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F6 - Leases, Derivatives, Foreign Currency Accounting, and Income Taxes $15.99
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Exam (elaborations)

F6 - Leases, Derivatives, Foreign Currency Accounting, and Income Taxes

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  • Course
  • Accounting for Leases
  • Institution
  • Accounting For Leases

F6 - Leases, Derivatives, Foreign Currency Accounting, and Income Taxes

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  • January 3, 2025
  • 16
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers
  • Accounting for Leases
  • Accounting for Leases
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F6 - Leases, Derivatives, Foreign
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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. - answer *A. Included as
part of minimum lease payments at present value.*
Explanation Choice "A" is correct. *Guaranteed residual value* is, in
effect, an *additional lease payment* and *must be included in the
calculation* of the present value of the *minimum lease payments.*
Choice "B" is incorrect. Finance leases are valued at present value
rather than future value.
Choice "C" is incorrect. Since the guaranteed residual value is
effectively an additional lease payment, its full value must be
included in the calculation of the present value of the minimum
lease payments.
Choice "D" is incorrect. Guaranteed residual value is, in effect, an
additional lease payment.


Assuming that no direct costs are involved, what are the
components of the lease receivable for a lessor involved in a direct-
financing lease?
A. The minimum lease payments plus any executory costs.
B. The minimum lease payments plus residual value.
C. The minimum lease payments less residual value.

,D. The minimum lease payments less executory costs. - answer *B.
The minimum lease payments plus residual value.*
Explanation Choice "B" is correct. Lessors recording a lease
receivable for a direct-financing lease should include the minimum
lease payments *PLUS any residual value*. The reason for this is
because the *lessor can also expect to collect this residual value
from the lessee* at the culmination of the lease.
Choice "A" is incorrect. Executory costs, like insurance, taxes, and
maintenance, are always recorded separately and do not affect the
computation of the minimum lease payments nor the lease
receivable.
Choice "C" is incorrect. The residual value needs to be added, not
subtracted, since the lessee is obligated to pay this to the lessor at
the culmination of the lease.
Choice "D" is incorrect. Executory costs do not affect the
computation of the lease receivable.


As an inducement to enter a lease, Graf Co., a lessor, granted Zep,
Inc., a lessee, twelve months of free rent under a five-year
operating lease. The lease was effective on January 1, Year 1, and
provides for monthly lease payments to begin January 1, Year 2. Zep
made the first lease payment on December 30, Year 1. In its Year 1
income statement, Graf should report lease revenue in an amount
equal to:
A. Zero.
B. Cash received during Year 1.
C. One-fourth of the total cash to be received over the life of the
lease.
D. One-fifth of the total cash to be received over the life of the
lease. - answer *D. One-fifth of the total cash to be received over
the life of the lease.*
Explanation Choice "D" is correct. Annual lease revenue equals the
total lease revenue from the lease allocated over the full life of the
lease. In this case, revenue equals total cash divided by five years.

, Choice "A" is incorrect. Since a service was provided and the
revenue is realizable through future collections, revenue must be
recognized in Year 1. Choice "B" is incorrect. Revenue is recognized
when a performance obligation is satisfied. In the case of leases,
this obligation is satisfied over the life of the lease. Cash basis
accounting would recognize revenue when cash was collected.
Choice "C" is incorrect. Revenue is recognized over the full life of
the lease (five years) rather being limited to the time frame during
which cash is collected.


Able Co. leased equipment to Baker under a noncancellable lease
with a transfer of title. Will Able record depreciation expense on the
leased asset and interest revenue related to the lease?
Depreciation expense/ Interest revenue
A. Yes/ Yes
B. Yes/ No
C. No/ No
D. No/ Yes - answer *D. No/ Yes *
Explanation Choice "D" is correct. Baker, the *lessee*, will capitalize
the lease (due to the transfer of title) and will *incur both
depreciation and interest expense*. Able will earn and book interest
income when the payments from Baker are received. Able will
remove the asset from its books at the inception of the lease and
will not depreciate the asset.


A 20-year property lease, classified as an operating lease, provides
for a 10 percent increase in annual payments every five years. In
the sixth year compared with the fifth year, the lease will cause the
following expenses to increase:
Lease/ Interest
A. No/ Yes
B. Yes/ No
C. Yes/ Yes
D. No/ No - answer *D. No/ No*

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