ACC 302 Final Exam Questions and Correct
Answers
2 types of lease (leasee)
1. finance lease
2. operating lease
requirements to be a finance lease
1. non cancellable
2. meet at least ONE of the following 5 tests:
-transfer of ownership
2. bargain purchase option
3. lease term test
4. PV test
5. alternative use test
transfer of ownership test
the lease transfers ownership of the asset to the lessee at the end of the term
bargain purchase option
it is reasonably certain that the lessee will exercise the option
lease term test
the lease term is a major part of the remaining economic life of the leased asset (75% or more
of the estimated economic life of the leased property)
present value test
,the PV of the lease payments equals;s or exceeds substantially all of the underlying asset's
fair value (90% or more of the fair value of the property)
PV of lease payments (lessee)
fixed rental payments + guaranteed residual value + bargain purchase option
alternative use test
at the end of the lease term, the lessor does not have an alternative use of the asset
classification vs measurement of liability: leassee
classification: include the full amount of residual value in PV test
measurement of liability:
1. if expected value is greater than or equal to guaranteed residual value, ignore
2. if expected value is less than guaranteed residual value, include PV of the difference
between expected and guaranteed residual value in computation of lease liability
lessee unguaranteed value
ignore for classification and measurement of liability
lease liability of lessee formula
PV of periodic rental payments + PV of bargain purchase option + PV of amounts probable
to be owed under a residual value guarantee
two types of leases (lessor)
1. sales type lease
2. operating lease
sales-type lease requirements
,must meet one or more of the following 5 tests:
1. the lease transfers ownership
2. the lease contains a bargain purchase option
3. the lease term is a major part of the remaining economic life of the underlying asset (75%
or more of the estimated economic life of the property)
4. the PV of the lease payments equals or exceeds substantially all of the underlying asset's
fair value (90% or more of the FV of the property)
5. the asset is of such a specialized nature that it is expected to have no alternative use to the
lessor at the end of the lease term
lessor: classification test vs measurement of receivable
include guaranteed residual value in both
lessor unguaranteed residual value
ignore for classification, include for measurement of receivable
lease receivable of lessor formula
PV of rental payments + PV of guaranteed and unguaranteed residual value + PV of bargain
purchase option
sales revenue formula
lease receivable - PV of unguaranteed residual value
COGS formula
cost of asset - PV of unguaranteed residual value
On December 31, 2019, Burke Corporation signed a 5-year, non-cancelable lease for a
machine. The terms of the lease called for Burke to make annual payments of $8,668 at
, the beginning of each year, starting December 31, 2019. The machine has an estimated
useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts
back to the lessor at the end of the lease term. Burke uses the straight-line method of
depreciation for all of its plant assets. Burke's incremental borrowing rate is 5%, and
the lessor's implicit rate is unknown.
a. What type of lease is this?
b. Compute the PV of the lease payments
c. Prepare all necessary journal entries for Burke for this lease through December 31,
2020
a. finance lease:
transfer ownership? NO (going back to lessor)
BPO? NO (none)
economic life= 5
lease term= 6
5/6= 83.33%, which is greater than 75%=> YES
b. no BPO, no guaranteed residual value
payment=8,668, 5 years, 5%
PV ANNUITY:
8,668 x 4.54595= 39,404
c. 12/31/19
DR right of use asset 39,404
CR lease liability 39,404
DR lease liability 8,668
CR cash 8,668
12/31/20
Answers
2 types of lease (leasee)
1. finance lease
2. operating lease
requirements to be a finance lease
1. non cancellable
2. meet at least ONE of the following 5 tests:
-transfer of ownership
2. bargain purchase option
3. lease term test
4. PV test
5. alternative use test
transfer of ownership test
the lease transfers ownership of the asset to the lessee at the end of the term
bargain purchase option
it is reasonably certain that the lessee will exercise the option
lease term test
the lease term is a major part of the remaining economic life of the leased asset (75% or more
of the estimated economic life of the leased property)
present value test
,the PV of the lease payments equals;s or exceeds substantially all of the underlying asset's
fair value (90% or more of the fair value of the property)
PV of lease payments (lessee)
fixed rental payments + guaranteed residual value + bargain purchase option
alternative use test
at the end of the lease term, the lessor does not have an alternative use of the asset
classification vs measurement of liability: leassee
classification: include the full amount of residual value in PV test
measurement of liability:
1. if expected value is greater than or equal to guaranteed residual value, ignore
2. if expected value is less than guaranteed residual value, include PV of the difference
between expected and guaranteed residual value in computation of lease liability
lessee unguaranteed value
ignore for classification and measurement of liability
lease liability of lessee formula
PV of periodic rental payments + PV of bargain purchase option + PV of amounts probable
to be owed under a residual value guarantee
two types of leases (lessor)
1. sales type lease
2. operating lease
sales-type lease requirements
,must meet one or more of the following 5 tests:
1. the lease transfers ownership
2. the lease contains a bargain purchase option
3. the lease term is a major part of the remaining economic life of the underlying asset (75%
or more of the estimated economic life of the property)
4. the PV of the lease payments equals or exceeds substantially all of the underlying asset's
fair value (90% or more of the FV of the property)
5. the asset is of such a specialized nature that it is expected to have no alternative use to the
lessor at the end of the lease term
lessor: classification test vs measurement of receivable
include guaranteed residual value in both
lessor unguaranteed residual value
ignore for classification, include for measurement of receivable
lease receivable of lessor formula
PV of rental payments + PV of guaranteed and unguaranteed residual value + PV of bargain
purchase option
sales revenue formula
lease receivable - PV of unguaranteed residual value
COGS formula
cost of asset - PV of unguaranteed residual value
On December 31, 2019, Burke Corporation signed a 5-year, non-cancelable lease for a
machine. The terms of the lease called for Burke to make annual payments of $8,668 at
, the beginning of each year, starting December 31, 2019. The machine has an estimated
useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts
back to the lessor at the end of the lease term. Burke uses the straight-line method of
depreciation for all of its plant assets. Burke's incremental borrowing rate is 5%, and
the lessor's implicit rate is unknown.
a. What type of lease is this?
b. Compute the PV of the lease payments
c. Prepare all necessary journal entries for Burke for this lease through December 31,
2020
a. finance lease:
transfer ownership? NO (going back to lessor)
BPO? NO (none)
economic life= 5
lease term= 6
5/6= 83.33%, which is greater than 75%=> YES
b. no BPO, no guaranteed residual value
payment=8,668, 5 years, 5%
PV ANNUITY:
8,668 x 4.54595= 39,404
c. 12/31/19
DR right of use asset 39,404
CR lease liability 39,404
DR lease liability 8,668
CR cash 8,668
12/31/20
