CHAPTER 15 Leases 927 Let’s look at an example that illustrates the relatively straightforward accounting for short-term leases. To do this, in Illustration 15–26 we modify Illustration 15–25 to assume the lease term is twelve months. On January 1, 2016, Sans Serif Publishers leased printing equipment from First LeaseCorp. The lease agreement specifies four quarterly payments of $25,000 beginning January 1, 2016, the beginning of the lease, and at the first day of each of the next three quarters. The useful life of the equipment is estimated to be six years. At the time this text was written, the FASB was deliberating several issues related to uncertainty in lease transactions that impact lessee and lessor accounting under the proposed ASU. Among those issues were variable lease terms and variable lease payments, guaranteed residual values, purchase options, and termination penalties. Respond to the questions, brief exercises, exercises, and problems in this supplement with the presumption that the guidance provided by the new Accounting Standards Update is being applied. Questions For Review of Key Topics Q 15–24 Distinguish between a Type A lease and a Type B lease. Q 15–25 At the beginning of a Type B lease, the lessee will record what asset and liability, if any? Q 15–26 At the beginning of a Type B lease, the lessor will record what asset and liability, if any? Q 15–27 In accounting for a Type A lease, how are the lessee’s and lessor’s income statements affected? Q 15–28 In accounting for a Type B lease, how are the lessee’s and lessor’s income statements affected? Q 15–29 In a Type A lease, “front loading” of lease expense and lease revenue occurs. What does this mean, and how is it avoided in a Type B lease? Q 15–30 Briefly describe the conceptual basis for asset and liability recognition under the right-of-use approach used by the lessee in a lease transaction. Q 15–31 A lease that has a lease term (including any options to terminate or renew that are reasonably certain) of twelve months or less is considered a “short-term lease.” How does a lessee record a lease using the short-cut approach available as an option for short-term leases? Brief Exercises At January 1, 2016, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2016, the beginning of the lease, and at each December 31 thereafter through 2023. The equipment was acquired recently by Crescent at a cost of $176,000 (its fair value) and was expected to have a useful life of 12 years with no residual value. The company seeks a 10% return on its lease investments. By this arrangement, the risks and rewards of ownership are deemed to have been transferred to the lessee. What will be the effect of the lease on Café Med’s earnings for the first year (ignore taxes)? In the situation described in BE 15–15, assume that the risks and rewards of ownership are deemed not to have been transferred to the lessee. What will be the effect of the lease on Café Med’s earnings for the first year (ignore taxes)? BE 15–15 Lessee; effect on earnings; Type A lease BE 15–16 Lessee; effect on earnings; Type B lease Beginning of the Lease (January 1, 2016) No entry to record a right-of-use asset and liability Lease Payments (January 1, April 1, July 1, October 1, 2016) Lease expense .................................................................. 25,000 Cash ............................................................................. 25,000 Illustration 15–26 Short-Term Lease If the short-cut option is chosen, the lessee recognizes lease payments as lease expense over the lease term.
Spiceland_Inter_Accounting8e_Ch15
To see the actual publication please follow the link above