Answered: motivated

Business

Accounting

motivated

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 8GI

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

Explain why the management of a lessee company may be motivated to avoid the classification of a lease arrangement as a finance lease by referring to possible adverse effects on the financial statements.

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Identify possible adverse effects on a lessee entity’s financial statements arising from the classification of a lease arrangement as finance lease.
Differentiate between an operating lease, acapital (or financial) lease, and a sale andleaseback arrangement. How would the pastaccounting treatment of leases mislead investorsand what rules have been put in place to mitigatethis problem?
How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor’s point of view?
Which of the following is not one of the classifications for leases from the lessor’s viewpoint? Operating. Sales-type. Direct financing. Off-balance sheet.
What would be the advantages and disadvantages of leasing assets instead of owning them? How would the financial statements be different in a leasing situation (for both operating leases and finance leases) for the lessee? What about the lessor (including all of the types)? What disclosures should be made by lessees and lessors related to future lease payments?
Which of the following statements are false under a sale a leaseback transaction? I. If a sale and leaseback transactions results in a finance lease, any excess of proceeds over the carrying amount shall not be immediately recognized as income by a seller-lessee. Instead, it shall be deferred and amortized over the lease term. II. If the sale price is established at fair value under an operating lease, any gain or loss shall be deferred and amortized over the period which the asset is expected to be used. I only II ONLY BOTH I AND II NEITHER I OR II
What is the basic difference between the accounting procedures used by a lessor for a sales-type lease and those used for a direct-financing lease?
What are the differences between a direct-financing and a sales-type lease for a lessor? Why would a lessor provide direct-financing to a lessee? What types of organizations provide direct-financing leases?
How may the use of leases shift the risk of rising expenses from the lessor to the lessee?
Assume a lessee leases equipment and insists on terms that qualify it as an operating lease, barely escaping the qualification as a capital lease. Discuss the impact that such an operating lease has on financial statements and related financial information as compared to the effect that a capital lease would have.
Explain the differences in revenue recognition for the lessor in a sales-type lease, a direct financing lease, and an operating lease.
Which is not an advantage of leasing from a lessee's viewpoint? A.The asset can be acquired without having to make a substantial down payment. B. Leased assets are never reported on the balance sheet. C. The risk of obsolescence may be reduced. D. A lease may provide 100% financing.