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ACCT 4050 Study Guide - Midterm Guide: Interest Expense, European Cooperation In Science And Technology, Net Income

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peachbuffalo68
26 Aug 2016
School
KSU
Department
Accounting
Course
ACCT 4050
Professor
Clements

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Document Summary

The collectability of lease payments must be reasonably predictable. If any costs to the lessor have yet to be incurred, they are reasonably predictable. Use lessor"s rate of return, then incremental rate. The guaranteed residual value is made by the lessee so that the lessor can sell the leased asset at the end of the lease for a guaranteed amount. Included as part of minimum lease payments at present value. Capital lease liability is the annual lease payments less executory costs (taxes, maintenance, etc. ) times the present value factor. Real estate taxes are a period cost and should be charged as an expense. Capital leases present a liability on the balance sheet and are not preferred over operating leases. Type of lease does not matter for lessor. No matter the type of lease, the lessor is the legal owner; the lessee can be the accounting owner. Sales type lease: fair value > book value.

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Related Questions

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 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.

On January 1, 2016, Caterpillar Inc. entered in a lease withNewmont Mining for a 797F mining truck. The term of thenon-cancelable lease is ten years and payments are required onJanuary 1 of each year. The first payment is due on January 1,2017. Additional terms of the lease are as follows:

1. Newmont Mining has an option to purchase the mining truck for$300,000 when the lease expires at which time the fair value isexpected to be $1,200,000.

2. The cost of the 797F mining truck to Caterpillar is$3,500,000. It has an estimated life of fifteen years and a salvagevalue of zero at the end of its lease due to extreme wear and tear.3. Caterpillar sets lease payments to earn 6% on itsinvestment.

4. Collectability of the payments is reasonably predictable, andthere are no important uncertainties surrounding the costs yet tobe incurred by Caterpillar. 5. Caterpillar has a 12-31year-end.

Required:

2. Prepare a lease amortization schedule for both the lessor andthe lessee for the entire life of the lease.

3. Prepare the journal entries on the books of the lessor forthe first and last year of the lease.

4. Prepare the journal entries on the books of the lessee forthe first and last year of the lease.

Red Leasing Company agrees to lease machinery to Fisher Corporation on January 1, 2017. The following information relates to the lease agreement.
The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
The cost of the machinery is $473,000, and the fair value of the asset on January 1, 2017, is $746,000.
At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $91,000. Fisher depreciates all of its equipment on a straight-line basis.
The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
Red desires a 10% rate of return on its investments. Fisher’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.
(Assume the accounting period ends on December 31.)
1. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
2. Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)