Chapter 15 Leases
110. Following the guidance of the new ASU, the total decrease in earnings (pretax) in Karla’s
December 31, 2016, income statement would be:
a. $5,000.
b. $7,400.
c. $8,400.
d. $9,000.
111. Cady Salons leased equipment from SmithCo on January 1, 2016, in a Type B lease. The
present value of the lease payments discounted at 10% was $80,000. Ten annual lease
payments of $12,000 are due at each January 1 beginning January 1, 2016. Following the
guidance of the new ASU, the amortization of the right–of-use asset for the reporting year
ending December 31, 2016, would be:
a. $ 5,200.
b. $ 6,800.
c. $ 8,000.
d. $12,000.
Chapter 15 Leases
Chapter 15 Leases
Matching Pair Questions
112. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBE
R
1. Capital leases
Accounting for these is based on
substance over form.
____
2. Present value of minimum
lease payments
Leasehold improvements.
____
3. Executory costs
The amount capitalized by the lessee.
____
4. Bargain purchase option
Capital lease expense.
____
5. Depreciable assets
Reduces the lessor’s lease payment
calculation.
____
113. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
NUMBER
1. Lessor’s minimum lease
receipts
____
2. Lessee’s guarantee
____
3. Executory costs
____
4. Sale-leaseback payments
____
5. Sales-type lease
____
1. Lessor’s minimum lease
Rent payments plus lessee-guaranteed and
2. Lessee’s guarantee
Residual value.
3. Executory costs
Tax payments.
4. Sale-leaseback payments
The amount paid to retain use of the asset
after sale.
5. Sales-type lease
Marketing tool for lessor.
Chapter 15 Leases
114. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBE
R
1. PV of bargain purchase
option price
Deducted in lessor’s computation of rental
payments.
____
2. Lessee’s minimum
lease payments
Lease payable equals PV of minimum lease
payments.
____
3. Lessor’s net
investment
PV of minimum lease payments plus PV of
unguaranteed residual value.
____
4. Net method
Periodic rent payments plus lessee-guaranteed
residual value.
____
5. Gross method
Lease receivable equals sum of minimum lease
payments
____
1. PV of bargain purchase
Deducted in lessor’s computation of rental
payments.
2. Lessee’s minimum lease
Lease payable equals PV of minimum lease
payments.
3. Lessor’s net investment
PV of minimum lease payments plus PV of
4. Net method
Periodic rent payments plus lessee-guaranteed
residual value.
5. Gross method
Lease receivable equals sum of minimum lease
Chapter 15 Leases
115. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Gross method
Contingent rentals.
____
2. Requires disclosure only
Title transfers to lessee.
____
3. Depreciation period over useful
life
Typically used by lessor but not lessee
____
4. Additional conditions for lessor
in nonoperating leases
Consistent with revenue recognition.
____
5. Bargain purchase option
Purchase price sufficiently less than the
expected fair value when exercised.
____
Chapter 15 Leases
116. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Discount rate
Classified as a contra asset account.
____
2. Depreciation on leased assets
Based on term of lease or useful life
depending on lease contract.
____
3. Deferred gain on sale-
leaseback
Identified as the lower of implicit rate or
lessee’s incremental borrowing rate.
____
4. Interest expense
Calculated as effective rate times balance.
____
5. Lessor’s gross investment
Calculated as minimum lease payments plus
unguaranteed residual value.
____
Chapter 15 Leases
117. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. 90% test
Operating costs borne by the lessee.
____
2. Sales-type lease selling
expense
Lessor reports rent revenue.
____
3. Residual value
Viewed as an additional payment when
guaranteed by lessee.
____
4. Operating lease
Included with initial direct costs.
____
5. Executory costs
Considered the most decisive of the four capital
lease criteria.
____
TERM
PHRASE
NUMBER
1. 90% test
Operating costs borne by the lessee.
2. Sales-type lease selling
expense
Lessor reports rent revenue.
3. Residual value
Viewed as an additional payment when
guaranteed by lessee.
4. Operating lease
Included with initial direct costs.
5. Executory costs
Considered the most decisive of the four capital
lease criteria.
118. Listed below are several terms and phrases associated with leases. Pair each item from List A
(by letter) with the item from List B that is most appropriately associated with it.
List A List B
Outstanding balance times effective rate. a. Lessor’s minimum lease payments.
Contingent rentals. b. Lessor’s net investment.
Minimum lease payments plus c. Lessor’s gross investment.
unguaranteed residual value. d. Disclosure only.
Periodic rent payments plus e. Depreciable assets.
lessee-guaranteed residual value. f. Loss to lessee.
PV of minimum lease payments plus g. Executory costs.
PV of unguaranteed residual value. h. Depreciation longer than lease term.
Initial direct costs. i. Operating lease.
Rent revenue. j. Interest expense.
Bargain purchase option. k. Additional lessor conditions.
Leasehold improvements. l. Lessee’s minimum lease payments.
Cash to satisfy residual value m. Purchase price less than fair value.
guarantee. n. Sales-type lease selling expense.
Capital lease expense. o. PV of bargain purchase option price.
Deducted in lessor’s computation
of lease payments.
Title transfers to lessee.
Revenue recognition.
Lease payments plus lessee-guaranteed
and third-party-guaranteed residual value.
Chapter 15 Leases
Chapter 15 Leases
Problems
119. Each of the independent situations below describes a capital lease in which annual lease
payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit
interest rate.
Situation
1
2
Lease term
10 yrs
20 yrs
Lessor’s desired
rate of return
10%
12%
Lessee’s
incremental
borrowing rate
12%
10%
Fair value of asset
$600,000
$400,000
For convenience, here are some table values:
Periods; int. rate
PV, ordinary
PV, annuity
annuity
due
10 periods, 10%
6.1446
6.7590
10 periods, 12%
5.6502
6.3283
20 periods, 10%
8.5136
9.3649
20 periods, 12%
7.4694
8.3658
Required:
For each situation determine the amount of the annual lease payment, as calculated by the
lessor.
120. Each of the four independent situations below describes a lease requiring annual lease
payments of $30,000.
Chapter 15 Leases
Required:
For each situation, determine the appropriate lease classification by the lessee and indicate
why.
Situation
1
2
3
4
Lease term (years)
4
4
4
4
Asset’s useful life (years)
6
6
5
6
Asset’s fair value
$132,000
$123,000
$129,000
$117,000
Bargain purchase option?
No
No
Yes
No
Annual lease payments
Beg. of
yr.
Beg. of yr.
End of yr.
End of yr.
Lessor’s implicit rate (known by
lessee)
5%
5%
7%
6%
Lessee’s incremental borrowing rate
5%
5%
5%
5%
121. On January 1, 2016, Salvatore Company leased several machines from Nola Corporation
under a three-year operating lease agreement. The lease calls for semiannual payments of
$15,000 each, payable on June 30 and December 31 of each year. The machines were acquired
by Nola at a cost of $90,000 and are expected to have a useful life of five years with no
expected residual value.
Required:
Prepare the appropriate journal entries for the lessee from the inception of the lease through
the end of 2016.
122. On January 1, 2016, Salvatore Company leased several machines from Nola Corporation
under a three-year operating lease agreement. The lease calls for semiannual payments of
$15,000 each, payable on June 30 and December 31 of each year. The machines were acquired
by Nola at a cost of $90,000 and are expected to have a useful life of five years with no
expected residual value.
Required:
Prepare the appropriate journal entries for the lessor from the inception of the lease through
the end of 2016.
123. On January 1, 2016, Holbrook Company leased a building under a three-year operating lease.
The annual rental payments are $68,000 on January 1, 2016, the inception of the lease, and
$50,000 January 1 of 2017 and 2018. Holbrook made structural modifications to the building
costing $90,000 before occupying the building. The useful life of the building and the
modifications is 30 years with no expected residual value.
Required:
Prepare the appropriate journal entries for Holbrook Company for 2016. Holbrook’s fiscal year
is the calendar year, and the company uses straight-line depreciation.
124. On January 1, 2016, Holbrook Company leased a building under a three-year operating lease.
The annual rental payments are $40,000 on January 1, 2016; $30,000 on January 1, 2017; and
$20,000 on January 1, 2018.
Required:
Prepare the appropriate journal entries for Holbrook Company from the inception of the lease
through the end of 2018.
Chapter 15 Leases
125. In its 2016 annual report to shareholders, Calipari Mining disclosed the following:
Calipari leases mineral interests and various other types of properties, including shovels,
offices, and miscellaneous equipment. Certain of the mineral leases require minimum annual
royalty payments, and others provide for royalties based on production.
Summarized below at December 31, 2016, are future minimum rentals and royalties under
noncancelable leases (amounts in $ millions):
Operating
Mineral
Capital
Leases
Royalties
Leases
2017
$15.3
1.2
4.9
2018
13.7
1.2
5.0
2019
12.1
1.2
4.1
2020
10.1
1.2
4.0
2021
9.7
1.2
–
After 2021
45.2
14.3
–
Total payments
$ 106.1
20.3
18.0
Present value of lease payments
$ 13.7
Less current portion
(3.2)
Present value of long-term payments
$ 10.5
Required:
1. Assume that the operating lease payments disclosed are from a single contract that lasts
through 2021. How much rent expense on these leases will be charged in 2017 and 2018?
Explain.
2. What amount would the Calipari December 31, 2016, balance sheet report as long-term
lease liabilities? Explain.
3. What amount of the 2017 capital lease payment by Calipari would represent interest
expense? Explain.
126. Eastern Edison Company leased equipment from Low-Tech Leasing on January 1, 2016. Low-
Tech purchased the equipment at a cost of $222,664.
Other information:
Lease term
3 years
Annual payments
$80,000 on January 1 each year
Life of asset
3 years
Fair value of asset
$222,664
Implicit interest rate
8%
Incremental rate
8%
There is no expected residual value.
Required:
Prepare appropriate journal entries for Low-Tech Leasing for 2016. Assume a December 31
year-end.
Lease receivable
Cash
Interest receivable
[($222,664 – 80,000) x 8%]
127. Python Company leased equipment from Hope Leasing on January 1, 2016. Hope purchased
the equipment at a cost of $222,664.
Other information:
Lease term
3 years
Annual payments
$80,000 on January 1 each year
Life of asset
3 years
Fair value of asset
$222,664
Implicit interest rate
8%
Incremental rate
8%
There is no expected residual value.
Required:
Prepare appropriate journal entries for Python for 2016. Assume straight-line depreciation and
a December 31 year-end.
Chapter 15 Leases
128. Elf Leasing purchased a machine for $500,000 and leased it to IGA, Inc., on January 1, 2016.
Lease description:
Quarterly rental payments $32,629 at beginning of each period
Lease term 5 years (20 quarters)
No residual value; no BPO
Economic life of machine 5 years
Implicit interest rate and
lessee’s incremental
borrowing rate 12%
Fair value of asset $500,000
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to
be incurred.
Required:
Prepare appropriate entries for both IGA and Elf Leasing from the inception of the lease
through the second rental payment on April 1, 2016. Depreciation is recorded at the end of
each fiscal year (December 31).
129. On June 30, 2016, Blue, Inc., leased a machine from Big Leasing Corporation. The lease
agreement qualifies as a capital lease and calls for Blue to make semiannual lease payments of
$281,454 over a three-year lease term, payable each June 30 and December 31, with the first
payment at June 30, 2016. Blue’s incremental borrowing rate is 10%, the same rate Big uses to
calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of
each fiscal year.
Required:
1. Determine the present value of the lease payments at June 30, 2016, (to the nearest $000)
that Blue uses to record the leased asset and lease liability.
2. What would be the pretax amounts related to the lease that Blue would report in its
balance sheet at December 31, 2016?
3. What would be the pretax amounts related to the lease that Blue would report in its
income statement for the year ended December 31, 2016?
Answer: