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ACC327_EX3CH21Rev_StudyGuide

ACC327_EX3CH21Rev_StudyGuide - C hapter 21 Study Guide Exam...

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Chapter 21 Study Guide – Exam 3 -The ____________ owns the property and the ____________ uses the property for a fee. -There are several advantages of leasing property. The advantages to the lessee are: 1. 2. 3. 4. -If land is ____________, no tax deduction is allowed for depreciation, however if land is ____________, the payments are tax deductible. -What are the 4 criteria to be considered a capital lease ? 1. 2. 3. 4. -The last two criteria do not apply if the lease term begins in the final _____ of the asset’s life. Capital Leases for LESSEES -Under a capital lease, the lessee treats the lease transaction as if ______________________. -The lessee records ___________ and a _____________ usually for the present value of the _________. (but the asset may not be recorded above its _____________.) -Minimum Lease Payments (MLPs) include the following: 1. (The minimum payments the lessee is obligated to make) 2.
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(The lessee guarantees that the asset will have a certain value when it reverts to the lessor. Any deficiency at the end of the lease must be made up by the _____________) 3. (An option to buy the asset at the end of the lease term at a price marked below the asset’s expected __________________) 4. (The amount the lessee must pay if it fails to renew the lease if the agreement specifies it must be renewed.) -If lessor makes payments for executory costs, ___________ must reduce the ___________ for purposes of computing present value. -If lessee makes payments for executory costs, the MLPs can be used ___________________ for executory costs. -Executory costs are not capitalizable costs are should not be included in ___________________. -The lessee will use its own _______________ borrowing rate to compute the present value of the MLPs unless the lessor’s ________________ rate is known to the lessee and is _________ than the lessee’s ________________ borrowing rate. -The lessor’s _______________ rate is the rate that equates the present value of the future payments with the ___________________ of the leased property at the inception of the lease term. -If the lessor’s implicit rate is known and is used, it increases the likelihood that the lease will be _______________ and helps prevent manipulation of the ______________ rate by the lessee. -A lease payment is broken down into the _____________ and the _________________. -Each lease payment made by the lessee is allocated between a _______________ of the lease obligation and __________________ by using the ______________ method (This method works as follows: _____________________ = _________________ X _________________ ; Principal Reduction = ___________________ - __________________) -The lessee should __________ the leased asset using one of the conventional methods.
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-If the lease met capitalization criteria 1 or 2, depreciate over ___________________. If the lease did not meet capitalization criteria 1 or 2 but met 3 or 4, depreciate over ______________________. -In the balance sheet, leased assets must be shown separately under ____________________. Lease obligations must be separately identified in ________________ section and appropriately categorized among ___________ or _______________ liabilities. -- Example. Lessee Entries, Capital Lease w / Unguaranteed Residual Value. On January 1, 2011, Adams Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Adams to make annual payments of $9,968 at the beginning of each year, starting January 1, 2011. 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. Adams uses the straight-line method of depreciation for all of its plant assets.
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