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Questions and Answers
Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease?
Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease?
- The lease term is greater than two-thirds of the economic life of the asset. (correct)
- The lease transfers ownership of the leased asset to the lessee at the end of the lease term.
- The lessee has the option of acquiring the asset during or at the end of the lease term at a bargain price.
- The present value of the lease payments is substantially all of the fair value of the leased asset.
In an operating lease in which the asset's economic life and lease term are different, what is true?
In an operating lease in which the asset's economic life and lease term are different, what is true?
- The lessor amortizes the leased asset over the term of the lease.
- The lessee amortizes the leased asset over the term of the lease at a straight-line amount.
- The lessee amortizes the leased asset at an amount that increases each period. (correct)
- The lessee amortizes the asset over its economic life.
On a five-year lease of equipment with a fair value of $485,100, how much interest revenue will Universal earn over the life of the lease?
On a five-year lease of equipment with a fair value of $485,100, how much interest revenue will Universal earn over the life of the lease?
96,575
What amount of interest revenue from the lease should Barr report in its 2021 income statement?
What amount of interest revenue from the lease should Barr report in its 2021 income statement?
What is the total increase in earnings (pretax) on Grant's 2021 income statement?
What is the total increase in earnings (pretax) on Grant's 2021 income statement?
A lease is classified as a finance lease if the usual risks and rewards are retained by the lessor.
A lease is classified as a finance lease if the usual risks and rewards are retained by the lessor.
Under IFRS, a lessee will reassess variable lease payments that depend on an index or a rate:
Under IFRS, a lessee will reassess variable lease payments that depend on an index or a rate:
What will be the balance in the right-of-use asset after two years for Geron Co.?
What will be the balance in the right-of-use asset after two years for Geron Co.?
What is the balance in the right-of-use asset at December 31, 2021, for Natick Co.?
What is the balance in the right-of-use asset at December 31, 2021, for Natick Co.?
What amount of interest revenue from the lease should King report in its 2021 income statement?
What amount of interest revenue from the lease should King report in its 2021 income statement?
What is the total increase in earnings (pretax) in King's 2021 income statement?
What is the total increase in earnings (pretax) in King's 2021 income statement?
What amount of total decrease in earnings (pretax) in Nichols' 2021 income statement would be recorded?
What amount of total decrease in earnings (pretax) in Nichols' 2021 income statement would be recorded?
What would be the total increase in earnings (pretax) on Crawford's 2021 income statement?
What would be the total increase in earnings (pretax) on Crawford's 2021 income statement?
Which of the following is required in order for a contract to contain an identified asset?
Which of the following is required in order for a contract to contain an identified asset?
Which of the following is not required in order for a contract to contain a lease?
Which of the following is not required in order for a contract to contain a lease?
A gain resulting from a sale-leaseback transaction should:
A gain resulting from a sale-leaseback transaction should:
Assuming a tax rate of 40%, what should List Corporation report net income of?
Assuming a tax rate of 40%, what should List Corporation report net income of?
The most common cause for variation in reported amounts for deferred taxes between U.S. GAAP and IFRS are:
The most common cause for variation in reported amounts for deferred taxes between U.S. GAAP and IFRS are:
Study Notes
Lease Classification Criteria
- A lease is classified as a finance lease if the usual risks and rewards are transferred to the lessee.
- The presence of options to purchase the asset at a bargain price or if the lease term exceeds two-thirds of the asset's economic life aren't sufficient alone for classification as a finance lease.
Operating Lease Amortization
- In an operating lease with different economic life and lease term, amortization is typically at an increasing amount each period.
Interest Revenue Calculation
- Universal Leasing Corp. expects a total interest revenue of $96,575 over five years from a lease with an annual payment of $116,334.
- Barr Machinery must report interest revenue for 2021 as calculated from the present value of asset lease payments after accounting for received payments.
Right-of-Use Asset Balances
- In finance leases, the right-of-use asset is amortized on a straight-line basis, resulting in reduced book value over time.
- After two years of a ten-year finance lease, a right-of-use asset balance reduced to $320,000 indicates annual amortization of $40,000.
Operating Lease Amortization Considerations
- In operating leases, the total balance of a right-of-use asset at year-end reflects interest expense and amortization adjustments, leading to specific year-end balances.
Total Earnings Impact
- A lease agreement that transfers control allows for reporting both interest revenue and selling profit as increases in pre-tax earnings.
- For Nichols Fruits, the total increase in earnings due to leasing arrangements totaled $10.4 million, combining selling profit and interest revenue.
Sale-Leaseback Transactions
- Gains from sale-leaseback transactions where the seller retains usage rights are amortized over the lease term and deferred initially.
Deferred Taxes Reporting
- Differences between reported accounting income and taxable income arise from temporary differences, impacting reported net income.
- The most common cause for variations in reported deferred tax amounts between U.S. GAAP and IFRS stems from non-tax differences.
Identified Asset Criteria
- For a lease to exist, the asset must be property, plant, or equipment, and cannot include substitutes during the lease period as identified benefits.
- Not all contract assets need to be explicitly specified to qualify as a lease; customer benefits and control during the contract term are more critical factors.
Tax Reporting
- Taxable income adjustments due to temporary differences should reflect correctly on financial statements, yielding a net income of $54,000 at a 40% tax rate from a pretax income of $90,000.
These notes encapsulate key principles and calculations related to leases, tax impacts, and financial reporting in clarity and brevity, essential for effective study sessions.
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Description
Test your knowledge on finance lease classifications with this quiz. Identify the criteria that do not qualify a lease as a finance lease based on ownership transfer, lease term, and payment present value. Perfect for accounting students!
