Question 1

A lessee normally computes the liability on a lease as the ________.

Accepted Answer

A)  present value of minimum lease payments 
B)  fair market value of the leased asset 
C)  future value of the minimum lease payments 
D)  sum of the cash payments over the term of the lease 
A)  present value of minimum lease payments 
B)  fair market value of the leased asset 
C)  future value of the minimum lease payments 
D)  sum of the cash payments over the term of the lease

Question 2

For a lessor to classify a lease as a capital lease, there can be no material uncertainties regarding the amount of reimbursable costs to be incurred by the lessee.

Accepted Answer

A) True 
 B)False

Question 3

On December 31 of the current year, Johnson Corporation leased equipment to Kennedy Company for a five-year period. The annual lease payment is $40,585; the discount rate for this lease is 9%. Lease payments are due on December 31 of each year, and the first payment was made at the inception of the lease. The normal cash price for this type of equipment is $180,000; the cost to Johnson was $170,000. The expected life of the equipment is five years. For December 31 of the current year, what will be the increase to Johnson's pretax earnings due to this lease?

Accepted Answer

A)  $11,834 
B)  $15,300 
C)  $16,200 
D)  $11,647 
A)  $11,834 
B)  $15,300 
C)  $16,200 
D)  $11,647

Question 4

Lawson leased equipment from Tirado on January 1 of the current year. The lease is a 6-year lease with annual payments of $215,000 due on each January 1, beginning with the current year. Lawson's incremental borrowing rate is 8%; Lawson knows that Tirado's implicit interest rate is 6%. What is the balance of Lawson's lease liability at December 31 or the current year?

Accepted Answer

A)  $815,019 
B)  $905,658 
C)  $713,735 
D)  $840,154 
A)  $815,019 
B)  $905,658 
C)  $713,735 
D)  $840,154

Question 5

On the books of a lessor, a lease may be classified as either ________.

Accepted Answer

A)  operating, capital, or direct-finance 
B)  direct-finance or sales type 
C)  operating, direct-finance, or sales type 
D)  operating, sales type or indirect-finance 
A)  operating, capital, or direct-finance 
B)  direct-finance or sales type 
C)  operating, direct-finance, or sales type 
D)  operating, sales type or indirect-finance

Question 6

Compare and contrast the major types of leases from the point of view of the lessor under GAAP.

Accepted Answer

Under GAAP, there are two groups of crit

Question 7

How do the total expenses over the life of a capital lease compare with the total expenses over the life of an operating lease?

Accepted Answer

A)  The expenses of a capital lease are greater for a capital lease than for an operating lease. 
B)  The expenses of an operating lease are greater than for a capital lease. 
C)  There is no difference between total expenses for an operating lease and a capital lease. 
D)  The total expenses cannot be compared. 
A)  The expenses of a capital lease are greater for a capital lease than for an operating lease. 
B)  The expenses of an operating lease are greater than for a capital lease. 
C)  There is no difference between total expenses for an operating lease and a capital lease. 
D)  The total expenses cannot be compared.

Question 8

The lessee depreciates leasehold improvements over the life of the improvements or the life of the lease, whichever is longer.

Accepted Answer

A) True 
 B)False

Question 9

If title does not pass from the lessor to the lessee under the terms of a lease, ________.

Accepted Answer

A)  the present value of the residual amount will be deducted by the lessor before computing the amount to be recovered through periodic lease payments 
B)  the present value of the residual amount will be added by the lessor before computing the amount to be recovered through periodic lease payments 
C)  the lessor will increase the basis of the asset by the residual value 
D)  the residual value will be ignored 
A)  the present value of the residual amount will be deducted by the lessor before computing the amount to be recovered through periodic lease payments 
B)  the present value of the residual amount will be added by the lessor before computing the amount to be recovered through periodic lease payments 
C)  the lessor will increase the basis of the asset by the residual value 
D)  the residual value will be ignored

Question 10

How does a sales-type lease differ from a direct-finance lease?

Accepted Answer

A)  The lessor depreciates the property over a longer period under a sales-type lease. 
B)  The lessor uses a higher interest rate on a sales-type lease than on a direct-finance lease. 
C)  The lessor receives less interest than on a direct-finance lease. 
D)  The lessor receives a manufacturer's or dealer's profit. 
A)  The lessor depreciates the property over a longer period under a sales-type lease. 
B)  The lessor uses a higher interest rate on a sales-type lease than on a direct-finance lease. 
C)  The lessor receives less interest than on a direct-finance lease. 
D)  The lessor receives a manufacturer's or dealer's profit.

Question 11

For a direct-finance capital lease, the lessor removes the leased asset from its balance sheet and records a lease receivable at the inception of the lease.

Accepted Answer

A) True 
 B)False

Question 12

Stillwater Sports
Stillwater Sports Company leased manufacturing equipment from Premier Leasing on January 1 of the current year. Premier purchased the equipment for $326,189.
Other information:
 $$\begin{array} { l l } 
\text { Lease term } & 4 \text { years } \
\text { Annual Payments } & \$ 90,000 \text { on January } 1 \text { beginning with the current year. } \
\text { Life of Asset } & 4 \text { years } \
\text { Fair value of Asset } & \$ 326,189 \
\text { Implicit interest rate } & 7 \% \
\text { Incremental rate } & 7 \%
\end{array}$$ 
There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year.
-Refer to Stillwater Sports:
Required:
1. Prepare appropriate journal entries for Stillwater Sports for the first year.
2. Show how the lease-related information will be presented on Stillwater's balance sheet for the first year.

Accepted Answer

1. This is a capital lease because the l

Question 13

StatMed Corporation leases medical equipment under a five-year capital lease. The terms of the lease call for five equal payments of $26,000, with the first payment due at the inception. The interest rate implicit in the lease is 11%. At what value is Obligation under Capital Lease recorded at the end of the first year?

Accepted Answer

A)  $115,537 
B)  $71,791 
C)  $89,537 
D)  $106,664 
A)  $115,537 
B)  $71,791 
C)  $89,537 
D)  $106,664

Question 14

Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $12 million. The lease agreement between SuperByte and Laguna Madre had the follow terms: 1. The lease is noncancellable.
2) The lease has no residual value or bargain purchase option.
3) The lease term is 8 years; payments are made semiannually.
4) Depreciation is recorded each December 31 using the straight-line approach.
5) The economic life of the equipment is 8 years.
6) The lessee's incremental borrowing rate and the implicit interest rate are both 8% annually.
7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1.
8) The fair value of the equipment at the inception of the lease is $16,000,000.
What is the net book value of the lease liability in Laguna Madre's balance sheet on June 30 of the current year?

Accepted Answer

A)  $11,970,536 
B)  $15,777,260 
C)  $10,455,319 
D)  $14,506,383 
A)  $11,970,536 
B)  $15,777,260 
C)  $10,455,319 
D)  $14,506,383

Question 15

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson knows this rate. At what interest rate should the minimum lease payments be computed?

Accepted Answer

A)  7% 
B)  9% 
C)  11% 
D)  13% 
A)  7% 
B)  9% 
C)  11% 
D)  13%

Question 16

For a lessor to classify a lease as a capital lease, collectability of the required minimum lease payments must be reasonably assured.

Accepted Answer

A) True 
 B)False

Question 17

The bargain purchase option is not included in the minimum lease payments for either the lessee or the lessor.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is a disclosure that a lessee must make within its financial statements?

Accepted Answer

A)  aggregated lease payments on both capital and operating leases for the next five years 
B)  the original amounts of debt associated with each lease 
C)  rent expense for the three-year period covered by the income statement 
D)  the original cost of assets leased under operating leases 
A)  aggregated lease payments on both capital and operating leases for the next five years 
B)  the original amounts of debt associated with each lease 
C)  rent expense for the three-year period covered by the income statement 
D)  the original cost of assets leased under operating leases

Question 19

Lessee accounting for a capital lease records lease expense and amortization expense.

Accepted Answer

A) True 
 B)False

Question 20

On January 1 of the current year, Jenkins Company signed a 6-year lease for equipment having a 9-year economic life. The present value of the monthly lease payments equaled 75% of the fair value of the equipment. No bargain purchase option or transfer of title was included. How will this lease be reflected on Jenkins' current year income statement?

Accepted Answer

A)  Rent expense equal to the current year lease payments. 
B)  Rent expense equal to the current year lease payments less interest expense. 
C)  Interest expense and depreciation expense. 
D)  Lease amortization equal to one-sixth of the equipment's fair value. 
A)  Rent expense equal to the current year lease payments. 
B)  Rent expense equal to the current year lease payments less interest expense. 
C)  Interest expense and depreciation expense. 
D)  Lease amortization equal to one-sixth of the equipment's fair value.

A lessee normally computes the liability on a lease as the ________.

For a lessor to classify a lease as a capital lease, there can be no material uncertainties regarding the amount of reimbursable costs to be incurred by the lessee.

On the books of a lessor, a lease may be classified as either ________.

Compare and contrast the major types of leases from the point of view of the lessor under GAAP.

How do the total expenses over the life of a capital lease compare with the total expenses over the life of an operating lease?

The lessee depreciates leasehold improvements over the life of the improvements or the life of the lease, whichever is longer.

If title does not pass from the lessor to the lessee under the terms of a lease, ________.

How does a sales-type lease differ from a direct-finance lease?

For a direct-finance capital lease, the lessor removes the leased asset from its balance sheet and records a lease receivable at the inception of the lease.

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson knows this rate. At what interest rate should the minimum lease payments be computed?

For a lessor to classify a lease as a capital lease, collectability of the required minimum lease payments must be reasonably assured.

The bargain purchase option is not included in the minimum lease payments for either the lessee or the lessor.

Which of the following is a disclosure that a lessee must make within its financial statements?

Lessee accounting for a capital lease records lease expense and amortization expense.

The Financial Reporting Environment

Financial Reporting Theory

Judgment and Applied Financial Accounting Research

Review of the Accounting Cycle

Statements of Net Income and Comprehensive Net Income

Statements of Financial Position and Cash Flows and the Annual Report

Accounting and the Time Value of Money

Revenue Recognition

Extenssion: Ol Revenue Recognition Previous Standard

Short-Term Operating Assets: Cash and Receivables

Short-Term Operating Assets: Inventory

Long-Term Operating Assets: Acquisition, Cost Allocation

Long-Term Operating Assets: Departures From Historical Cost

Operating Liabilities and Contingencies

Financing Liabilities

Accounting for Stockholders Equity

Investing Assets

Accounting for Income Taxes

Accounting for Leases

Accounting for Employee Compensation and Benefits

Earnings Per Share

Accounting Corrections and Error Analysis

The Statement of Cash Flows

Filters

Exam 18: Extension: Ol Accounting for Leases Current Standard

A lessee normally computes the liability on a lease as the ________.

For a lessor to classify a lease as a capital lease, there can be no material uncertainties regarding the amount of reimbursable costs to be incurred by the lessee.

On the books of a lessor, a lease may be classified as either ________.

Compare and contrast the major types of leases from the point of view of the lessor under GAAP.

How do the total expenses over the life of a capital lease compare with the total expenses over the life of an operating lease?

The lessee depreciates leasehold improvements over the life of the improvements or the life of the lease, whichever is longer.

If title does not pass from the lessor to the lessee under the terms of a lease, ________.

How does a sales-type lease differ from a direct-finance lease?

For a direct-finance capital lease, the lessor removes the leased asset from its balance sheet and records a lease receivable at the inception of the lease.

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson knows this rate. At what interest rate should the minimum lease payments be computed?

For a lessor to classify a lease as a capital lease, collectability of the required minimum lease payments must be reasonably assured.

The bargain purchase option is not included in the minimum lease payments for either the lessee or the lessor.

Which of the following is a disclosure that a lessee must make within its financial statements?

Lessee accounting for a capital lease records lease expense and amortization expense.

The Financial Reporting Environment

Financial Reporting Theory

Judgment and Applied Financial Accounting Research

Review of the Accounting Cycle

Statements of Net Income and Comprehensive Net Income

Statements of Financial Position and Cash Flows and the Annual Report

Accounting and the Time Value of Money

Revenue Recognition

Extenssion: Ol Revenue Recognition Previous Standard

Short-Term Operating Assets: Cash and Receivables

Short-Term Operating Assets: Inventory

Long-Term Operating Assets: Acquisition, Cost Allocation

Long-Term Operating Assets: Departures From Historical Cost

Operating Liabilities and Contingencies

Financing Liabilities

Accounting for Stockholders Equity

Investing Assets

Accounting for Income Taxes

Accounting for Leases

Accounting for Employee Compensation and Benefits

Earnings Per Share

Accounting Corrections and Error Analysis

The Statement of Cash Flows

Filters