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Flashcards in 13E: Wrong Answers Deck (46):

Accrued rent receivable equation

Accrued rent receivable = rent revenue - cash collections


Leasehold improvements are capitalized and amortized over...

The shorter of the remaining life of the lease and the useful
Life of improvements


When the residual value is guaranteed by a third party, the lessee's minimum lease payments include only...

The rentals


If interest payments are made on January 1st of each year on a capital lease, can the principal amount be affected on October 1st by accrued interest?



When calculating the initial lease liability, annual Executory costs are...3

1 not an expense or liability until incurred

2 excluded from minimum lease payments

3 not reflected in initial lease liability


In a six year capital lost starting December 31, year 1:
Does the first payment made on December 31, yr. 1 include interest expense? Does it include a lease liability?

Includes lease liability, but first payment doesn't include interest


If the lease term is 5 years and the useful life is 8 years, what amount will be used to calculate depreciation if a bargain purchase option is exercised?

8 years

Because intend to use it over its useful life


Note disclosure: Aggregate amount for lease term

Is total remaining lease payments in the agreement


Note disclosure: amount for appropriate required period

Total lease payments over next 5 years


When a bargain purchase option exists, at the end of the lease the balance in the lease payable column should equal...

The bargain purchase option price


Failure to include the present value of the bargain purchase option price in the beginning present value of the lease would result in...

An ending balance in the lease payable column of zero


Sale leaseback arrangements are treated as though...

2 transactions were a single financing transaction if the lease
Qualifies as a capital lease


In a sale leaseback arrangement any gIn or loss is deferred and amortized over the life of the lease term if...

possession reverts to lessor


In a sale leaseback arrangement any gIn or loss is deferred and amortized over the economic life if...

Ownership transfers to the lessee


In a sale leaseback transaction, the seller lessee has retained the property, the gain on sale should be...

Deferred for both capital and operating leases


An example of an operating lease in which substantially all of the remaining use of the leased asset is retained by the lessee occurs when the lease term begins...

Within the last 25% of the asset's original useful life


Deferred gain from sale leaseback transaction acts as...

Asset valuation allowance


Deferred gain acts as an asset valuation allowance resulting in net amount shown for leased asset being equal to...

Same carrying value as if sale and leaseback transaction had
Not occurred


A modification to a capital lease that changes the classification of the lease to an operating lease requires the transaction be accounted for as...

A sales leaseback transaction, defer gain and recognize it over
Life of operating lease


How do you record the journal entry for a capital lease payment made by the lessee?

Capital lease liability. Xxx
Cash. Xxx


How do you record the journal entry of the lessee for expenses associated with a capital lease?

Depreciation exp. Xxx
Accumulated depr. Xxx

Interest expense. Xxx
Capital lease liability. Xxx


Sales type lease

Sales revenue (the present value of the minimum lease payments)
Less the carrying amount of the leased asset

is reported on the Lessor's income statement at the inception of the lease


Direct financing lease

Interest revenue is the only item reported on the income statement
Over the lease term


Operating lease- lessee

Rental payments are recognized on a straight line basis

even though the lease calls for payments that increase over the
term of the lease


Operating lease- lessor

Initial direct costs should be treated as an asset and amortized
Over the life of the lease on a straight line basis


Unearned interest revenue

The difference between the fair value of the asset leased and the
Total payments to be received over the lease term


Residual value

Included in the lessor's gross investment, whether guaranteed
Or Unguaranteed


Capital lease

Depreciation expense related to the leased asset is reported
on the lessee's income statement over the lease term


Implicit rate

Produces a desired rate of return which causes the aggregate
Present value of the minimum lease payments to be equal to
The fair value of the leased property


Interest method

Produces a constant periodic rate of return on the net investment


Present value of the minimum lease payments

Should be recorded as both an asset and a liability by the lessee
When the lease contains a bargain purchase option


Bargain purchase option

Lessee's right to purchase leased property for an amount
substantially lower than the expected FV at exercise date


Sale leaseback

The substance of this transaction is that it consists of two separate
And distinct transactions


Annuity due

A lease agreement which requires the annual payments to be
made at the beginning of each period


Initial direct costs

Costs, such as appraisal fees, incurred by the lessor in setting up
The lease agreement


Current lease obligation

The principal portion of the lease liability which must be paid
within the next operating cycle


As a capital lease progresses, the interest expense...

2) the carrying amount of the lease...

Decreases for the lessee

2) decreases for the lessee


Depreciation expense is calculated using (in the numerator)...

The present value of the minimum lease payments


When a bargain purchase option exists, depreciation is calculated using...

The asset's useful life


If a capital lease is modified in such a way that it qualifies as an operating lease, it should be treated as...

A sales-leaseback transaction


If a seller lessee retains substantially all rights to use the property in a sales leaseback transaction, the gain on sale is...

Deferred by the seller lessee


Unguaranteed residual is considered part of...

The lessor's net investment in lease unless there's a transfer of
Title or bargain purchase option


Unguaranteed residual, is it part of the minimum lease payment for the lessee?

Not part of the minimum lease payment it is ignored


Do minimum lease payments include penalties?



Ex. Failure to renew


Initial direct costs, how are they treated by the lessor?

Should be capitalized and amortized straight line over the life
Of the lease


Free or uneven lease payments received by the lessor should be recognized...

As revenue on a straight line basis and prorated over the life
Of the lease