978-1259722660 Chapter 15 Solution Manual Part 1

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QUESTIONS FOR REVIEW OF KEY

TOPICS

Question 15-1

Regardless of the legal form of the agreement, a lease is accounted for as either a

rental agreement or a purchase/sale accompanied by debt financing depending on the

Question 15-2

Periodic interest expense is calculated by the lessee as the effective interest rate

Question 15-3

Finance leases and installment notes are very similar. The fundamental nature of

Question 15-4

The criteria are: (1) the agreement specifies that ownership of the asset transfers to

Solutions Manual, Vol.2, Chapter 15 15–1

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Chapter 15 Leases

Solutions Manual, Vol.2, Chapter 15 15–2

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Answers to Questions (continued)

Question 15-5

The lease is a finance lease to Seminole because the present value of the lease

payments ($5.2 million) is greater than substantially all of the fair value of the asset

Question 15-6

When accounting for a finance lease, as lease payments are made over the term of

the lease, the lessee records interest expense and the lessor records interest revenue at

Question 15-7

Sometimes, the lessor earns an immediate profit from the lease transaction in

In addition to interest revenue earned over the lease term, the lessor receives a

profit on the “sale” of the asset. This selling profit exists when the fair value of the

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Answers to Questions (continued)

Question 15-8

Even when the risks and rewards of ownership are not transferred to the lessee, the

Question 15-9

In an operating lease, the lessor records no lease receivable and does not remove

Question 15-10

When accounting for an operating lease, both the lessee and lessor record total

lease expense (lessee) and lease revenue (lessor) on a straight-line basis. The lessor,

The lessee records its total lease expense on a straight-line basis over the term of

the lease. This is accomplished by recording interest the normal way (at the effective

Question 15-11

The right to use a leased asset can provide the lessee with a significant benefit.

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Answers to Questions (continued)

Question 15-12

In a finance lease, the lessee records more expense and the lessor records more

revenue early in the life of the lease. This “front loading” of lease expense and

This “front loading” is avoided in an operating lease because both the lessee and

lessor record total lease expense (lessee) and interest revenue (lessor) on a

straight-line basis. The lessee records its total lease expense on a straight-line basis

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Answers to Questions (continued)

Question 15-13

The lessor’s discount rate is the effective interest rate the lease payments provide

In its calculations, the lessee uses same rate the lessor uses if it is known to the

lessee. This is the rate implicit in the lease agreement. In other words, it’s the desired

rate of return the lessor has in mind when deciding the size of the lease payments, the

Question 15-14

When a lessee has a short-term lease it’s acceptable to use a short-cut approach and

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Answers to Questions (continued)

Question 15-15

Contingent rentals are not included in lease payments but are reported in disclosure

notes by both the lessor and lessee. This is because they are not determinable at the

beginning of the lease. They are included as components of income when (and if) the

payments occur. Two exceptions to excluding variable payments are:

When apparent “variable” payments actually are fixed payments in disguise,

When the variation in the lease payments depends on an index or a rate, the

Consumer Price Index or current market rate of interest, for example.

Question 15-16

A purchase option is a provision in a lease contract that gives the lessee the option

to purchase the leased property at a specified exercise price. If that price is

Also, the exercise price would be part of the lease payments for both the lessee and

Question 15-17

Sometimes the actual term of a lease is not obvious. In these situations, we need to

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Answers to Questions (continued)

Question 15-18

The lease term will be 8 years. The lease term for both the lessee and the lessor is

Question 15-19

Several situations cause us to re-measure a lease liability (and right-of-use asset).

Situations requiring remeasurement of the lease liability are when there is a

change in the assessment of:

the lease term.

or, when there is a modification of the terms of the lease not accounted for as a new

lease.

We reassess (a) the lease term or (b) whether exercise of a purchase or

In those two situations, as well as when there’s a modification of the terms of

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Answers to Questions (continued)

Question 15-20

A lessee-guaranteed residual value is considered if the lessee-guaranteed residual

value exceeds the estimate of the actual residual value. If a cash payment under a

Question 15-21

If a purchase option is reasonably certain to be exercised, the exercise price is

included in determining lease payments. A lessee-guaranteed residual value is not

included in determining lease payments unless the amount guaranteed exceeds the

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Answers to Questions (continued)

Question 15-22

Repairs, maintenance, hazard insurance, and property taxes are costs often

associated with owning and operating an asset. Often, for convenience, a lease

contract will specify that the lessor is to pay some or all of these costs, but in reality

these additional costs are embedded in the periodic payments made by the lessee. The

accounting question is whether to include these costs as separate components of the

As a practical expedient, the lessee is given the option to elect to include

non-lease components in the amounts to be capitalized, except for insurance and

Question 15-23

The incremental costs (those that would not have been incurred had the lease

agreement not occurred) of consummating a completed lease transaction incurred by

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Answers to Questions (continued)

Question 15-24

Initial direct costs paid by the lessee are added to the right-of-use asset.

If incurred by the lessor, treatment depends on the classification of the lease. In a

In a sales-type lease with no selling profit, initial direct costs are deferred and

included in the lease receivable. The nature of the lease motivates this treatment. The

Question 15-25

Extensive disclosure requirements for lessees and lessors are designed to enable

Question 15-26

Question 15-27

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Answers to Questions (continued)

Question 15-28

Sale leaseback accounting is permitted only when the sale portion qualifies as a sale

under the revenue recognition guidelines. If the leaseback qualifies as a finance lease,

Question 15-29

No. If a seller-lessee sells an asset that’s subject to a leaseback for a major part of

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