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AFM391 Study Guide - Final Guide: Finance Lease, Operating Lease, 6 Years

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lemonbeetle804
16 Dec 2018
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM391
Professor
Sasan Saiy

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Document Summary

Operating lease, if the useful life of the asset is substantially longer than 5 years. There is no bpo and the present value of the lease payments is much less than the fair val ue of the leased asset. The following are the characteristics of a lease. Interest rate implicit in the lease (known to the lessee) Determine the present value of minimum lease payments and the appropriate classification of this lease for lessee. The lease payments are substantially all (>90%) of the fmv of the leased asset. On january 1, 2016, hc entered a lease to rent office space. ,000 per year, at the beginning of each year, for 10 years. The building"s estimated useful life is 30 years and its current fair value is estimated to be million. Hc and record the j/es for the first year of the lease. 10 year length of lea se is substantially less than 30 year length of useful life.

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Related Questions

Which of the following is a criterion for classifying a lease as a capital lease by a lessee?
A. The present value of the minimum lease payments is 75% or more of the fair value of the leased property.
B. The lease term is equal to 75% or more of the estimated economic life of the leased property.
C. The lease agreement contains an option to purchase the leased property at its fair value at the end of the lease term.
D. The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term.

Choose the correct answer

32. An essential element of a lease isthat the

a. lessor conveys less than his or her totalinterest in the property.

b. lessee provides a sinking fund equal to oneyear’s lease payments.

c. property that is the subject of the leaseagreement must be held for sale by the lessor prior to the draftingof the lease agreement.

d. term of the lease is substantially equal to theeconomic life of the leased property.

33. What impact does a bargainpurchase option have on the present value of the minimum leasepayments computed by the lessee?

a. There is no impact as the option does not enterinto the transaction until the end of the lease term.

b. The lessee must increase the present value of theminimum lease payments by the present value of the optionprice.

c. The lessee must decrease the present value of theminimum lease payments by the present value of the optionprice.

d. The minimum lease payments would be increased bythe present value of the option price if, at the time of the leaseagreement, it appeared certain that the lessee would exercise theoption at the end of the lease and purchase the asset at the optionprice.

34. The methods of accounting for alease by the lessee are

a. operating and capital lease methods.

b. operating, sales, and capital lease methods.

c. operating and leveraged lease methods.

d. None of these answers are correct.

35. Which of the following is a correct statement of one of thecapitalization criteria?

a. The lease transfers ownership of the property tothe lessor.

b. The lease contains a purchase option.

c. The lease term is equal to or more than 75% ofthe estimated economic life of the leased property.

d. The minimum lease payments (excluding executorycosts) equal or exceed 90% of the fair value of the leasedproperty.

Gerbil Leasing Company agrees to lease equipment to Playa Corporation on January 1, 2014. The following information relates to the lease agreement.

- The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.

- The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2014, is $700,000.

- At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Joseph estimates that the expected residual value at the end of the lease term will be $50,000. Playa amortizes all of its leased equipment on a straight-line basis.

- The lease agreement requires equal annual rental payments, beginning on January 1, 2014.

- The collectibility of the lease payments is probable.

- The lessor's implicit rate is unknown.

REQUIRED: Please show the calculation(s)/discussion of the test you use to answer the following questions:

1) What type of lease is this for the lessee?

2) What type of lease is this for the lessor?