Question 1

Recording a manufacturer/dealer lease
On January 1, Lexy Corp. leases a truck they have manufactured to Roxy Corp. Lexy has calculated the lease payments to Roxy to be $ 40,000 per year for 4 years and the sales price of the truck is $ 130,000. It cost Lexy $ 100,000 to manufacture the truck. Record the journal entries to set up the lease on January 1 on Lexy's books.

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On January 1, Lexy...

Question 2

Operating leases for lessors
Discuss how lessors account for operating leases including the lease payments, depreciation and other direct costs. Discuss the disclose requirements for both ASPE and IFRS 16.

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Discuss how lessors account...

Question 3

Sale-leaseback transactions
Why would a company enter into a sale-leaseback transaction?

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Why would a company enter into...

Question 4

Differences between ASPE and IFRS 16
Discuss the differences between ASPE and IFRS 16 in recognition of leases by lessee.

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Discuss the...

Question 5

IFRS 16 disclosure requirements for non-capital leases
What disclosures are required under IFRS 16 for leases that are exempt from right-of-use lease accounting?

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What...

Question 6

Accounting for a direct financing lease by the lessor
Explain the procedures used to account for a direct financing lease (ASPE) or finance lease (IFRS) by the lessor.

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Question 7

IFRS 16 additional disclosures
A right-of-use or capital lease has similar disclosures as in the standards for long-term liabilities and some additional disclosures. What are the additional disclosures?

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A right-of-use or capital...

Question 8

Differences between ASPE and IFRS 16
Discuss the differences between ASPE and IFRS 16 in recognition of leases by the lessor.

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Discuss the...

Question 9

Accounting for a sales-type lease by the lessor
Explain the procedures used to account for a sales-type lease (ASPE) or manufacturer or dealer lease (IFRS) by the lessor.

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Question 10

Lessee and lessor accounting (sale-leaseback)
On January 1, 2020, Kirk Corp. sells land to Spock Inc. for $ 2,000,000, and immediately leases the land back. Both companies follow ASPE. The following information relates to this transaction:
1. The term of the non-cancellable lease is 20 years and the title transfers to Kirk at the end of the lease term.
2. The land has a cost basis of $ 1,600,000 to Kirk.
3. The lease agreement calls for equal rental payments of $ 203,704 at the end of each year.
4. The land has a fair value of $ 2,000,000 on January 1, 2020.
5. The incremental borrowing rate of Kirk Corp. is 10%. Kirk is aware that Spock set the annual rentals to ensure a rate of return of 8%.
6. Kirk pays all executory costs, which total $ 170,000 in 2020.
7. Collectibility of the rentals is reasonably assured, and any unreimbursable costs under the lease that are likely to be incurred can be reasonably estimated by the lessor.
Instructions
a) Prepare all the 2020 journal entries on the books of Kirk Corp. to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.)
b) Prepare all the 2020 journal entries on the books of Spock Inc. to reflect the above purchase and lease transactions.

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On January 1,...

Question 11

Reasons companies resist capital leases
Companies have resisted having an increased recognition of capital leases, what arguments have companies used against capitalization?

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Companies have resisted...

Question 12

ASPE revenue recognition tests
ASPE and IFRS have similar criteria to assess whether a lease is an operating lease or a financing lease for lessors, with ASPE having two additional revenue-recognition-based tests that must be passed. What are they?

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ASPE and IFRS have...

Question 13

Leases with real estate
If Pink Inc. leased land to Blue Co. and the land did not transfer to Blue Co. at the end of the lease, what type of lease would it be and why?

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If Pink Inc. leased...

Question 14

Lessee and lessor accounting (sale-leaseback)
On January 1, 2020, Baritone Inc. sells machinery to Contralto Corp. at its fair value of $ 1,200,000 and immediately leases it back. The machinery's original cost was $ 2,000,000, and its book value at January 1, 2020 was $ 1,050,000. The lease is for 10 years and the implicit interest rate is 10%. The lease payments of $ 177,500 start on January 1, 2020. Baritone uses straight-line depreciation and assumes there will be no residual value at the end of the 10 years. Assume this lease will be accounted for as a capital (finance) lease by both parties.
Instructions
a) Prepare all of Baritone's 2020 entries to reflect the above sale and lease transactions.
b) Prepare all of Contralto's 2020 entries to reflect the above sale and lease transactions.

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On January 1,...

Question 15

Calculation of lease amounts for lessor for Manufacturer/Dealer leases with guaranteed residual amount.
Cow Co. is a farming equipment dealer who reports using IFRS. It plans to lease a piece of farming equipment to Horse Inc. and wants to earn a profit on the equipment as well as earn interest. The details of the lease are as follows:
-It will be a 5 year lease and will have annual rental payments due at the beginning of the year.
-The rate of return Cow Co. wants to earn on the equipment is 7%.
-The estimated residual value (guaranteed) is $ 10,000 (the present value of which is $ 7,130).
-The annual lease payments are $ 55,359 (the present value of which is $ 242,870); and
-The leased equipment has an $ 200,000 cost to the dealer, Cow Co.
Instructions
Calculate the gross investment, unearned interest income, sales revenue, cost of goods sold and gross profit for Cow Co.

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Question 16

ASPE, a lease is classified as a capital lease if it substantially transfers the risks and rewards of ownership from the lessor to the lessee and classified as an operating lease if the risks and rewards are not substantially transferred. Given this, explain the risks and rewards of ownership.

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Question 17

Operating lease calculations
On January 1, 2020, Lewis Corp. purchased a building for $ 900,000, with the intention of leasing it. The building is expected to have a 20 year life, no residual value, and will be depreciated on a straight-line basis. On April 1, 2020, under a cancellable lease, Lewis leased the building to Clark Company for $ 300,000 a year ($ 25,000 a month) for a four-year period ending March 31, 2024. Clark paid $ 300,000 to Lewis on April 1, 2020. During calendar 2020, Lewis incurred $ 30,000 in maintenance and other executory costs under the provisions of the lease. This lease is properly classified as an operating lease by both parties.
Instructions
a) How much income before income taxes will Lewis report from this lease for calendar 2020?
b) How much rent expense will Clark report in connection with this lease for calendar 2020?

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On January 1, 2020, Lewis...

Question 18

Operating lease journal entries for the lessor
On January 1, 2020 Green Company, a lessor, provides an operating lease of a car to Red Inc. The annual lease payments are $ 6,000 and the car is on Green's books at a cost of $ 25,000, the expected useful life of the car is 5 years. Record the 2020 journal entries for Green Company.

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On...

Question 19

Lease terminology
For operating, sales-type, and financing-type leases, what is the appropriate ASPE and IFRS terminology for each?

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For operating, sales-type, and financing-type leases,...

Question 20

Calculation of lease amounts for lessor for manufacturer/dealer leases with unguaranteed residual value
Cow Co. is a farming equipment dealer who reports using IFRS. It plans to lease a piece of farming equipment to Horse Inc. and wants to earn a profit on the equipment as well as earn interest. The details of the lease are as follows:
-It will be a 5 year lease and will have annual rental payments due at the beginning of the year.
-The rate of return Cow Co. wants to earn on the equipment is 7%.
-The estimated residual value (unguaranteed) is $ 10,000 (the present value of which is $ 7,130).
-The annual lease payments are $ 55,359 (the present value of which is $ 242,870); and
-The leased equipment has a $ 200,000 cost to the dealer, Cow Co.
Instructions
Calculate the gross investment, unearned interest income, sales revenue, cost of good sold and gross profit for Cow Co.

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Quiz 8: Leases

Operating leases for lessors Discuss how lessors account for operating leases including the lease payments, depreciation and other direct costs. Discuss the disclose requirements for both ASPE and IFRS 16.

Sale-leaseback transactions Why would a company enter into a sale-leaseback transaction?

Differences between ASPE and IFRS 16 Discuss the differences between ASPE and IFRS 16 in recognition of leases by lessee.

IFRS 16 disclosure requirements for non-capital leases What disclosures are required under IFRS 16 for leases that are exempt from right-of-use lease accounting?

Accounting for a direct financing lease by the lessor Explain the procedures used to account for a direct financing lease (ASPE) or finance lease (IFRS) by the lessor.

IFRS 16 additional disclosures A right-of-use or capital lease has similar disclosures as in the standards for long-term liabilities and some additional disclosures. What are the additional disclosures?

Differences between ASPE and IFRS 16 Discuss the differences between ASPE and IFRS 16 in recognition of leases by the lessor.

Accounting for a sales-type lease by the lessor Explain the procedures used to account for a sales-type lease (ASPE) or manufacturer or dealer lease (IFRS) by the lessor.

Reasons companies resist capital leases Companies have resisted having an increased recognition of capital leases, what arguments have companies used against capitalization?

ASPE revenue recognition tests ASPE and IFRS have similar criteria to assess whether a lease is an operating lease or a financing lease for lessors, with ASPE having two additional revenue-recognition-based tests that must be passed. What are they?

Leases with real estate If Pink Inc. leased land to Blue Co. and the land did not transfer to Blue Co. at the end of the lease, what type of lease would it be and why?

ASPE, a lease is classified as a capital lease if it substantially transfers the risks and rewards of ownership from the lessor to the lessee and classified as an operating lease if the risks and rewards are not substantially transferred. Given this, explain the risks and rewards of ownership.

Lease terminology For operating, sales-type, and financing-type leases, what is the appropriate ASPE and IFRS terminology for each?