Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Test Bank for Intermediate Accounting, Fifteenth Edition
21 - 34
Solution 21-111 (cont.)
BE. 21-112—Operating lease.
Maris Co. purchased a machine on January 1, 2015, for $1,500,000 for the express purpose of
leasing it. The machine is expected to have a five-year life, no salvage value, and be depreciated
on a straight-line monthly basis. On April 1, 2015, under a cancelable lease, Maris leased the
machine to Dunbar Company for $450,000 a year for a four-year period ending March 31, 2019.
Maris incurred total maintenance and other related costs under the provisions of the lease of
$15,000 relating to the year ended December 31, 2015. Harley paid $450,000 to Maris on April 1,
2015.
Instructions [Assume the operating method is appropriate for parts (a) and (b).]
(a) Under the operating method, what should be the income before income taxes derived by
Maris Co. from this lease for the year ended December 31, 2015?
(b) What should be the amount of rent expense incurred by Dunbar from this lease for the year
ended December 31, 2015?
Solution 21-112
EXERCISES
Ex. 21-113—Lease criteria for classification by lessor.
What are the criteria that must be satisfied for a lessor to classify a lease as a direct-financing or
sales-type lease?
Accounting for Leases
21 - 35
Solution 21-113
Ex. 21-114—Direct-financing lease (essay).
Explain the procedures used to account for a direct-financing lease.
Solution 21-114
Ex. 21-115—Lessor accounting—sales-type lease.
Hayes Corp. is a manufacturer of truck trailers. On January 1, 2014, Hayes Corp. leases ten
trailers to Lester Company under a six-year noncancelable lease agreement. The following
information about the lease and the trailers is provided:
1. Equal annual payments that are due on January 1 each year provide Hayes Corp. with an
8% return on net investment (present value factor for 6 periods at 8% is 4.99271).
2. Titles to the trailers pass to Lester at the end of the lease.
3. The fair value of each trailer is $50,000. The cost of each trailer to Hayes Corp. is $45,000.
Each trailer has an expected useful life of nine years.
4. Collectibility of the lease payments is reasonably predictable and there are no important
uncertainties surrounding the amount of costs yet to be incurred by Hayes Corp.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 - 36
Instructions
(a) What type of lease is this for the lessor? Discuss.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Hayes Corp. for the first three years.
(d) Prepare the journal entries for the lessor for 2014 to record the lease agreement, the receipt
of the lease rentals, and the recognition of revenue (assume the use of a perpetual
inventory method and round all amounts to the nearest dollar).
Accounting for Leases
21 - 37
Solution 21-115
*Ex. 21-116—Lessee and lessor accounting (sale-leaseback).
On January 1, 2015, Morris Company sells land to Lopez Corporation for $8,000,000, and
immediately leases the land back. The following information relates to this transaction:
1. The term of the noncancelable lease is 20 years and the title transfers to Morris Company at
the end of the lease term.
2. The land has a cost basis of $6,720,000 to Morris.
3. The lease agreement calls for equal rental payments of $754,459 at the beginning of each
year.
4. The land has a fair value of $8,000,000 on January 1, 2015.
5. The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez
Corporation set the annual rentals to ensure a rate of return of 8%.
6. Morris Company pays all executory costs which total $255,000 in 2015.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 - 38
*Ex. 21-116 (cont.)
7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties
surrounding the costs yet to be incurred by the lessor.
Instructions
(a) Prepare the journal entries for the entire year 2015 on the books of Morris Company to
reflect the above sale and lease transactions (include a partial amortization schedule and
round all amounts to the nearest dollar.)
(b) Prepare the journal entries for the entire year 2015 on the books of Lopez Corporation to
reflect the above purchase and lease transactions.
*Solution 21-116
Accounting for Leases
21 - 39
*Ex. 21-117—Sale-leaseback.
On January 1, 2015, Hester Co. sells machinery to Beck Corp. at its fair value of $720,000 and
leases it back. The machinery had a carrying value of $630,000, the lease is for 10 years and the
implicit rate is 10%. The lease payments of $106,500 start on January 1, 2015. Hester uses
straight-line depreciation and there is no residual value.
Instructions
(a) Prepare all of Hester’s entries for 2015.
(b) Prepare all of Beck’s entries for 2015.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 - 40
PROBLEMS
Pr. 21-118—Lessee accounting—capital lease.
Eubank Company, as lessee, enters into a lease agreement on July 1, 2014, for equipment. The
following data are relevant to the lease agreement:
1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of
$782,757 are due on July 1 of each year.
2. The fair value of the equipment on July 1, 2014 is $2,800,000. The equipment has an
economic life of 6 years with no salvage value.
3. Eubank depreciates similar machinery it owns on the sum-of-the-years’-digits basis.
4. The lessee pays all executory costs.
5. Eubank’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor
used an implicit rate of 8% in computing the lease payments (present value factor for 4
periods at 8%, 3.57710; at 10%, 3.48685.
Instructions
(a) Indicate the type of lease Eubank Company has entered into and what accounting treatment
is applicable.
(b) Prepare the journal entries on Eubank’s books that relate to the lease agreement for the
following dates: (Round all amounts to the nearest dollar. Include a partial amortization
schedule.)
1. July 1, 2014.
2. December 31, 2014.
3. July 1, 2015.
4. December 31, 2015.
Accounting for Leases
21 - 41
Pr. 21-119—Lessee accounting—capital lease.
Krause Company on January 1, 2015, enters into a five-year noncancelable lease, with four
renewal options of one year each, for equipment having an estimated useful life of 10 years and a
fair value to the lessor, Daly Corp., at the inception of the lease of $2,000,000. Krause’s
incremental borrowing rate is 8%. Krause uses the straight-line method to depreciate its assets.
The lease contains the following provisions:
1. Rental payments of $146,000 including $13,000 for property taxes, payable at the beginning
of each six-month period.
2. A termination penalty assuring renewal of the lease for a period of four years after expiration
of the initial lease term.
3. An option allowing the lessor to extend the lease one year beyond the last renewal exercised
by the lessee.
4. A guarantee by Krause Company that Daly Corp. will realize $100,000 from selling the asset
at the expiration of the lease. However, the actual residual value is expected to be $60,000.
Instructions
(a) What kind of lease is this to Krause Company?
(b) What should be considered the lease term?
(c) What are the minimum lease payments?
(d) What is the present value of the minimum lease payments? (PV factor for annuity due of 20
semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 interest
periods at 8% annual rate, .45639.) (Round to nearest dollar.)
(e) What journal entries would Krause record during the first year of the lease? (Include an
amortization schedule through 1/1/16 and round to the nearest dollar.)
Test Bank for Intermediate Accounting, Fifteenth Edition
21 - 42
Accounting for Leases
21 - 43
Pr. 21-120—Lessor accounting—direct-financing lease.
Lucas, Inc. enters into a lease agreement as lessor on January 1, 2015, to lease an airplane to
National Airlines. The term of the noncancelable lease is eight years and payments are required
at the end of each year. The following information relates to this agreement:
1. National Airlines has the option to purchase the airplane for $12,000,000 when the lease
expires at which time the fair value is expected to be $20,000,000.
2. The airplane has a cost of $51,000,000 to Lucas, an estimated useful life of fourteen years,
and a salvage value of zero at the end of that time (due to technological obsolescence).
3. National Airlines will pay all executory costs related to the leased airplane.
4. Annual beginning of year lease payments of $1,172,753 allow Lucas to earn an 8% return on
its investment.
5. Collectibility of the payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by Lucas.
Instructions
(a) What type of lease is this? Discuss.
(b) Prepare a lease amortization schedule for the lessor for the first two years (2015-2016).
(Round all amounts to nearest dollar.)
(c) Prepare the journal entries on the books of the lessor to record the lease agreement, to
reflect payments received under the lease, and to recognize revenue, for 2015.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 - 44
Accounting for Leases
21 - 45
IFRS QUESTIONS
True/False
1. IFRS requires that companies provide a year-by-year breakout of future noncancelable lease
payments due in years 1 through 5.
2. IFRS for leases is more “rules-based” than U.S. GAAP and includes many bright-line criteria
to determine ownership.
3. IFRS requires lesses to.use their incremental rate, unless the implicit rate is known by the
lessee and the implicit rate is lower than the incremental rate.
4. IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks,
and leveraged leases.
5. Because IFRS is very general in its provisions for lease accounting, the required disclosures
for leases under IFRS are more detailed and extensive than those required under U.S. GAAP.
Multiple Choice
6. Which of the following statements is true when comparing the accounting for leasing
transactions under U.S. GAAP with IFRS?
a. IFRS requires that companies provide a year-by-year breakout of future noncancelable
lease payments due in years 1 through 5.
b. IFRS for leases is more “rules-based” than U.S. GAAP and includes many bright-line
criteria to determine ownership.
c. The IFRS leasing standard is the subject of over 30 interpretations since its issuance in
1982.
d. IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks,
and leveraged leases.
7. Which of the following is a one of the criteria for recording a lease as a finance lease, under
IFRS?
a. The lease term is for the major part of the economic life of the asset.
b. The lease must be cancelable.
c. The lease doesn’t contain a bargain-purchase option.
d. The present value of the minimum lease payments amounts to 75% of the fair value of the
leased asset.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 - 46
8. Which of the following statement is true?
a. Operating leases under GAAP are referred to as finance leases under IFRS.
b. IFRS has an additional lessor criterion for capitalization that collectability of the payments
required from the lessee is reasonably predictable.
c. IFRS is more general in its provisions for determining if a lease arrangement transfers the
risks and rewards of ownership.
d. Under IFRS, in computing the present value of the minimum lease payments, the lessee is
required to use the incremental borrowing rate.
Short Answer
9. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS
with respect to the accounting for leases.
