Accounting Chapter 15 This is Accomplished Recording Interest The Normal Way

184) Big Bucks leased equipment to Shannon Company on July 1, 2018. The lease payments

were calculated to provide the lessor a 10% return. Ten annual lease payments of $36,000 are

due each July 1, beginning July 1, 2018.

Required

1. Prepare the journal entries to record the lease by Shannon at July 1, 2018, and at December 31,

2018, the end of the reporting period. Consider this to be a finance lease. Round your answers to

the nearest whole dollar amounts.

2. Prepare the journal entries to record the lease by Shannon at July 1, 2018, and at December 31,

2018, the end of the reporting period. Consider this to be an operating lease. Round your answers

to the nearest whole dollar amounts.

Use this information to answer the following questions:

Deal Leasing leased equipment to Hand Company on January 1, 2018. The lease payments were

calculated to provide the lessor a 10% return. Ten annual lease payments of $60,000 are due at

the beginning of each year beginning January 1, 2018. The present value of an annuity due of $1

at 10% for ten periods is 6.75902.

185) Required:

Consider this to be a finance lease. Round your answers to the nearest whole dollar amounts.

1. Prepare the journal entries to record the lease by Hand (lessee) at January 1, 2018.

2. Prepare the journal entries to record the lease by Hand (lessee) at December 31, 2018, the end

of the first reporting period.

186) Required:

Consider this to be an operating lease. Round your answers to the nearest whole dollar amounts.

1. Prepare the journal entries to record the lease by Hand (lessee) at January 1, 2018.

2. Prepare the journal entries to record the lease by Hand (lessee) at December 31, 2018, the end

of the first reporting period.

187) Lotsa Bucks leased equipment to Shannon Company on January 1, 2018. The lease

payments were calculated to provide the lessor a 10% return. Ten annual lease payments of

$20,000 are due at the beginning of each year beginning January 1, 2018. The present value of an

annuity due of $1 at 10% for ten periods is 6.75902.

Required:

1. Prepare the journal entries to record the lease by Shannon at January 1, 2018, and at December

31, 2018, the end of the reporting period. Consider this to be a finance lease. Round your

answers to the nearest whole dollar amounts.

2. Prepare the journal entries to record the lease by Shannon at January 1, 2018, and at December

31, 2018, the end of the reporting period. Consider this to be an operating lease. Round your

answers to the nearest whole dollar amounts.

188) What amounts are considered to be lease payments when the lessee calculates the right-of-

use asset and lease payable?

189) Discuss the financial statement disclosure requirements for all leases entered into by the

lessee.

190) Discuss the three major types of leases that may apply to the lessor when there is no third

party guarantee. How do they differ?

191) Discuss the economic advantages of leasing.

192) Describe the use of amortization for an asset leased under a finance lease. Include a

discussion of the amortization period.

193) Differentiate between guaranteed and unguaranteed residual value of leased property. Does

the difference affect the lessor’s accounting for the lease?

194) 1) In a lease transaction, what are initial direct costs?

2) How does the lessor account for initial direct costs in an operating lease, a sales-type lease

with selling profit, and a sales-type lease with no selling profit?

195) Discuss the financial statement disclosure requirements for all leases entered into by the

lessor.

196) How do U.S. GAAP and International Financial Reporting Standards (IFRS) compare to

classifying a lease as a finance lease?

197) Compare and contrast the way leases are classified between operating leases and finance

leases under U.S. GAAP and IFRS.

198) A lessee should classify a lease transaction as a finance lease if it is noncancelable and one

or more of five classification criteria are met. What are these criteria?

199) In accounting for a finance lease/sales-type lease, explain how the lessee’s and lessor’s

income statements are affected.

200) What is selling profit in a sales-type lease? How does the lessor account for selling profit in

a sales-type lease with a selling profit?

201) In accounting for an operating lease, describe how the lessee’s and lessor’s income

statements are affected.

202) Briefly describe the conceptual basis for asset and liability recognition under the right-of–

use approach used by the lessee in a lease transaction.

203) In a financing lease, “front loading” of lease expense and lease revenue occurs. What does

this mean, and how is it avoided in an operating lease?

204) The discount rate influences virtually every amount reported in connection with a lease by

both the lessor and the lessee. What is the lessor’s discount rate when determining the present

value of lease payments? What is the lessee‘s discount rate?

205) Sometimes a lease might specify that lease payments may be increased (or decreased) at

some future time during the lease term depending on whether or not some specified event occurs

such as revenues or profits exceeding some designated level. Under what circumstances are

contingent rentals included or excluded from lease payments? If excluded, how are they

recognized in income determination?

206) What is a purchase option? How does it affect accounting for a lease?

207) Sometimes a lease can be renewed for additional periods or terminated after a specified

period. How do the lessee and lessor decide the lease term to be used in accounting for the lease?

208) What situations cause a lessee to remeasure a lease liability (and right-of-use asset)? How is

that accomplished?

209) Occasionally, a lease agreement includes a guarantee by the lessee that the lessor will

recover a specified residual value when custody of the asset reverts back to the lessor at the end

of the lease term. Under what circumstance can the guaranteed residual value influence the

amounts recorded by the lessee and lessor? In that circumstance, how are the amounts affected?

210) Compare the way a purchase option that is reasonably certain to be exercised and a lessee-

guaranteed residual value are treated by the lessee and lessor when determining lease payments.

211) What nonlease costs might be included as part of lease payments? How are they accounted

for by the lessee in a finance lease when paid by the lessee? Explain.

212) Is it possible that a finance lease under IFRS be classified as an operating lease under U.S.

GAAP? Explain.

213) When a company sells an asset and simultaneously leases it back, what criteria must be met

to apply sale-leaseback accounting rather than accounting for the transaction as a loan?

214) Wainwright Ropes leased high-tech electronic equipment from Wacha Leasing on January

1, 2018. Wacha purchased the equipment from Red Bird Machines at a cost of $215,732. The

equipment has an estimated useful life of six years and possession of the equipment will revert

back to Wacha at the end of the lease.

Related information:

Lease term 3 years (12 quarterly periods)

Quarterly rental payments $20,000 at the beginning of each period

Economic life of asset 3 years

Fair value of asset $215,732

Implicit interest rate 8%

Required: Prepare appropriate entries for Wainwright from the beginning of the lease through

March 31, 2018. December 31 is the fiscal year end for Wainright. Appropriate adjusting entries

are recorded at the end of each quarter. Round your answers to the nearest whole dollar amounts.

215) Pita Pub leased a specialty machine for a five-year non-cancelable term. At the end of the

five-year term, Pita Pub has four consecutive one-year renewal options. A replacement machine

can be acquired, but due to an expensive installation process and Pita Pub’s lease term for its

mall location, Pita Pub expects to lease the machine for seven years. What is the lease term?

A) 5 years

B) 6 years

C) 7 years

D) 9 years

216) Trussel Creations leased kitchen equipment under a five-year lease with an option to renew

for three years at the end of five years and an option to renew for an additional three years at the

end of eight years. The first three-year renewal option can be exercised for one-half the original

and usual rate. What is the length of the lease term that Trussel Creations should assume in

recording the transactions related to the lease?

A) 5 years

B) 8 years

C) 11 years

D) cannot be determined