# Warren Co. recorded a right-of-use asset of $800,000 in a 10-year Type A lease. The interest rate charged by the lessor was 8%. Under the new ASU, the balance in the right-of-use asset after two years will be:

#Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

Payment	Cash Payment	Effective Interest	Decrease in balance	Balance
				63,282
1	10,000		10,000	53,282
2	10,000	6,394	3,606	49,676
3	10,000	5,961	4,039	45,638
4	10,000	5,477	4,523	41,114
5	10,000	4,934	5,066	36,048
6	10,000	4,326	5,674	30,373
7	10,000	3,645	6,355	24,018
8	10,000	2,882	7,118	16,901
9	10,000	?	?	?
10	10,000	?	?	?

What would the lessee record as annual depreciation on the asset using the straight-line method?

#XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $600,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation?

# If the lessee and lessor use different interest rates to account for a capital lease, then:

Total expenses for the lessee will be different from the lessor's total revenues.

Total expenses for the lessee will equal the lessor's total revenues.

GAAP has been violated by at least one party.

The lessee will report more net income for the year.

##

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2016. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: Lease payments: $2,466,754 semiannually; first payment at January 1, 2016; remaining payments at June 30 and December 31 each year through June 30, 2020. Lease term: five years (10 semiannual payments). No residual value; no bargain purchase option. Economic life of equipment: five years. Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. Fair value of the computers at January 1, 2016: $20 million. Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Lone Star Company would account for this as:

A capital lease.

A direct financing lease.

A sales type lease.

An operating lease.

##

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

Payment	Cash Payment	Effective Interest	Decrease in balance	Balance
				63,282
1	10,000		10,000	53,282
2	10,000	6,394	3,606	49,676
3	10,000	5,961	4,039	45,638
4	10,000	5,477	4,523	41,114
5	10,000	4,934	5,066	36,048
6	10,000	4,326	5,674	30,373
7	10,000	3,645	6,355	24,018
8	10,000	2,882	7,118	16,901
9	10,000	?	?	?
10	10,000	?	?	?

What would be the outstanding balance after payment 10?

## Cady Salons leased equipment from Smith Co. on January 1, 2016, in a Type B lease. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at each January 1 beginning January 1, 2016. Following the guidance of the new ASU, the amortization of the right-of-use asset for the reporting year ending December 31, 2016, would be:

## Karla Salons leased equipment from Smith Co. on July 1, 2016, in a Type A lease. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due each year beginning July 1, 2016. Smith Co. had constructed the equipment recently for $66,000, and its retail fair value was $80,000. Under the new ASU, what amount of interest revenue from the lease should Smith Co. report in its December 31, 2016, income statement?

### If the leaseback portion of a sale-leaseback transaction is classified as an operating lease:

Any gain is deferred and recognized as a reduction of rent expense.

Any gain is deferred and recognized as a reduction of depreciation.

Any gain is recognized at the lease's inception.

There can be no gain.