Questions and Answers
Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease?
In an operating lease in which the asset's economic life and lease term are different, what is true?
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?
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What is the total increase in earnings (pretax) on Grant's 2021 income statement?
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A lease is classified as a finance lease if the usual risks and rewards are retained by the lessor.
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Under IFRS, a lessee will reassess variable lease payments that depend on an index or a rate:
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What will be the balance in the right-of-use asset after two years for Geron Co.?
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What is the balance in the right-of-use asset at December 31, 2021, for Natick Co.?
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What amount of interest revenue from the lease should King report in its 2021 income statement?
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What is the total increase in earnings (pretax) in King's 2021 income statement?
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What amount of total decrease in earnings (pretax) in Nichols' 2021 income statement would be recorded?
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What would be the total increase in earnings (pretax) on Crawford's 2021 income statement?
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Which of the following is required in order for a contract to contain an identified asset?
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Which of the following is not required in order for a contract to contain a lease?
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A gain resulting from a sale-leaseback transaction should:
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Assuming a tax rate of 40%, what should List Corporation report net income of?
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The most common cause for variation in reported amounts for deferred taxes between U.S. GAAP and IFRS are:
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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!