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Exam 8: Leases

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Question 41

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Which of the following is NOT a potential advantage of leasing?

A) no tax advantages for the lessor
B) cheaper financing
C) 100% financing at fixed rates
D) protection against obsolescence

E) B) and D)
F) A) and D)

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Question 42

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On July 1, 2019, Huey Corp. leased heavy equipment to Duey Inc. for one year, at $ 60,000 a month. Duey returned the equipment on June 30, 2020, and the next day, Huey Corp. leased this equipment to Luey Ltd. for three years, at $ 75,000 a month. The original cost of the equipment was $ 3,200,000. The equipment, which has been continually on lease since July 1, 2017, is being depreciated on a straight-line basis over ten years with no residual value. Assuming that both the lease to Duey and the lease to Luey are appropriately recorded as operating leases for accounting purposes, how much net income (loss) before income taxes that each company would record as a result of the above facts for the year ended December 31, 2020?

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Question 43

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Regarding a basic capital (finance) lease for a lessee, which of the following statements is INCORRECT?

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.

For the lessor, what is included in the lease receivable account?

Under IFRS, if land is the sole property being leased, and title does transfer at the end of the lease, it should be accounted for as a(n)

Types of lessors Explain the difference between a manufacturer finance company and an independent finance company.

On January 1, 2020, Fern Corp. enters into an agreement with Nicki Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1) The term of the non-cancellable lease is three years with no renewal option. Payments of $ 543,244 are due on December 31 of each year. 2) The fair value of the machine on January 1, 2020, is $ 1,400,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3) Fern depreciates all its machinery on a straight-line basis. 4) Fern's incremental borrowing rate is 10%. Fern does not have knowledge of the 8% implicit rate used by Nicki. 5) Immediately after signing the lease, Nicki discovers that Fern is the defendant in a lawsuit that is sufficiently material to make collectibility of future lease payments doubtful. From Fern's viewpoint, what type of lease is this?

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

The lease liability under IFRS 16 is amortized using

Use the following information for questions 31-32. On January 2, 2020, Cruise Ltd. signed a ten-year non-cancellable lease for a heavy-duty drill press. The lease required annual payments of $ 52,500, starting December 31, 2020, with title passing to Cruise at the end of the lease. Cruise is accounting for this lease as a capital (finance) lease. The drill press has an estimated useful life of 20 years, with no residual value. Cruise uses straight-line depreciation for all its plant assets. The lease payments were determined to have a present value of $ 352,279, based on an implicit interest rate of 8%. -On their 2020 income statement, how much depreciation expense should Cambridge report in connection with this lease?

On January 1, 2020, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1) The term of the non-cancellable lease is three years with no renewal option. Payments of $ 271,622 are due on December 31 of each year. 2) The fair value of the machine on January 1, 2020, is $ 700,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3) Marlene depreciates all its machinery on a straight-line basis. 4) Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich. If Dietrich records this lease as a finance lease, what amount would be recorded as Lease Receivable at the inception of the lease?

On July 1, 2020, Justin Ltd., a dealer in machinery and equipment, leased equipment to Trudeau Inc. The lease is for ten years, and at the end of the lease period, title will pass to Trudeau. Justin requires ten equal annual payments of $ 62,100 on July 1 of each year, and Trudeau made the first payment on July 1, 2020. Justin had purchased the equipment for $ 390,000 on January 1, 2020, and established a selling price of $ 500,000 (which was fair value at July 1, 2020) . Assume that, at July 1, 2020, the present value of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $ 450,000. The useful life of the equipment is 12 years. For the year ended December 31, 2020, what is the amount of gross profit and interest income that Justin should record regarding this lease?

Assume Red Corp. (a company reporting under IFRS) wants to earn an 4% return on its investment of $ 600,000 in an asset that is to be leased to Blue Corp. for ten years with an annual rental due in advance each year. How much should Red charge for annual rental assuming there is no purchase option that is reasonably certain to be exercised by Blue Corp.?

Which of the following is a correct statement regarding one of the ASPE capitalization criteria?

Initial direct costs are

On January 1, 2020, Dionne Ltd. signs a 10-year non-cancellable lease agreement to lease a storage building from Seline Inc. Seline is in the business of leasing/selling property. Collectibility of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs) . Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement: 1) The agreement requires equal payments at the end of each year. 2) At January 1, 2020, the fair value of the building is $ 900,000 and Seline's book value is $ 750,000. 3) The building has an estimated economic life of 10 years, with no residual value. Dionne uses straight-line depreciation for all its depreciable assets. 4) At the termination of the lease, title to the building will transfer to the lessee. 5) Dionne's incremental borrowing rate is 11%. Seline Inc. set the annual rental to ensure a 10% rate of return. The lessor's implicit rate is known to Dionne. 6) The yearly lease payment includes $ 3,000 executory costs related to taxes on the property. From the lessor's viewpoint, what type of lease is this?

For a lessee, the minimum lease payments may include

items, under IFRS 16, are included in the definition of a lease payment?

how a lessor determines a rental amount to charge in a lease arrangement. Instructions