✓ fx 5 questions at 3 points each C E F [1] [2] D [a] [b] [c] [d] General questions on the New Lease Accounting Rule-ASC

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✓ fx 5 questions at 3 points each C E F [1] [2] D [a] [c] [d] General questions on the New Lease Accounting Rule-ASC TOPIC 842 Select the best choice. 5 question at 3 points each [e] [1 The purpose of the new lease rule was to force balance sheet recognition of leasetontracts as those are defined in the new rule, ASC Topic 842. This is one exception to this "on balance sheet recognition" rule. The reporting entity may continue to keep the following type of lease contract "Off Balance Sheet. G [c] [d] I [e] 11 H 1 ACS Topic 842 requires the Lessee to apply 5 Lease Qualifications Tests to characterize Lease Contracts as either Finance or Operating leases. Identify the characteristics you can generally associate to Finance Leases. [a] Finance leases result in two separate expenses recorded in Earnings: Interest Expense and Amortization Expense To total of expenses recorded in Earnings is higher in the early years of the lease than the latter years-Finance leases are front end loaded. The Amortization of the Right of Use Asset follows an amortization process similar to Depreciation and most of the time this is straight line amortization Interest Expense is determined under the Effective Interest Method. Leases of Airplanes Leases of Rail Road Cars Leases of Construction Equipment if the manufacturer is the great American Company, Caterpillar. All the above. None of the above Leases with an initial contractual term of 12 months or lease and no contract terms that might extend this. All the above None of the above. K
[3] [4] [5] If, upon applying the Lease Qualifications Tests under ASC Topic 842, the lessee determines that the lease contract is an Operating lease, it can expect the accounting for this contract to reflect the following attributes: [a] [c] [d] [e] There is only one expense and it is usually labelled Lease Expense A right of use asset and a lease obligation must be recognized "on balance sheet " and this is the major change from legacy GAAP. The amortization of the Right of Use asset is derived from a complex series of calculations and is counter-intuitive because the amortization amount in later years is higher than the amortization in the early years. All the above None of the above. For both lease contract formats, what normally is seen in Balance Sheets is that the Liability is split into a Current Liability and a Non-Current Liability. [a] [a] [c] TRUE FALSE For both lease contract formats, the Right of Use asset is normally presented among Noncurrent Assets while the Liability is split between Current and NonCurrent Liabilities. Think about this carefully. What does lease accounting generally do to Working Capital when it is defined as Current Assets minus Current Liabilities? It makes Working Capital smaller It makes Working Capital langer It has no impact at all on Working Capital as defined above.
Il Lease Qualifications Test Under ASC TOPIC 842 all lease contracts are subjected to the qualifications tests. There are 5 tests The tests are used to determine whether the contract is a FINANCE or an OPERATING Lease from the lessee's point of view and a Sale Type or Operating lease from the lessor's point of view. Examine the Contract terms set out below, apply the qualifications test and then determine what kind of Lease Contract this is: 7 questions-2 points for each of the 5 tests and 2 points for the first conclusion and 3 points for the second final conclusion. Total 15 points Contract Terms [1] 221 [3] 14] A large piece or mining equipment manufactured by Caterpillar. The lessor determines that at the end of the lease term (see below) the leased equipment will have a residual value of 0. Despite this the Lessor decides to retain legal title to the equipment at all times. The reason for this is that fully depreciated Caterpillar equipment is often so hardy that it can be used and rented beyond the manufacturer's stated "useful life" The Lessor "doubles down on its intent to retain title to the equipment at all time and keep it after the lease ends. It grants NO purchase option to the lessee Lease Term The Term of the lease is 5 years. The useful life of the asset is 7 years. The lease term provisions are simply stated. There are no extension or put options Value Exchanged The Fair Value and acquistion cost to the lessor of this asset is 80,000 The Lessor's implied rate is 10%. Lease payments are made in equal amounts at the start of every year. This represents an ANNUITY DUE + The Annuity Due Factor for a 5 year term is 4.16986 On this basis the Lessee accepts to pay 5 equal annual payments at the Lease Qualifications Test Irefer to Class Notes and Text) [1] Title Transfer Test 221 (31 (4) Reasonable Purchase Option test Lease Term Test (aka the 75% test) The Value Paid Test (aka the 90% test) III Operating Lease Test result Passed/Failed IY Finance Lease for the Lessee
[5] D E CONCLUSION K The Lessee demands that the equipment will be painted Southeastern Green instead of the usual Caterpillar yellow with black stripes The Lessor accepts this accomodation which it does not see as material. The lessor believes it can release the equipment with these colors, or repaint the equipment at nominal cost if needed. To the lessor this is trivial. How many of the qualification tests are passed? What kind of lease contract does the lessee have? (Finance or Operating?) (5) M N O Customization Test P Q