases are subIect to changes in the ta4 la/ and thus
could be reduced or eliminated.
Problem 12
Business leasing has become a large market. Banks, other lending institutions, and
commercial leasing companies represent the largest share of the business leasing
market
/ith the remainder consisting of manufacturers, dealers, and distributors.
1dentif$ the ad#antages and disad#antages to lessors of leasing rather than selling
propert$.
Test Bank, Intermediate Accounting, 14
th
ed. ,+
Solution 12
L91
Leasing has se#eral ad#antages o#er sales for lessors. !ustomers ma$ be un/illing or
unable to purchase propert$. The use of leasing offers the lessor a means of ser#icing
these customers and thus preser#ing a sale that other/ise might be lost. The lessor
sees
leasing as one component of a full&ser#ice, selling strateg$.
Leasing also ma$ afford the lessor /ith the opportunit$ of maintaining a business
relationship /ith the lessee. 1n a purchase, the relationship bet/een the bu$er and
seller
ma$ be limited to the time of the negotiation and consummation of the sale. A leasing
transaction, on the other hand, ma$ result in the lessee and lessor maintaining contact
o#er an e4tended period of time. 6uch contracts ma$ de#elop into long&term business
relationships that pro#e useful both to the lessee and the lessor.
Can$ lease agreements are structured such that the title to the leased propert$ remains
/ith the lessor. The lessor thus stands to benefit from the residual #alue of the asset at
the end of the lease term. The asset ma$ be leased to another lessee or sold. Large
increases in residual #alues can result in significant gains to lessors /hen the assets
are
sold. This can be a t/o&edged s/ord, ho/e#er. The lessor also can be saddled /ith
an
obsolete asset if he or she is not astute in structuring lease rates to encourage
ma4imum
use of the asset prior to its becoming obsolete. This accomplished b$ charging higher
leasing rates for short&term leases o#er long&term leases in order to compensate the
lessor
for assuming the risk of obsolescence.
A maIor disad#antage of leasing to lessors results from fi4ed rates on long&term leases.
6uch fi4ed rates e4pose the lessor to the risk of opportunit$ losses if interest rates
ad#ance.
CHAPTER 15 -- QUI. A
3ame RRRRRRRRRRRRRRRRRRRRRRRRR
6ection RRRRRRRRRRRRRRRRRRRRRRRR
T ? 1. 3oncancelable leases are contracts /ith cancellation pro#isions and
penalties that are so costl$ for the lessee to in#oke that in all likelihood,
cancellation /ill not occur.
T ? . Both cancelable and noncancelable leases are subIect to capitalization.
T ? ". The inception of the lease is defined as the date of the lease agreement, or
the date of an earlier /ritten commitment.
T ? 4. The beginning of the lease term is defined as the date on /hich the leased
propert$ is actuall$ transferred to the lessee.
T ? %. ,ental pa$ments, including an$ e4ecutor$ costs, are part of the minimum
lease pa$ments.
T ? '. Cinimum lease pa$ments include an$ amount to be paid for purchase options
and residual #alues.
T ? (. The lessor uses the implicit interest rate in determining the present #alue of
the minimum lease pa$ments.
T ? ). The lessee al/a$s uses its incremental borro/ing rate in determining the
present #alue of the minimum lease pa$ments.
T ? +. 1f a lease transfers o/nership of the propert$ to the lessee b$ the end of the
lease term, it /ill be classified as a capital lease b$ the lessee.
T ? 1.. An$ lease that contains a bargain purchase option must be treated as a
capital lease b$ both the lessee and lessor.
))
CHAPTER 15 -- QUI. '
3ame RRRRRRRRRRRRRRRRRRRRRRRRR
6ection RRRRRRRRRRRRRRRRRRRRRRRR
T ? 1. :hen rental pa$ments #ar$ o#er the term of an operating lease, the lessee
should recognize rental e4pense on a straight&line basis.
T ? . 1n a capital lease, the lessee records the ac2uisition of the asset at the lo/er
of the present #alue of the minimum lease pa$ments or the fair market #alue
of the asset.
T ? ". 1nitial direct costs are immediatel$ recognized as an e4pense b$ the lessor
/hen the costs are incurred in conIunction /ith an operating lease.
T ? 4. 1nitial direct costs in a sales&t$pe lease are immediatel$ recognized as a
reduction in manufacturer@s profit.
T ? %. 1nitial direct costs incurred in connection /ith a direct financing lease are
recognized o#er the lease term through reduced interest re#enue.
T ? '. An$ adIustment for a permanent decline in an unguaranteed residual #alue
during the lease term should be accounted for as a change in estimate.
T ? (. A direct financing lease results in the recognition of t/o different t$pes of
re#enue.
T ? ). Losses incurred b$ the lessee in the sale portion of a sale&leaseback should
be deferred.
T ? +. Leases of land should be e#aluated using the four criteria established in
?A6B 6tatement 3o. 1".
T ? 1.. Gnder GAAP, it is impossible for a lease to be classified as a capital lease b$
the lessor and an operating lease b$ the lessee.
)+
CHAPTER 15 -- QUI. C
3ame RRRRRRRRRRRRRRRRRRRRRRRRR
6ection RRRRRRRRRRRRRRRRRRRRRRRR
A. Bargain purchase option
B. Bargain rene/al option
!. !apital lease
*. *irect financing lease
0. 04ecutor$ costs
?. Guaranteed residual #alue
G. 1mplicit interest rate
B. 1ncremental borro/ing rate
1. 1nitial direct costs
8. Lease term
S. Lessee
L. Lessor
C. Cinimum lease pa$ments
3. 3et lease in#estment
9. 9perating lease
P. ,esidual #alue
J. 6ales&t$pe lease
,. Gnguaranteed residual #alue
6elect the term that best fits each of the follo/ing definitions and descriptions. 1ndicate
$our ans/er b$ placing the appropriate letter in the space pro#ided.
RRRR 1. ,ate that discounts minimum lease pa$ments to the fair market #alue of the
leased asset at the inception of the lease.
RRRR . !osts such as commissions, legal fees, and document preparation that are
incurred in negotiating and completing a lease transaction.
RRRR ". A lease entered into b$ a lessor /ho is primaril$ engaged in pro#iding
financial ser#ices.
RRRR 4. The #alue of leased propert$ that remains /ith the lessor at the end of the
lease termF market factors and asset condition determine the asset #alue
remaining.
RRRR %. The rental pa$ments re2uired o#er the lease term plus an$ amount to be paid
b$ the lessee under a bargain purchase option or guaranteed residual #alue
pro#ision.
RRRR '. A lease pro#ision allo/ing the lessee to ac2uire o/nership of a leased asset
in the future at a price that is e4pected to be substantiall$ less than market
#alue at the time of ac2uisition.
RRRR (. A lease arrangement used b$ manufacturers or dealers to facilitate the
marketing of their products.
RRRR ). A lease agreement that is in substance a purchase and sale of propert$.
RRRR +. The time period from the beginning to the end of a lease.
RRRR1.. An entit$ that o/ns propert$ and transfers the right to use that propert$ to
another entit$.
+.
CHAPTER 15 -- QUI. SOLUTIONS
Juiz A
1. T
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". T
4. T
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Juiz B
1. T
. T
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4. T
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'. T
(. ?
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Juiz !
1. G
. 1
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4. ,
%. C
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+. 8
1.. L
/Thi" &a0e i" eft 1an2 intentionay34