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32. An essential element of a lease isthat the

a. lessor conveys less than his or her totalinterest in the property.

b. lessee provides a sinking fund equal to oneyear’s lease payments.

c. property that is the subject of the leaseagreement must be held for sale by the lessor prior to the draftingof the lease agreement.

d. term of the lease is substantially equal to theeconomic life of the leased property.

33. What impact does a bargainpurchase option have on the present value of the minimum leasepayments computed by the lessee?

a. There is no impact as the option does not enterinto the transaction until the end of the lease term.

b. The lessee must increase the present value of theminimum lease payments by the present value of the optionprice.

c. The lessee must decrease the present value of theminimum lease payments by the present value of the optionprice.

d. The minimum lease payments would be increased bythe present value of the option price if, at the time of the leaseagreement, it appeared certain that the lessee would exercise theoption at the end of the lease and purchase the asset at the optionprice.

34. The methods of accounting for alease by the lessee are

a. operating and capital lease methods.

b. operating, sales, and capital lease methods.

c. operating and leveraged lease methods.

d. None of these answers are correct.

35. Which of the following is a correct statement of one of thecapitalization criteria?

a. The lease transfers ownership of the property tothe lessor.

b. The lease contains a purchase option.

c. The lease term is equal to or more than 75% ofthe estimated economic life of the leased property.

d. The minimum lease payments (excluding executorycosts) equal or exceed 90% of the fair value of the leasedproperty.

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019
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Related questions

Which of the following is a criterion for classifying a lease as a capital lease by a lessee?
A. The present value of the minimum lease payments is 75% or more of the fair value of the leased property.
B. The lease term is equal to 75% or more of the estimated economic life of the leased property.
C. The lease agreement contains an option to purchase the leased property at its fair value at the end of the lease term.
D. The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term.

Two cases...

For each of the following cases, assume the lessor is amanufacturer or dealer and that the leased asset cost the lessor$84,000.

Case A: A lessor and lessee enter into a lease agreement wherebyan 18 wheeler with a fair value of $130,000 and a useful life offive years will be leased for four years. The lease payments willbe made at the beginning of each year. The lessee guarantees thatat the end of the lease term, the truck's residual value will be atleast $20,000. The lessor requires a rate of return at 12%. Thelessee can borrow to purchase at an interest rate of 10%.

We already know:

-The amount of the lessor's net investment is $130,000

-The amount of the annual lease payment is $34479

-The amount of the lessor's gross investment is $157,916

-The present value of the minimum lease payments is $130,000

-The amount of the interest income over the life of the lease is$27,916

Case B:

Like case A, except the lessee guarantees that at the end of thelease term, the truck's residual value will be at least $10,000.The expected residual value at the end of the lease term is$20,000.

We already know:

-The amount of the lessor's net investment is $130,000

-The amount of the annual lease payment is $34479

-The amount of the lessor's gross investment is $157,916

-The present value of the minimum lease payments is $130,000

-The amount of the interest income over the life of the lease is$27,916

Make all jorunal entries for the four years covered by the leaseagreement for each case for both the lessee and lessor. i.e,:

Case A: Lessee and Lessor, Case B: Lessee and Lessor

Lessee Santi contracts for three leases of three machines forsix months: lease A, lease B and Lease C. Each lease isnon-cancelable and each machine reverts to the lessor at the end ofthe lease term. The first rental payment for each machine is paidat the inception of the lease, with the balance to be paid in equalamounts at the start of each of five quarters thereafter. Thelessors agreed to pay the executory costs and included this amountin the lease rentals. For each of the machine the present value ofthe minimum lease payment is equal to 55% of the fair value of themachine. The following information is peculiar to each lease:

1. Lease A: it is agreed that at the time of the sixth payment,for an added bargain purchase option payment Lessee Santi can buythe property. The lease term is equal to 70% of the estimatedeconomic life of the asset.

2. Lease B: does not give the lessee the option to buy themachine. The lease term is equal to 90% of the estimated economiclife of the asset.

3. Lease C: does not give the lessee the option to buy themachine. The lease term is equal to 70% of the estimated economiclife of the asset.

Required:

1. How should Santi classify each of the three leases above, andwhy? Discuss the rationale for your answer.

2. What amount, if any, should Santi record as a liability atthe inception of the lease for each of the three leases above?

3. Assuming that the minimum lease payments are made on astraight-line basis, how should Santi record minimum lease paymentfor each of the three leases above?

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