ACTG 2011 Study Guide - Final Guide: Contingent Liability, Financial Statement, Pension

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olivesardine643

25 Mar 2016

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Capital/finance lease transfers the risks and rewards of ownership to the lessee. Ifrs: ownership from lessee is likely, lessee gains most economic benefits from asset, present value of lease payments = fair value of the leased asset. Likely a capital lease if it is a very specialized purchase under ifrs. After initial purchase, lease and asset are accounted for separately. Interest expense is calculated by multiply liability outstanding at the. Interest expense = liability at beginning of year x interest rate. Over time, interest expense will get smaller due to the decrease in carrying amount. The carry amount of the lease is calculated by the present. Payment for lease is annually but accounting for a capital. Cr cash xxxx xxxx < amount paid based on carrying amount. Operating lease does not transfer the risk and rewards of ownership to the lessee. > earn classified as an operating lease, the lessee has off-balance-sheet financing.

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Choose the correct answer

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 oneyearâs 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.

whitewolf712

# Warren Co. recorded a right-of-use asset of $800,000 in a10-year Type A lease. The interest rate charged by the lessor was8%. Under the new ASU, the balance in the right-of-use asset aftertwo years will be:

#Refer to the following lease amortization schedule. The 10payments are made annually starting with the inception of thelease. Title does not transfer to the lessee and there is nobargain purchase option or guaranteed residual value. The asset hasan expected economic life of 12 years. The lease isnoncancelable.

Payment	Cash Payment	Effective Interest	Decrease in balance	Balance
				63,282
1	10,000		10,000	53,282
2	10,000	6,394	3,606	49,676
3	10,000	5,961	4,039	45,638
4	10,000	5,477	4,523	41,114
5	10,000	4,934	5,066	36,048
6	10,000	4,326	5,674	30,373
7	10,000	3,645	6,355	24,018
8	10,000	2,882	7,118	16,901
9	10,000	?	?	?
10	10,000	?	?	?

What would the lessee record as annual depreciation on the assetusing the straight-line method?

#XYZ Company leased equipment to West Corporation under a leaseagreement that qualifies as a capital lease to West but not as aresult of a bargain purchase option or a title transfer. Thepresent value of the asset is $600,000. The expected economic lifeof the asset is 10 years. The lease term is five years. Using thestraight-line method, what would West record as annualdepreciation?

# If the lessee and lessor use different interest rates toaccount for a capital lease, then:

Total expenses for the lessee will be different from thelessor's total revenues.

Total expenses for the lessee will equal the lessor's totalrevenues.

GAAP has been violated by at least one party.

The lessee will report more net income for the year.

Technoid Inc. sells computer systems. Technoid leases computersto Lone Star Company on January 1, 2016. The manufacturing cost ofthe computers was $12 million.

This noncancelable lease had the following terms:

â¢ Lease payments: $2,466,754 semiannually; first payment at January1, 2016; remaining payments at June 30 and December 31 each yearthrough June 30, 2020.
â¢ Lease term: five years (10 semiannual payments).
â¢ No residual value; no bargain purchase option.
â¢ Economic life of equipment: five years.
â¢ Implicit interest rate and lessee's incremental borrowing rate:5% semiannually.
â¢ Fair value of the computers at January 1, 2016: $20million.

Collectibility of the rental payments is reasonably assured, andthere are no lessor costs yet to be incurred.

Lone Star Company would account for this as:

A capital lease.

A direct financing lease.

A sales type lease.

An operating lease.

Refer to the following lease amortization schedule. The 10payments are made annually starting with the inception of thelease. Title does not transfer to the lessee and there is nobargain purchase option or guaranteed residual value. The asset hasan expected economic life of 12 years. The lease isnoncancelable.

Payment	Cash Payment	Effective Interest	Decrease in balance	Balance
				63,282
1	10,000		10,000	53,282
2	10,000	6,394	3,606	49,676
3	10,000	5,961	4,039	45,638
4	10,000	5,477	4,523	41,114
5	10,000	4,934	5,066	36,048
6	10,000	4,326	5,674	30,373
7	10,000	3,645	6,355	24,018
8	10,000	2,882	7,118	16,901
9	10,000	?	?	?
10	10,000	?	?	?

What would be the outstanding balance after payment 10?

## Cady Salons leased equipment from Smith Co. on January 1,2016, in a Type B lease. The present value of the lease paymentsdiscounted at 10% was $80,000. Ten annual lease payments of $12,000are due at each January 1 beginning January 1, 2016. Following theguidance of the new ASU, the amortization of the right-of-use assetfor the reporting year ending December 31, 2016, would be:

## Karla Salons leased equipment from Smith Co. on July 1, 2016,in a Type A lease. The present value of the lease paymentsdiscounted at 10% was $80,000. Ten annual lease payments of $12,000are due each year beginning July 1, 2016. Smith Co. had constructedthe equipment recently for $66,000, and its retail fair value was$80,000.

Under the new ASU, what amount of interest revenue from the leaseshould Smith Co. report in its December 31, 2016, incomestatement?

### If the leaseback portion of a sale-leaseback transaction isclassified as an operating lease:

Any gain is deferred and recognized as a reduction of rentexpense.

Any gain is deferred and recognized as a reduction ofdepreciation.

Any gain is recognized at the lease's inception.

There can be no gain.

plumantelope901

A) Which of the following is not likely to be a reason why agovernment might obtain an asset through an operating lease? Thegovernment

a) Does not have enoughcash or credit to purchase the asset.

b) Wishes to avoid therisk of owning an asset that has become obsolete and cannot besold.

c) Believes the totalvalue of assets reported in the schedule of changes in capitalassets is already too high.

d) Needs the asset foronly a small part of its useful life.

B) A government is required to report a lease as a capital leaseif it meets which of the following conditions?

a) The lease term is equalto or greater than 75 percent of the estimated economic life of theleased property.

b) The lease transfersownership of the property from the lessor to the lessee by the endof the lease term and/or the lease contains an option for thelessee to purchase the property at a bargain price.

c) The present value ofrental and other minimum lease payments equals or exceeds 90percent of the fair value of the leased property.

d) Any one of the aboveconditions meets the requirement.

ACTG 2011 Study Guide - Final Guide: Contingent Liability, Financial Statement, Pension

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