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Chapter 15 Leases
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
Question 15-2
Periodic interest expense is calculated by the lessee as the effective interest rate
Question 15-3
Leases and installment notes are very similar. The fundamental nature of the
Question 15-4
Current GAAP does allow airlines' balance sheets to appear as if the companies
15–2 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 15-5
The criteria are: (1) the agreement specifies that ownership of the asset transfers to
Question 15-6
A bargain purchase option is a provision in the lease contract that gives the lessee
Question 15-7
The lease is a capital lease to Seminole because the present value of the minimum
Question 15-8
Yes. The minimum lease payments for the lessee exclude any residual value not
Answers to Questions (continued)
Question 15-9
The way a bargain purchase option is included in determining minimum lease
Question 15-10
Executory costs are costs usually associated with ownership of an asset such as
Question 15-11
The lessor’s discount rate is the effective interest rate the lease payments provide
the lessor over and above the “price” at which the asset is “sold” under the lease. It is
Answers to Questions (continued)
Question 15-12
Contingent rentals are not included in minimum lease payments but are reported in
Question 15-13
The costs of negotiating and consummating a completed lease transaction incurred
Question 15-14
In an operating lease initial direct costs are recorded as prepaid expenses (assets)
and amortized as an operating expense (usually straight-line) over the lease term. This
approach is due to the nature of operating leases in which rental revenue is earned
Answers to Questions (continued)
Question 15-15
Lease disclosure requirements are quite extensive for both the lessor and lessee.
Question 15-16
On the surface there are two separate transactions. But the seller/lessee still retains
the use of the asset that it had prior to the sale-leaseback. In reality the seller/lessee
15–6 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 15-17
The FASB specified exceptions to the general classification criteria for leases that
involve land because of the unlimited useful life of land and the inexhaustibility of its
inherent value through use. When title passes to the lessee – through automatic title
Question 15-18
The guidelines for determining when a material amount of land is involved in a
Answers to Questions (continued)
Question 15-19
A leveraged lease involves significant long-term, nonrecourse financing by a third-
party creditor. The lessor serves the role of a mortgage broker and earns income by
Question 15-20
Question 15-21
Yes. A finance lease under IFRS might be classified as an operating lease under
U.S. GAAP. U.S. GAAP has precise guidelines while IFRS are more “principles-
Answers to Questions (concluded)
Question 15-22
In general, IFRS is considered to be more principles-based while U.S. GAAP is
more rules-based. For example, under IFRS one situation that normally indicates a
finance lease is if the noncancelable lease term is for a major portion of the expected
economic life of the asset. Another is if the present value of the minimum lease
Question 15-23
The IASB and FASB are collaborating on a joint project with the intent of revising
accounting standards for leases. As of 2014, the Boards have agreed on a “right of
SUPPLEMENT QUESTIONS FOR REVIEW OF KEY TOPICS
Question 15-24
When we look beyond the “form” of some lease transactions and focus on their
Question 15-25
Question 15-26
A lessor records a Type B lease as if it were an operating lease under current
Question 15-27
When accounting for a Type A lease, as lease payments are made over the term of
15–10 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 15-28
When accounting for a Type B lease, both the lessee and lessor record total lease
expense (lessee) and lease revenue (lessor) on a straight-line basis. The lessor, having
recorded no entry affecting its balance sheet at the beginning of the lease, simply
Question 15-29
As with capital leases in current GAAP, in a Type A 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 revenue occurs due to the fact that interest is higher
Answers to Questions (continued)
Question 15-30
The right to use a leased asset can provide the lessee with a significant benefit.
Question 15-31
When a lessee has a short-term lease it’s acceptable to use a short-cut approach and
forego recording the right-of-use asset and the lease payable. The lessee simply
recognizes lease payments as expense over the lease term. This is essentially the same
as accounting for an operating lease in current GAAP.
15–12 Intermediate Accounting, 8/e
BRIEF EXERCISES
Brief Exercise 15-1
Because none of the four classification criteria is met, this is an operating lease.
Brief Exercise 15-2
Because none of the four classification criteria is met, this is an operating lease.
Accordingly, Lakeside will record rent revenue for each of the four $25,000
Brief Exercise 15-3
Because this is an operating lease, Ward will record rent expense for each of the
$5,000 payments. The advance payment also represents rent, recorded initially as
Brief Exercise 15-4
The lease is a capital lease to Athens because the present value of the minimum
lease payments ($20.4 million) is greater than 90% of the fair value of the asset (90%
Brief Exercise 15-5
The present value of the minimum lease payments ($20.4 million) is greater than
90% of the fair value of the asset (90% x $22.4 million = $20.16 million). Since the
Brief Exercise 15-6
In direct financing leases, the lessor records a receivable for the present value of
the lease payments to be received ($1,531,000 for Sonic). The difference between the
total of the lease payments ($1,701,000 for Sonic) and the present value of the lease
15–14 Intermediate Accounting, 8/e
Brief Exercise 15-7
The amount of interest expense the lessee would record in conjunction with the
second quarterly payment at October 1 is $2,892:
Initial balance, July 1 (given) ................................... $150,000
Journal entries (not required):
July 1
Leased asset (given) .............................................. 150,000
Oct. 1
Interest expense (2% x [$150,000 – 5,376]) ............... 2,892
Brief Exercise 15-8
The lease payable in the balance sheet will be $113,731:
Initial balance, January 1 (calculated below) ............ $140,000
The liability for interest on the lease payable in the balance sheet will be $5,687:
Brief Exercise 15-9
Pretax earnings will be reduced by $29,020 as calculated below:
January 1 interest expense ....................................... $ 0
15–16 Intermediate Accounting, 8/e
Brief Exercise 15-10
The price at which the lessor is “selling” the asset being leased is the present
value of the lease payments:
The lessor’s income statement will report an increase of $20,687 as calculated
below:
January 1, interest revenue ....................................... $ 0
Dec. 31, interest revenue (5% x [$140,000* – 26,269]) 5,687
Journal entry (not required):
Lease receivable (present value) ....................................... 140,000
Brief Exercise 15-11
$100,000 ÷ 16.67846** = $5,996
Brief Exercise 15-12
Amount to be recovered (fair value) $600,000
Brief Exercise 15-13
Amount to be recovered (fair value) $700,000
Less: Present value of the residual value ($100,000 x .82270*) (82,270)
15–18 Intermediate Accounting, 8/e
Brief Exercise 15-14
Under U.S. GAAP, this would not be a capital lease because none of the four
classification criteria is met. The lease term is less than 75% of the economic life of
the asset, and the present value of the minimum lease payments is less than 90% of the
SUPPLEMENT BRIEF EXERCISES
Brief Exercise 15-15
Income Statement:
Interest expense (10% x [($25,000 x 6.33493) – 25,000]) $13,337*
Journal entries (not required):
January 1, 2016
Right-of-use asset ............................................... 158,373
December 31, 2016
Interest expense (10% x [$158,373 – 25,000]) ........... 13,337*
Brief Exercise 15-16
Income Statement:
Interest (10% x [$25,000 x 5.33493 ) ......................... $13,337*
Journal entries (not required):
January 1, 2016
Right-of-use asset ................................................ 158,373
December 31, 2016
Interest expense (10% x [$158,373 – 25,000]) ........... 13,337*
