F 6 Leases, Derivatives, Foreign Currency Accounting, income taxes

Which of the following situations would require that a lessor NOT book a lease as an operating lease under GAAP?
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Which of the following situations would require that a lessor NOT book a lease as an operating lease under GAAP?
the lease term represents 80% of the economic life of the asset leased
a lease term which represents 80% of the economic life of the asset will meet the E in OWNES criteria meaning that the lessee will book this as a financing lease and the lessor will book it as a sales type lease
On January 1, Year 1, Frost Co. entered into a two-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on 1/1/Y1 and ends on 12/31/Y2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the minimum lease payments is 13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a finance lease under GAAP?
the fair value of the computers on 1/1/Y1 is 14,000

13,000/14,000 = 93%
Bain Co. entered into a 10 year lease agreement for a new piece of equipment worth 500,000. At the end of the lease, Bain will have the option to purchase the equipment. Which of the following would require the lease to be accounted for as a finance lease under GAAP?
the estimated life of the asset is 12 yearsif the lease term is 10 years and the useful life of the asset is 12 years, then the 75% criteria is met (10.12=83%) and the lease will be accounted for as a finance lease
Which of the following is a characteristic of a finance lease under GAAP?
the lease contains a written purchase option that the lessee is reasonably certain to exercise
Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease A: FINANCE LEASE
Lease B: FINANCE LEASE

both leases have terms equal to or more than 75% of their estimated economic life; therefore, both are finance leases under GAAP
Assuming GAAP and given no other information on the terms of the lease, the lessee will account for a lease as operating in all of the following situations except:
the present value of the minimum lease payments is equal to 95% of fair value
***when the present value of the lease payments exceeds 90% of the fair value of the asset, the lessee will likely treat the lease as a finance lease
Under GAAP, one criterion for a finance lease classification is that the term of the lease represents the major part of the leased property's estimated economic life at the inception of the lease. What is a reasonable minimum threshold as a percentage for representing a major part of the asset's economic life?
75%

a reasonable minimum threshold is that the lease term be greater than or equal to 75% of the economic life of the leased asset
On January 1, a company enters into an operating lease for office space and receives control of the property to make leasehold improvements. The company begins alterations to the property on March 1 and the company's staff moves into the property on May 1. The monthly lease payments begin on July 1. The recognition of lease expense for the new offices should begin in which of the following months?
the lessee should begin the recognition of lease expenses for the new office in January, as this is the commencement date. The commencement date is the date the underlying asset is made available to the lessee for use. Lease expense is recorded over the lease term
Assuming that no direct costs are involved, what are the components of the lease receivable for a lessor involved in a direct financing lease?
the minimum lease payments plus residual value
As an inducement to enter a lease, Graf Co., a lessor, granted Zep, Inc., a lessee, twelve months of free rent under a five year operating lease. The lease was effective on 1/1/Y1 and provides for monthly lease payments to begin 1/1/Y2. Zep made the first lease payment on 12/30/Y1. In its 12/31/Y1 IS, Graf should report lease revenue in an amount equal to:
1/5 of the total cash to be received over the life of the lease
Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease? Depreciation Expense Interest revenue A. No Yes B. No NoDepreciation Expense Interest revenue A. No YesWhich of the following statements regarding the lessor's accounting under an operating lease is most accurate?a refundable security deposit is booked as a liability until refunded to the lesseethe lessee should recognize amounts probable of being owed under a residual value guarantee as a component of lease paymentson the commencement date of the lease.Able sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of sale, the gain should be reported as: A. Operating income. B. An extraordinary item, net of income tax. C. A separate component of stockholders' equity. D. A failed saleA failed saleAnton owns equipment originally purchased four years ago for $325,000. On January 1, Year 5 Anton sells the equipment to Bridges for 208,000. The equipment has a remaining useful life of six years, a carrying value of 195,000, and a fair value of 202,000. Bridges has agreed to lease the equipment back to Anton for year years with annual payments of 48,375 and an implicit rate of 5.25%. The lease qualifies as a sale. When the transfer takes place Anton will record a financing liability equal to: A. 0 B. 6,000B 208,000 sale-202,000 fv= 6,000Watts Inc. entered into an agreement to lease a printer from jennings co. The lease is for 3 years and does not stipulate owner transfership or contain a written option. Printer has a 5 year life and the equipment is standard. The net present value of the lease payments is half of the fair value of the equipment and there is no residual guarantee. How would Watts and Jennings account for lease Watts Jennings A. Operating OperatingWatts Jennings A. Operating OperatingOn January 1, year 1, a shipping company sells a boat and leases it from the buyer in a sale-leaseback transaction. At the end of the 10-year lease, ownership of the boat reverts to the shipping company. The fair value of the boat, at the time of the transaction, was less than its undepreciated cost. Which of the following outcomes most likely will result from the sale-leaseback transaction? A. The boat will not be classified in property, plant and equipment of the shipping company. B. The shipping company will recognize the total profit on the sale of the boat in the current year. C. The shipping company will recognize in the current year a loss on the sale of the boat.C. The shipping company will recognize in the current year a loss on the sale of the boat.On April 1, Year 1, Hall Fitness Center leased its gym to Dunn Fitness Center under a 4-year operating lease. Hall normally charges $6,000 per month to lease its gym, but as an incentive, Hall gave Dunn half off the first year's rent and one quarter off the second year's rent. Dunn's rental payments were as follows: Year 1: 12 × $3,000 = $36,000 Year 2: 12 × $4,500 = $54,000 Year 3: 12 × $6,000 = $72,000 Year 4: 12 × $6,000 = $72,000 Dunn's rent payments were due on the first day of the month, beginning on April 1, Year 1. What amount should Dunn report as rent expense in its monthly income statement for April, Year 3?The annual rent before incentives is $72,000 ($6,000 × 12 months), but the first year's rent is $36,000 ($72,000 × 50%), and the second year's rent is $54,000 ($72,000 × 75%). Consequently, the straight-line monthly rent expense over the 4-year term of the operating lease is $4,875 [($36,000 + $54,000 + $72,000 + $72,000) ÷ (12 months per year × 4 years)].