Tutorial #5 – LEASING
1.
Lease M does not contain a bargain purchase
option, but the lease term is equal to 90% of the estimated economic life of the
leased property. Lease P does not transfer ownership of the property to the
lessee at the end of the lease term, but the lease term is equal to 75% of the
estimated economic life of the leased property. How should the lessee classify
these leases?
Lease M
Lease P
(a)
Finance Lease
Operating Lease
(b) Finance
Lease
Finance Lease
(c)
Operating Lease
Finance Lease
(d) Operating
Lease
Operating Lease
2.
For a finance lease, the amount recorded
initially by the lessee as a liability should normally
(a)
Exceed the total of the minimum lease payments
(b) Exceed
the present value of the minimum lease payments at the beginning of the lease
(c)
Equal the total of the minimum lease payments
(d) Equal
the present value of the minimum lease payments at the beginning of the lease.
3.
At the inception of a finance lease, the guaranteed residual value
should be
(a)
Included as part of minimum lease payments at present value
(b)
Included as part of minimum lease payments at future value
(c)
Included as part of minimum lease payments only to the extent that
guaranteed residual value is expected to exceed estimated residual value
(d)
Excluded from minimum lease payments
4.
On January 2, 1997, Noble Mining Co. (lessee) entered into a 5-year
lease for drilling equipment. Noble accounted for the acquisition as a finance
lease for $240,000, which includes a $10,000 bargain purchase option. At the end
of the lease, Noble expects to exercise the bargain purchase option. Noble
estimates that the equipment's fair value will be $20,000 at the end of its
8-year life. Noble regularly uses straight-line depreciation on similar
equipment. For the year ended December 31, 1997, what amount should Noble
recognize as depreciation expense on the leased asset?
(a)
$48,000
(b)
$46,000
(c)
$30,000
(d)
$27,500
5.
The lessee should amortize the capitalizable cost of the leased asset in
a manner consistent with the lessee's normal depreciation policy for owned
assets for leases that
Transfer ownership of the
Contain
a bargain
property to the lessee by the
purchase
option
end of the lease term
(a)
No No
(b)
No Yes
(c)
Yes
Yes
(d) Yes No
6.
A 3-year lease is initiated on 1/1/95 for equipment with an expected
useful life of 6 years. The equipment reverts back to the lessor upon expiration
of the lease agreement. Three payments are due to the lessor in the amount of
$60,000 per year beginning 31/12/95. An additional sum of $4,000 is to be paid
annually by the lessee for insurance. The lessee guarantees a $5,000 residual
value on 31/12/97 to the lessor. The leased asset is expected to also have a
$5,000 salvage value on 31/12/97; therefore the asset should be depreciated down
to the $5,000 expected residual value. The lessee's incremental borrowing rate
is 12% (same as the lessor's implicit rate).
Note
- (PVIFA 12%,6) = 4.1114;
(PVIF 12%,6)
= 0.5066;
(PVIFA 12%,3) = 2.4018 and (PVIF 12%,3) = 0.7118
Required:
a)
Why will the above lease be classified as a finance lease?
b)
Record all the necessary entries in the books of the lessee over the life
of the lease.
c)
What amount will be shown on the lessee's balance sheet for lease
obligation outstanding as at 31/12/96?
d)
What are the total cash
payments made by the lessee over the life of the lease?
7.
A 4-year lease is initiated on 1/1/94 for equipment with an expected
useful life of 7 years. Four (4) annual payments of $50,000 each are due to the
lessor beginning 31/12/94. The lessee can exercise a bargain purchase option on
31/12/97 for $5,000. The expected residual value at 31/12/2000 is $3,000. The
lessee's incremental borrowing rate is 15% (lessor's implicit rate is unknown).
Note
- (PVIFA 15%,7) = 4.1604;
(PVIF 15%,7)
= 0.3759;
(PVIFA 15%,4) = 2.8550 and (PVIF 15%,4) = 0.5718
Required:
a)
Why will the above lease be classified as a finance lease?
b)
Record all the necessary entries in the books of the lessee over the life
of the lease.
c)
What amount will be shown on the lessee's balance sheet for lease
obligation outstanding as at 31/12/95