Intermediate Accounting, 10 Ed
10th Edition
ISBN: 9781260310177
Author: Mark W. Nelson, Wayne B. Thomas J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 15, Problem 15.1E
Lease classification
• LO15–1
Each of the four independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and indicate why.
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E 15-9 Lessor calculation of annual lease payments; lessee calculation of asset and liability LO15-2
Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the beginning of
each year. The lessee is aware of the lessor's implicit rate of return.
Lease term (years)
Lessor's rate of return (known by lessee)
Lessee's incremental borrowing rate
Fair value of lease asset
1
10
11%
12%
$600,000
Required:
For each situation, determine:
a. The amount of the annual lease payments as calculated by the lessor.
b. The amount the lessee would record as a right-of-use asset and a lease liability.
Situation
2
20
9%
10%
$980,000
3
4
12%
10%
$185,000
Part 1: New Lease Accounting – using IFRS 16 Leases Effect Analysis.
Which payments are to be included in the measurement of lease assets and lease liabilities? Also, discuss the pros and cons of excluding the following payments from the measurement. - Variable lease payments linked to future use or sales - Optional payments relating to lease-extension option when a lessee is not reasonably certain to exercise the option.
Part 1: New Lease Accounting – IFRS 16 Leases Effect Analysis.
What are the top three industries most affected by IFRS 16 as measured by the present value of future payments for off-balance-sheet leases to total assets? Which leased assets propel them to the top three? Also, discuss the extent that smaller firms would be affected by IFRS 16.
Which payments are to be included in the measurement of lease assets and lease liabilities? Also, discuss the pros and cons of excluding the following payments from the measurement.
Variable lease payments linked to future use or sales
Optional payments relating to lease-extension option when a lessee is not reasonably certain to exercise the option.
Discuss the effects of the new accounting on the following items and ratios of lessees. Provide reason(s) behind all effects.
EBITDA, operating profit, and profit before tax
Operating cash flow, financing cash flow, and total cash flow
Debt to equity, current ratio, and return on total assets
Chapter 15 Solutions
Intermediate Accounting, 10 Ed
Ch. 15 - Prob. 15.2QCh. 15 - Prob. 15.3QCh. 15 - Prob. 15.4QCh. 15 - A lessee should classify a lease transaction as a...Ch. 15 - Lukawitz Industries leased non-specialized...Ch. 15 - In accounting for a finance lease/sales-type...Ch. 15 - What is selling profit on a sales-type lease? How...Ch. 15 - At the beginning of an operating lease, the lessee...Ch. 15 - At the beginning of an operating lease, the lessor...Ch. 15 - In accounting for an operating lease, how are the...
Ch. 15 - Briefly describe the conceptual basis for asset...Ch. 15 - In a financing lease, front loading of lease...Ch. 15 - The discount rate influences virtually every...Ch. 15 - A lease that has a lease term (including any...Ch. 15 - A lease might specify that lease payments may be...Ch. 15 - What is a purchase option? How does it affect...Ch. 15 - A six-year lease can be renewed for two additional...Ch. 15 - Culinary Creations leased kitchen equipment under...Ch. 15 - What situations cause us to remeasure a lease...Ch. 15 - Prob. 15.21QCh. 15 - Compare the way a purchase option that is...Ch. 15 - What nonlease costs might be included as part of...Ch. 15 - The lessors initial direct costs often are...Ch. 15 - When are initial direct costs recognized in an...Ch. 15 - Prob. 15.26QCh. 15 - Prob. 15.27QCh. 15 - Prob. 15.28QCh. 15 - When a company sells an asset and simultaneously...Ch. 15 - Prob. 15.30QCh. 15 - Lease classification LO151 (Note: Brief Exercises...Ch. 15 - Lease classification LO151, LO152 Corinth Co....Ch. 15 - Lessee and lessor; calculate interest;...Ch. 15 - Finance lease; lessee; balance sheet effects ...Ch. 15 - Finance lease; lessee; income statement effects ...Ch. 15 - Sales-type lease; lessor; income statement effects...Ch. 15 - Prob. 15.7BECh. 15 - Operating lease LO154 (Note: Brief Exercises 8...Ch. 15 - Operating lease LO154 At the beginning of its...Ch. 15 - Short-term lease LO155 King Cones leased ice...Ch. 15 - Uncertain lease term LO156 Java Hut leased a...Ch. 15 - Uncertain lease payments LO156 On January 1,...Ch. 15 - Purchase option; lessor; sales-type lease LO152,...Ch. 15 - Residual value; sales-type lease LO152, LO153,...Ch. 15 - Guarantee d residual value LO156 On January 1,...Ch. 15 - Lessors initial direct costs; sales-type lease ...Ch. 15 - Lease classification LO151 Each of the four...Ch. 15 - Prob. 15.9ECh. 15 - Lessor calculation of annual lease payments;...Ch. 15 - Sales-type lease; lessor; income statement effects...Ch. 15 - Calculation of annual lease payments; residual...Ch. 15 - Lease concepts; finance/sales-type leases;...Ch. 15 - Calculation of annual lease payments; purchase...Ch. 15 - Prob. 15.37ECh. 15 - Prob. 15.38ECh. 15 - Prob. 15.39ECh. 15 - Lessors initial direct costs; operating and...Ch. 15 - Research Case 151 FASB codification; locate and...Ch. 15 - Ethics Case 153 Leasehold improvements LO153...Ch. 15 - Communication Case 155 Wheres the gain? Appendix...Ch. 15 - Prob. 15.6DMPCh. 15 - Prob. 1CCTCCh. 15 - Prob. 2CCTC
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- Part 1: New Lease Accounting –IFRS 16 Leases Effect Analysis. Identify differences between IFRS 16 and U.S. GAAP new lease accounting (ASC Topic 842). Based on these differences, discuss which one (IFRS or U.S. GAAP) you favor and why? Discuss three main features of the two transition methods for lessees under ASC 842 and IFRS 16. Which transition method would investors likely prefer? Why? Which transition method may be preferred by companies? Why?arrow_forwardE 15-26 Lease concepts; finance/sales- type leases; guaranteed and unguaranteed residual value LO15-2, LO15-6 Each of the four independent situations below describes a sales-type lease in which annual lease payments of $100,000 are payable at the beginning of each year. Each is a finance lease for the lessee. Determine the following amounts at the beginning of the lease: A. The lessor's: 1. Lease payments 2. Gross investment in the lease 3. Net investment in the lease B. The lessee's: 4. Lease payments 5. Right-of-use asset 6. Lease liability Lease term (years) Lessor's and lessee's interest rate Residual value: Estimated fair value Guaranteed by lessee 1 7 9% 0 0 Situation 2 7 11% $50,000 0 3 8 10% 4 8 12% $8,000 $50,000 $8,000 $60,000arrow_forwardWhat is the net lease receivable of the lessor at the commencement of the lease? *a. 4,534,000b. 3,790,000c. 4,990,000d. 2,590,000arrow_forward
- *attached is the problem REQUIRED: choose the letter What is the lease liability on Dec. 31, 2020? a. 1,352,000b. 1,152,000c. 1,067,200d. 1,552,000 What is the lease liability to be reported as non-current on Dec 31, 2020? a. 1,215,920b. 1,090,240c. 1,067,200d. 973,920arrow_forwardExercise 15-9 (Algo) Lessor calculation of annual lease payments; lessee calculation of asset and liability [LO15-2] Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit rate of return. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Situation 1 2 3 Lease term (years) 11 21 4 Lessor's rate of return (known by lessee) 10% 8% 11% Lessee's incremental borrowing rate 11% 9% 10% Fair value of lease asset $800,000 $1,180,000 $385,000 Required: a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as a right-of-use asset and a lease liability, for each of the above situations. Note: Round your answers to the nearest whole dollar.arrow_forwardExercise 15-9 (Algo) Lessor calculation of annual lease payments; lessee calculation of asset and liability [LO15-2] Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit rate of return. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Lease term (years) Lessor's rate of return (known by lessee) Lessee's incremental borrowing rate Fair value of lease asset Situation 1 Situation 2 Situation 3 Lease Payments Right-of-use Asset/Lease 1 Payable 10 10% 11% $790,000 Situation 2 20 8% 9% Required: a. & b. Determine the amount of the annual lease payments as calculated by the lessor and the amount the lessee would record as a right-of-use asset and a lease liability, for each of the above situations. Note: Round your answers to the nearest whole dollar. $1,170,000 5 11% 10% $375,000arrow_forward
- *see attached What is the gross investment in the lease? a. 8,652,705b. 9,052,705c. 6,000,000d. 8,252,705arrow_forwardPROBLEM 3C Assume that ADB Leasing Corp. and WXY Inc. sign a lease contract effective on January 1, 2019where ADB Leasing leases to WXY Inc. a bulldozer. The terms and provisions of the lease contract andother pertinent date are as follows:• The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rentalpayments of P20,711.11 at the beginning of each year (annuity-due basis).• The bulldozer has a fair value at the commencement of the lease of P100,000, an estimatedeconomic life of five years, and a guaranteed residual value of P5,000. (WXY expects thatit is probable that the expected value of the residual value at the end of the lease will be greaterthan the guaranteed amount of P5,000.)• The lease contains no renewal options. The bulldozer reverts to ADB Leasing at the terminationof the lease.• WXY's incremental borrowing rate is 5 percent per year.• WXY depreciates its equipment on a straight-line basis.• ADB Leasing sets the annual rental rate to…arrow_forwardExercise 15-1 (Static) Lease classification [LO15-1] Lease term (years) Asset's useful life (years) Asset's fair value Purchase option that is reasonably certain to be exercised? Annual lease payments. Lessor's implicit rate (known by lessee) Lessee's incremental borrowing rate Situation 1. 2 3 4 $44,000 Mo Beginning of year 5% 5x Lease Classification 4 Situation $45,000 Yes End of year 60% 5% 3 4 6 $41,000 Required: Each of the four independent situations above describes a lease requiring annual lease payments of $10,000 For each situation, determine the appropriate lease classification by the lessee. Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) No Beginning of year 5% 5% $38,000 No End of year 6%arrow_forward
- Question 5 The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee. Inception date: May 1, 2025 Annual lease payment due at the beginning of each year, beginning with May 1, 2025: $30,000 Bargain-purchase option price at end of lease term = $10,000 Lessor's implicit rate = 7% The lease term ends in FIVE years on April 30, 2030. What is the present value of the asset being leased? Recommendation: draw a timeline of the cash flows from the lessee to the lessor. Your Answer: Answerarrow_forwardQ9 he objective of IAS 17 Leases is to prescribe the appropriate accounting treatment and required disclosures in relation to leases. Which TWO of the following situations would normally lead to a lease being classified as a finance lease? (i) The lease transfers ownership of the asset to the lessee by the end of the lease term. (ii) The lease term is for approximately half of the economic life of the asset. (iii) The lease assets are of a specialised nature such that only the lessee can use them without major modifications being made. (iv) At the inception of the lease, the present value of the minimum lease payments is 60% of what the leased asset would cost to purchase. Select one: a. (ii) and (iii) b. (iii) and (iv) c. (i) and (ii) d. (i) and (iiiarrow_forwardPROBLEM NO. 3 Assume that DBP Leasing Corp. and Minasugbo Inc. sign a lease contract effective on January 1, 2019 where DBP Leasing leases to Minasugbo a bulldozer. The terms and provisions of the lease contract and other pertinent date are as follows: • The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rental payments of P20,711.11 at the beginning of each year (annuity-due basis). The bulldozer has a fair value at the commencement of the lease of P100,000, an estimated economic life of five years, and a guaranteed residual value of P5,000. (Minasugbo expects that it is probable that the expected value of the residual value at the end of the lease will be greater than the guaranteed amount of P5,000.) The lease contains no renewal options. The bulldozer reverts to DBP Leasing at the termination of the lease. Minasugbo's incremental borrowing rate is 5 percent per year. • Minasugbo depreciates its equipment on a straight-line basis. DBP Leasing…arrow_forward
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Accounting for Finance and Operating Leases | U.S. GAAP CPA Exams; Author: Maxwell CPA Review;https://www.youtube.com/watch?v=iMSaxzIqH9s;License: Standard Youtube License