QUESTIONS
1. What are the major lessor groups in the United States? What advantage does a captive have in a leasing arrangement?
2. Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions:
(a) What might be the advantages of leasing the assets instead of owning them?
(b) What might be the disadvantages of leasing the assets instead of owning them?
(c) In what way will the balance sheet be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?
3. Identify the two recognized lease accounting methods for lessees and distinguish between them.
4. Ballard Company rents a warehouse on a month-tomonth basis for the storage of its excess inventory. The company periodically must rent space whenever its production greatly exceeds actual sales. For several years, the company officials have discussed building their own storage facility, but this enthusiasm wavers when sales increase sufficiently to absorb the excess inventory. What is the nature of this type of lease arrangement, and what accounting treatment should be accorded it?
5. Distinguish between minimum rental payments and minimum lease payments, and indicate what is included in minimum lease payments.
6. Explain the distinction between a direct-financing lease and a sales-type lease for a lessor.
7. Outline the accounting procedures involved in applying the operating method by a lessee.
8. Outline the accounting procedures involved in applying the capital lease method by a lessee.
9. Identify the lease classifications for lessors and the criteria that must be met for each classification.
10. Outline the accounting procedures involved in applying the direct-financing method.
11. Outline the accounting procedures involved in applying the operating method by a lessor.
12. Walker Company is a manufacturer and lessor of computer equipment. What should be the nature of its lease arrangements with lessees if the company wishes to account for its lease transactions as sales-type leases?
13. Metheny Corporation’s lease arrangements qualify as sales-type leases at the time of entering into the transactions.
How should the corporation recognize revenues and costs in these situations?
14. Alice Foyle, M.D. (lessee), has a noncancelable 20-year lease with Brownback Realty, Inc. (lessor) for the use of a medical building. Taxes, insurance, and maintenance are paid by the lessee in addition to the fixed annual payments, of which the present value is equal to the fair value of the leased property. At the end of the lease period, title becomes the lessee’s at a nominal price. Considering the terms of the lease described above, comment on the nature of the lease transaction and the accounting treatment that should be accorded it by the lessee.
15. The residual value is the estimated fair value of the leased property at the end of the lease term.
(a) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the lessee’s accounting for a capitalized-lease transaction?
(b) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the lessor’s accounting for a direct-financing lease transaction?
16. How should changes in the estimated unguaranteed residual value be handled by the lessor?
17. Describe the effect of a “bargain-purchase option” on accounting for a capital lease transaction by a lessee.
18. What are “initial direct costs” and how are they accounted for?
19. What disclosures should be made by lessees and lessors related to future lease payments?
*20. What is the nature of a “sale-leaseback” transaction?
