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# Intermediate Accounting Study Set 7

## Quiz 18 :Accounting for Leases

The ________ date is when the lease agreement is signed. The ________ date is the date on which the lessee is allowed to begin using the leased asset.
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Group I criteria provide guidance to operationalize the concept of ownership and control of an asset. To meet the Group I criteria, a transaction only needs to meet one of the five criteria. List those five criteria.
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1. The lease transfers ownership of the leased asset to the lessee at the end of the lease term. If the lease transfers ownership, then the lessee firm has, in essence, purchased the asset.
2. The lessee is given an option to purchase the asset that the lessee is reasonably certain to exercise. For example, it might be reasonably certain that the lessee would exercise a purchase option if the specified purchase price is well below the expected value of the leased asset at the completion of the lease term.
3. The lease term is for a major part of the economic life of the asset. If the lease term provides the lessee the use and control over substantially all of the asset's useful life, then the agreement should be considered equivalent to purchasing the asset.
4. The present value of the sum of the lease payments and any residual value the lessee guarantees to pay (that is not otherwise included in the lease payments) is equal to substantially all of the asset's fair value. The present value computation includes lease payments in the renewal periods, if any. Meeting this criterion implies that the lessee is providing the lessor compensation that is equivalent to the purchase of the asset.
5. The leased asset is of a specialized nature. An asset with a specialized nature has no alternative use to the lessor at the end of the lease term. Because the asset has no alternative use to the lessor, its specialized nature implies that the lessor must have transferred control over the asset to the lessee.

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In general, the cost of an asset over the life of the lease is lower than if the lessee purchased the asset.
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Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year. The lease payments are $78,000 per year. The fair value of the leased asset is$290,000. The lessor's deferred initial direct costs are equal to $24,000. The lessor's estimate of the unguaranteed residual asset is$115,000. Based on the above information, what is the implicit rate in the lease for Kataran?
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The initial direct costs cannot be deferred and the lessor must expense initial direct costs at the lease commencement.
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If the lessor meets any one of the five Group I criteria, then the lessor classifies the lease as a(n) ________. If the lessor meets both of the Group II criteria, but none of the Group I criteria, then the lessor classifies the lease as a(n) ________. If the transaction does not meet either the Group I or Group II criteria, then the lessor classifies the lease as a(n) ________.
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The Group II criteria seem like a simple way to achieve a reporting outcome. FASB wanted lessors to recognize a profit at lease commencement from nonoperating lease treatment due partly to a third-party residual value guarantee.
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When a company purchases equipment by issuing a long-term note, the interest element of the payment is tax deductible. However, if the company leases equipment, the entire lease payment may be tax deductible.
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The concept of substance over form can be applied to leases. Which lease terms are most important to understanding the economic substance of the lease contract?
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Present value of lease payments + Present value of guaranteed or unguaranteed residual asset = Fair value of leased asset + Deferred initial direct costs.
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Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year. The lease payments are $68,000 per year. The fair value of the leased asset is$280,000. The lessor's deferred initial direct costs are equal to $14,000. The lessor's estimate of the unguaranteed residual asset is$125,000. Based on the information above, what is the implicit rate?
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When there are several assets as part of the lease, only some must be separately identified.
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Which of the following items are not examples of initial direct lease costs?
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Which of the following assets is always considered a separate lease component in a lease, unless the impact on the financial statements of not separating it from the other asset(s) is insignificant?
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IFRS does not classify leases as operating and financing and does not distinguish two types of leases. Rather, lessee accounting treatment is the same for all leases under IFRS.
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After identifying a lease, both the lessee and the lessor are required to separate the various lease and nonlease components and allocate consideration to these components.
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Alpha Company has three components in their lease agreement: the building, the equipment and the maintenance service. Total consideration in the contract is \$500,000 per year. Alpha Company has identified the following standalone prices: Calculate the percentages and allocate the consideration to each component.
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In instances where there is not an observable standalone selling price, the lessor must use an estimate of the standalone selling price and allocate it based on which of the following methods?
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