Deck 21: Accounting for Leases

Question 1

Minimum lease payments do not include

A)any guarantee by the lessee of the residual value
B)any payments on failure to renew or extend the lease
C)executory costs
D)minimum periodic rental payments

Answer 1

C

Question 2

On January 1, Lessee Company incorrectly recorded a 10-year operating lease as a capital lease.The lease requires annual payments.As a result of the recording error, Lessee Company's assets and total liabilities will be $\begin{array}{lll}& \text { Total Assets}& \text { Total Liabilities}\\ \text { I. } & \text { not affected } & \text { not affected } \\\text { II. } & \text { not affected } & \text { understated }\\\text { III. } & \text { understated }&\text { overstated }\\\text { IV. } &\text { overstated }&\text { overstated } \end{array}$

A)I
B)II
C)III
D)IV

Answer 2

IV

Question 3

On January 1, Lessor Company incorrectly recorded a sales-type lease as an operating lease.As a result of this error, the reported amount for Lessor Company's property, plant, and equipment leased to others is

A)not affected
B)overstated
C)understated
D)not determinable

Answer 3

A

Question 4

Which of the following criteria would not apply in determining if a lease is a capital lease if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased asset?

A)the lease is non-cancellable
B)the lease contains a bargain purchase option
C)the lease transfers ownership of the property to the lessee by the end of the lease term
D)the lease term is equal to 75% or more of the estimated economic life of the leased property

Question 5

According to current GAAP, leased property recorded as a capital lease normally should be reported as a long-term or intangible asset on the balance sheet of the lessee and the lessor as follows: $\begin{array}{lll}&\text { Lessee}&\text { Lessor }\\\text { I. } & \text { included } & \text { included } \\\text { II. } & \text { included } & \text { not included } \\\text { III. } & \text { not included } & \text { not included }\\\text { IV. } & \text { not included } & \text { included }\end{array}$

A)I
B)II
C)III
D)IV

Question 6

The lease term includes the fixed non-cancellable term of the lease plus

A)any periods covered by an ordinary renewal option during which a guarantee by the lessee of the lessor's debt related to the leased property is expected to be in effect
B)any periods covered by a bargain renewal option
C)any periods for which failure to renew the lease imposes a significant penalty on the lessee
D)all of these

Question 7

Which is not an advantage of leasing from a lessee's viewpoint?

A)The asset can be acquired without having to make a substantial down payment.
B)The lease is a way of indirectly making a sale.
C)"Off-balance-sheet financing" may be practiced.
D)The risk of obsolescence may be reduced.

Question 8

On January 1, Lessee Company incorrectly recorded a 10-year capital lease as an operating lease.The lease requires annual payments.As a result of the recording error, Lessee Company's current ratio and debt to stockholders' equity ratio will be $\begin{array}{lll}&& \text { Debt to Stockholders } \\&\text { Current Ratio } &\text { Equity Ratio }\\\text { I. } & \text { not affected } & \text { not affected } \\\text { II. } & \text { understated } & \text { understated } \\\text { III. } & \text { overstated } & \text { overstated } \\\text { IV. } & \text { nwerctated } & \text { 11verctated }\end{array}$

A)I
B)II
C)III
D)IV

Question 9

From the lessor's standpoint, all of the following statements are true regarding leasing except that

A)the lease may serve as a marketing tool and thereby increase sales
B)if the residual value of the asset is not guaranteed, the lessor has transferred the risks of residual value decreases to the lessee
C)for sales-type lease agreements, the lessor earns interest in addition to profit from the transfer of the asset
D)the accounting procedures used by a lessor for a sales-type lease are similar to the accounting procedures used for a normal sale of merchandise under a perpetual inventory system

Question 10

For a lease that contains a bargain purchase option, minimum lease payments include

A)any guarantee by the lessee of the residual value
B)any payments on failure to renew or extend the lease
C)executory costs
D)minimum periodic rental payments required by the lease over the lease term

Question 11

Which of the following facts would require a lessee to classify a lease as a capital lease?

A)The lease term is 85% of the estimated economic life of the leased property.
B)The present value of the minimum lease payments is 85% of the fair market value of the leased property to the lessor, less any investment tax credit accruing to the lessor.
C)The lease contains a purchase option.
D)The lease does not transfer ownership of the leased property.

Question 12

From the lessee's viewpoint, all of the following are advantages of leasing except that

A)if a lease is recorded as a capital lease, the calculated rate of return on the total assets ratio and the current ratio will be improved
B)a lease agreement may reduce the risk of obsolescence for a lessee
C)in many cases, an asset may be leased without requiring the lessee to make a substantial down payment
D)the lessee may be able to claim larger tax deductions through leasing the asset than if the asset were purchased

Question 13

Which is an advantage of leasing from a lessee's viewpoint?

A)The asset can be acquired without having to make a substantial down payment.
B)The lease is a way of indirectly making a sale.
C)"Off-balance-sheet financing" may be avoided.
D)The risk of obsolescence may be increased.

Question 14

Executory costs

A)are included in the minimum lease payments by the lessee
B)should normally be borne by the party that is, in substance, the owner of the asset
C)are the costs incurred by the lessor that are directly associated with negotiating and completing the lease transaction
D)are always paid by the lessee

Question 15

If a lease is classified as a capital lease because the present value of the minimum lease payments is equal to 90% or more of the fair value of the leased property, the time period to be used by the lessee to amortize the leased property is the

A)lease term
B)expected economic life of the property
C)lease term or the expected economic life of the property, whichever is longer
D)expected economic life of the property or the lease term, whichever is shorter

Question 16

If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is

A)the lease term
B)the expected economic life of the property
C)the lease term or the expected economic life of the property, whichever is shorter
D)the maximum amortization period for intangible assets

Question 17

On January 1, Lessor Company incorrectly recorded a 10-year operating lease as a capital lease.The lease requires annual payments.As a result of the recording error, Lessor Company's rent revenue and interest revenue will be $\begin{array}{lll}& \text {Rent Revenue}& \text {Interest Revenue}\\\text { I. } & \text { not affected } & \text { not affected } \\\text { II. } & \text { overstated } & \text { understated } \\\text { III. } & \text { understated } & \text { overstated } \\\text { IV. } & \text { underctated } & \text { inderstated }\end{array}$

A)I
B)II
C)III
D)IV

Question 18

On January 1, Lessee Company incorrectly recorded a capital lease as an operating lease.The ratio of debt to stockholders' equity would be

A)not affected
B)overstated
C)understated
D)not determinable

Question 19

According to current GAAP, leased property could be reported as an asset on the balance sheet of the lessee and the lessor as follows: $\begin{array}{lll}&\text { Lessee}&\text { Lessor }\\ \text { I. } & \text { included } & \text { included } \\\text { II. } & \text { included } & \text { not included }\\\text { III. } & \text {not included } & \text { not included }\end{array}$

A)I
B)II
C)III
D)all of the above

Question 20

If a lease qualifies as a capital lease, which of the following combinations of payments would be included?

A)minimum periodic rental payments plus executory costs
B)minimum periodic rental payments plus the payment required for a bargain purchase option
C)minimum periodic rental payments minus any payment required for a guarantee of the residual value
D)minimum periodic rental payments minus any payments required for failure to renew or extend the lease

Question 21

On January 1, 2010, Rachel Company leased equipment by signing a five-year lease that required five payments of $30, 000 due on December 31 of each year.The equipment remains the property of the lessor at the end of the lease, and Rachel does not guarantee any residual value.Using a rate of 7%, Rachel capitalized the lease on January 1, 2010, in the amount of $123, 006.What is the amount of interest expense Rachel should report on its 2011 income statement?

A)$ 8, 610
B)$ 7, 113
C)$21, 390
D)$22, 887

Question 22

Which of the following correctly states a lease capitalization criterion from the point of view of the lessee?

A)Collectibility of the lease payments is reasonably certain.
B)The present value of the minimum lease payments is equal to 75% or more of the fair value of the leased property.
C)The lease contains a bargain purchase option.
D)The lease term is equal to at least 85% of the estimated economic life of the leased asset.

Question 23

On January 1, 2010, Remy Corp., a lessee, signed a five-year capital lease for new equipment.The lease requires annual payments of $8, 000.The first payment is due on December 31, 2010.Remy guaranteed a residual value of $2, 000.On December 31, 2014, Remy returned the asset to the lessor, and the asset was appraised at a value of $1, 500.Remy should record which of the following on December 31, 2014?

A)a $1, 500 credit to leased equipment
B)a $ 500 debit to a loss account
C)a $ 500 debit to cash
D)a $1, 500 credit to cash

Question 24

If a lessee classifies a lease as a capital lease and uses the straight-line method of amortization, the amount to be amortized over the lease term is

A)the original amount capitalized less the present value of the guaranteed residual value (if applicable)
B)the original amount capitalized less the unguaranteed residual value
C)the original amount capitalized less the guaranteed residual value (if applicable)
D)fair value of the leased property

Question 25

On January 1, 2010, Leslie Company signed a lease agreement requiring ten annual payments of $14, 000, beginning December 31, 2010.The agreement was classified as a capital lease.When reviewing Leslie's accounting records, which of the following would not be expected?

A)
$\begin{array} { l r } \text { Leased Equipment } & 105,210 \\\text { Capital Lease Obligation } & 105,210\end{array}$
B)
$\begin{array} { l c } \text { Interest Expense } & 7,365 \\\text { Obligation Under Capital Leases } & 6,635 \\\quad \text { Cash } & 14,000\end{array}$
C)
Depreciation Expense: Leased Equipment $\quad$ 10,521
Accumulated Depreciation:
Leased Equipment $\quad$ $\quad$ $\quad$ 10,521
D)
$\begin{array} { l c } \text { Rent Expense } & 14,000 \\\text { Cash } & 14,000\end{array}$

Question 26

Exhibit 21-1 On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60, 000, beginning December 31, 2010.The lease qualifies as a capital lease.Victor's incremental borrowing rate was 9% and the lessor's implicit rate, known by Victor, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively.

-
Refer to Exhibit 21-1.The interest expense for 2010 would be (round answers to the nearest dollar)

A)$21, 003
B)$22, 746
C)$24, 225
D)$26, 133

Question 27

A capital lease should be recorded in the lessee's accounts at the inception of the lease in an amount equal to

A)the present value of the minimum lease payments less the executory costs included in the minimum lease payments
B)the total value of the future rental payments less any estimated contingent payments
C)the total value of future rental payments less any executory payments included in the future payments
D)the total value of the minimum lease payments less executory costs, if any

Question 28

Exhibit 21-1 On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60, 000, beginning December 31, 2010.The lease qualifies as a capital lease.Victor's incremental borrowing rate was 9% and the lessor's implicit rate, known by Victor, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively.

-
Refer to Exhibit 21-1.The balance of the lease obligation for financial reporting purposes on December 31, 2010, after the lease payment would be (round answers to the nearest dollar)

A)$ 0
B)$167, 979
C)$227, 448
D)$233, 379

Question 29

On January 1, 2010, Rayma Co.leased equipment by signing a five-year lease that required five payments of $30, 000 due on January 1 of each year with the first payment due January 1, 2010.The equipment remains the property of the lessor at the end of the lease and Rayma does not guarantee any residual value.Using a 10% cost of capital, Rayma capitalized the lease on January 1, 2010, in the amount of $125, 096.What is the amount of current portion of the lease liability Rayma should report on the December 31, 2011, balance sheet?

A)$ 7, 461
B)$20, 490
C)$22, 539
D)$30, 000

Question 30

On January 1, 2010, Wally Company signed a four-year lease requiring annual payments of $45, 000, with the first payment due on January 1, 2010.Wally's incremental borrowing rate was 6%.Actuarial information for 6% follows: $\begin{array}{llr}&\text {3 Periods}&\text {4 Periods}&\text {5 Periods}\\ \text { Present value of an annuity due of \( 1 @ 6 \% \) } &2.83339&3.67301&4.46511\\ \text { Present value of ordinary annuity of 1 @ \( 6 \% \)} &2.67301&3.46511&4.21236\\\end{array}$
Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)?

A)$200, 931
B)$165, 285
C)$155, 931
D)$144, 555

Question 31

When a lessee makes periodic cash payments for a capital lease, which of the following accounts is decreased?

A)Lease Rental Expense
B)Leased Equipment
C)Capital Lease Obligation
D)Interest Expense

Question 32

When a lessee makes periodic cash payments for an operating lease, which of the following accounts is increased?

A)Lease Rental Expense
B)Leased Equipment
C)Obligation Under Capital Leases
D)Interest Expense

Question 33

On January 1, 2010, Karen Corp.leased equipment by signing a five-year lease that required five payments of $60, 000 due on December 31 of each year.Karen has a 9% cost of capital and capitalized the lease on January 1, 2010, in the amount of $233, 379.As of December 31, 2012, what amount is reported as the current portion of the lease liability?

A)$60, 000
B)$46, 331
C)$42, 506
D)$13, 669

Question 34

On January 1, 2010, Mabel Company leased equipment by signing a five-year lease that required five payments of $90, 000 due on December 31 of each year.The equipment remains the property of the lessor at the end of the lease, and Mabel does not guarantee any residual value.Using a rate of 10%, Mabel capitalized the lease on January 1, 2010, in the amount of $341, 172.What is the amount of the lease liability on December 31, 2011?

A)$252, 348
B)$223, 818
C)$204, 918
D)$195, 288

Question 35

On January 1, 2010, Matilda Company signed a four-year lease requiring annual payments of $15, 000 with the first payment due on January 1, 2010.The fair value of the equipment leased was $50, 000.Matilda's incremental borrowing rate was 6%.Actuarial information for 6% follows: $\begin{array}{llr}&\text {3 Periods}&\text {4 Periods}&\text {5 Periods}\\ \text { Present value of an annuity due of \$ } &2.83339&3.67301&4.46511\\ \text { Present value of ordinary annuity of 1 \$} &2.67301&3.46511&4.21236\\\end{array}$
Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)?

A)$48, 185
B)$50, 000
C)$51, 977
D)$55, 095

Question 36

If a non-cancellable lease contains a bargain purchase option, the lessee is expected to be able to pay all future rents, and the lessor is expected to incur unreimbursable costs during the lease term, the lessee and lessor should classify the lease as $\begin{array}{lll}&\text { Lessee}&\text { Lessor }\\ \text { I. } & \text { operating } & \text { operating } \\\text { II. } & \text { operating } & \text { capital } \\\text { III. } & \text { capital } & \text { capital } \\\text { IV. } & \text { capital } & \text { operating }\end{array}$

A)I
B)II
C)III
D)IV

Question 37

Which of the following correctly states a lessee criterion for classifying a lease as a capital lease?

A)The lessee guarantees the residual value.
B)The sum of the lease payments exceeds 90% of the fair value of the asset.
C)The asset is the property of the lessor at the end of the lease term.
D)The lease term is equal to 75% or more of the estimated economic life of the leased asset.

Question 38

On January 1, 2010, Rayma Co.leased equipment by signing a six-year lease that required six payments of $30, 000 due on January 1 of each year with the first payment due January 1, 2010.The equipment remains the property of the lessor at the end of the lease, and Rayma does not guarantee any residual value.Using an 8% cost of capital, Rayma capitalized the lease on January 1, 2010, in the amount of $149, 781.What is the total amount of lease liability (including interest)Rayma should report as of December 31, 2011?

A)$ 99, 364
B)$107, 313
C)$119, 781
D)$121, 415

Question 39

The lessee should classify a non-cancellable long-term lease as a capital lease if

A)there is a purchase option at the end of the lease term
B)the present value of the minimum lease payments is at least 75% of the fair value of the leased property
C)the present value of the minimum lease payments is at least 90% of the fair market value of the leased property to the lessor
D)the estimated residual value of the leased property at the termination of the lease is equal to 90% of the lessee's guaranteed residual value

Question 40

Exhibit 21-1 On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60, 000, beginning December 31, 2010.The lease qualifies as a capital lease.Victor's incremental borrowing rate was 9% and the lessor's implicit rate, known by Victor, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively.

-
Refer to Exhibit 21-1.The balance of the lease obligation on January 1, 2011, for financial reporting purposes after the lease payment would be (round answers to the nearest dollar)

A)$ 0
B)$166, 779
C)$227, 448
D)$233, 379

Question 41

On January 1, 2010, Larry, Inc.leased equipment, signing a five-year lease that requires five payments of $40, 000 due on January 1 of each year with the first payment due January 1, 2010.Larry accounted for the lease as a capital lease.Using a rate of 9%, Larry determined the present value on January 1, 2010, to be $169, 589.What is the amount of the long-term lease obligation that Larry should report on its December 31, 2011 balance sheet?

A)$ 70, 364
B)$101, 252
C)$112, 915
D)$129, 589

Question 42

An operating lease should be recorded in the lessee's accounts at the inception of the lease at an amount equal to

A)the present value of the minimum lease payments less the executory costs included in the minimum lease payments
B)the total value of the future rental payments less any estimated contingent payments
C)the total value of the future rental payments less any executory payments included in the future payments
D)none of these

Question 43

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr} \text {Present value of \( \$ 1 \) } &0.567427\\ \text { Present value of ordinary annuity of \( \$ 1 \) } &3.604776\\\end{array}$



-Refer to Exhibit 21-2.If the Maury Company uses the straight-line method of depreciation for its assets, the depreciation expense for the leased equipment for the year ending December 31, 2010, is

A)$15, 554
B)$14, 419
C)$13, 554
D)$12, 419

Question 44

When a lessee makes periodic cash payments for a capital lease, which of the following accounts is increased?

A)Lease Rental Expense
B)Leased Equipment
C)Capital Lease Obligation
D)Interest Expense

Question 45

Which of the following statements regarding the calculation of the lessee's depreciation expense for a capital lease is true?

A)The bargain purchase option price is deducted from the original cost capitalized, and the difference is allocated over the estimated economic life of the asset.
B)The guaranteed residual value is deducted from the original cost capitalized, and the difference is allocated over the estimated economic life of the asset.
C)The unguaranteed residual value is deducted from the original cost capitalized, and the difference is allocated over the term of the lease.
D)The guaranteed residual value is deducted from the original cost capitalized, and the difference is allocated over the term of the lease.

Question 46

The lessee should report capital lease obligations on the balance sheet as

A)a current liability
B)a long-term liability
C)a current liability for the current portion and a long-term liability for the remaining amount
D)a note to the financial statements only

Question 47

On January 1, 2010, Marty Inc.leased equipment by signing a five-year lease that required five payments of $60, 000 due on January 1 of each year with the first payment due January 1, 2010.The equipment remains the property of the lessor at the end of the lease and Marty does not guarantee any residual value.Marty accounted for the lease as an operating lease, and using a rate of 10%, determined its present value on January 1, 2010, to be $250, 194.What is the amount of current lease liability Marty should report on its December 31, 2010 balance sheet?

A)$40, 980
B)$45, 078
C)$54, 544
D)$60, 000

Question 48

On January 1, 2010, Scarlett signed a lease agreement with Amber.Amber will use the equipment and make ten annual payments of $15, 000 beginning December 31, 2010.The lease is considered to be a sales-type lease.When reading the Scarlett income statement, you would expect to find which of the following accounts?

A)Rent Revenue
B)Interest Revenue
C)Rental Expense
D)Interest Expense

Question 49

The Rupert Company leased a machine at the beginning of 2010.The machine, which had cost the lessor $85, 000, was properly capitalized by Rupert at $73, 734.84.A lease payment of $16, 563 is due at the end of each year.The expected life of the machine is seven years, and the term of the lease is five years.At the beginning of 2015, the machine will be returned to the lessor.Both Rupert and the lessor use the straight-line method of depreciation.What amount of depreciation expense should Rupert record in 2010 for the machine (round calculations up to the nearest dollar)?

A)$14, 600
B)$14, 747
C)$16, 563
D)$17, 000

Question 50

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr} \text {Present value of \( \$ 1 \) } &0.567427\\ \text { Present value of ordinary annuity of \( \$ 1 \) } &3.604776\\\end{array}$


- Refer to Exhibit 21-2.The interest expense associated with the leased equipment for the year ending December 31, 2010, is

A)$ 2, 400
B)$ 8, 651
C)$ 9, 332
D)$20, 000

Question 51

Which of the following is not a required disclosure by a lessee of an operating lease?

A)rental expense for the period
B)total contingent rentals
C)the amount of any sublease rentals
D)the gross amount of assets under operating leases

Question 52

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr} \text {Present value of \( \$ 1 \) } &0.567427\\ \text { Present value of ordinary annuity of \( \$ 1 \) } &3.604776\\\end{array}$



- Refer to Exhibit 21-2.What would be the debit to Leased Equipment under Capital Leases on January 1, 2010? (Round amounts to the nearest dollar.)

A)$ 72, 096
B)$ 77, 770
C)$100, 000
D)$110, 000

Question 53

On January 1, 2010, Scarlett signed a lease agreement with Amber.Amber will use the equipment and make ten annual payments of $15, 000 beginning December 31, 2010.The lease is considered to be a capital lease.When reading the Amber income statement, you would expect to find which of the following accounts?

A)Rent Revenue
B)Interest Revenue
C)Rental Expense
D)Interest Expense

Question 54

On January 1, 2010, Becky Company signed a lease agreement requiring six annual payments of $50, 000, beginning December 31, 2010.The lease qualifies as an operating lease.Becky's incremental borrowing rate was 9% and the lessor's implicit rate, known by Becky, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. Rounded to the nearest dollar, interest and rent expenses for 2010 would be
$\begin{array}{llr} & \text { Interest }&\text { Rent } \\\text { I. } & \$ 50,000&\$0 \\\text { II. } & \$ 0 &\$22,430\\\text { III. } & \$ 22,430&\$50,000 \\\text { IV. } & \$ 0&\$50,000\end{array}$

A)I
B)II
C)III
D)IV

Question 55

The lessee's footnote disclosures should include the future minimum rental payments as of the date of the latest balance sheet presented, in the aggregate and for a certain number of succeeding fiscal years.This number of years is

A)5
B)10
C)15
D)20

Question 56

When is it appropriate for the lessee to use the lessor's implicit rate to discount the minimum lease payments?

A)whenever the lessee knows what the lessor's rate is
B)when the lessor's rate is higher than the lessee's incremental borrowing rate
C)when the lessee's incremental borrowing rate is lower than the lessor's rate
D)when the lessor's implicit rate is lower than the lessee's incremental borrowing rate

Question 57

Ginnie, Inc.entered into a five-year capital lease on December 31, 2010.This lease requires five minimum annual lease payments due on December 31 of each year.The first minimum payment was paid on December 31, 2010.This payment included which of the following? $\begin{array}{ll}&\text { Interest Expense}&\text { Lease Liability}\\\text {I.}&\text { No } & \text { Yes } \\\text {II.}&\text { Yes } & \text { No } \\\text {III.}&\text { Yes } & \text { Yes } \\\text {IV.}&\text { No } & \text { No }\end{array}$

A)I
B)II
C)III
D)IV

Question 58

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr} \text {Present value of \( \$ 1 \) } &0.567427\\ \text { Present value of ordinary annuity of \( \$ 1 \) } &3.604776\\\end{array}$


- Refer to Exhibit 21-2.What is the correct interest expense for the year ending December 31, 2011, for the lease obligation? (Round answers to the nearest dollar.)

A)$20, 000
B)$11, 948
C)$ 8, 052
D)$ 7, 290

Question 59

On January 3, 2010, the Walton Corporation signed a 10-year non-cancellable lease for manufacturing equipment.The fair value of the equipment at that time was $550, 000.At the end of the lease period, the equipment, which has an estimated life of 15 years, will be returned to the lessor.Additional information is below: $\begin{array}{ll}\text { Lease payments(year-end) } & \$ 80,000 \\\text { WaltonCorporation's incremental borrowing rate } & 10 \% \\\text { Lessor's implicit interest rate (known to Walton) } & 12 \%\\\text {Present value factor for an ordinary annuity of 10 years }\\\text {at \( 10 \% \)}&6.144567\\\text {Present value factor for an ordinaty annuity of 10 years}\\\text {at \( 12 \% \)}&5.650223\end{array}$
Walton should

A)capitalize the equipment at $550, 000
B)capitalize the equipment at $491, 565
C)capitalize the equipment at $452, 018
D)not capitalize the equipment

Question 60

Which of the following items would not be included in the calculation of the capital lease obligation?

A)bargain purchase option
B)guaranteed residual value
C)executory costs
D)any payments required for failure to renew or extend the lease

Question 61

Which of the following statements is true about initial direct costs?

A)Initial direct costs should always be debited against income by the lessor in the period of the inception of the lease.
B)Initial direct costs are ownership-type costs such as insurance, maintenance, and taxes.
C)Initial direct costs of an operating lease should be recorded by the lessor as a prepaid asset.
D)Initial direct costs of a sales-type lease should be expensed as incurred, and an equal amount of the unearned income should be recognized as income in the same period.

Question 62

A lease will be treated as a direct financing lease by the lessor when

A)the lessor is a financial institution
B)the interest revenue element is determined in such a manner as to produce a constant periodic rate of return on the net investment of the lease
C)at least one of the four basic criteria is met, collectibility of the minimum lease payments is reasonably assured, no uncertainties surround the amount of the unreimbursable costs, and the lessor does not have a dealer profit or loss
D)the lease agreement contains a provision for unguaranteed residual value

Question 63

For a sales-type lease, cost of goods sold is valued by the lessor at

A)the recorded cost assigned to the inventory less the present value of the guaranteed residual value of the leased property accruing to the benefit of the lessor
B)the recorded cost assigned to the inventory less the undiscounted value of the unguaranteed residual value of the leased property accruing to the benefit of the lessor
C)the recorded cost assigned to the inventory less the present value of the unguaranteed residual value of the leased property accruing to the benefit of the lessor
D)the recorded cost assigned to the inventory less the undiscounted value of the guaranteed residual value of the leased property accruing to the benefit of the lessor

Question 64

Exhibit 21-3 On January 1, 2010, Quincy Company enters into a five-year sales-type lease with Andy Company.The lease requires Andy to make five annual payments at the beginning of the year, with the first payment due January 1, 2010.The lease includes a bargain purchase price of $10, 000.Quincy requires a 10% rate of return.The cost to Quincy of the property is $100, 000, and it has a fair value of $150, 000.Present value factors for a 10% interest rate are as follows:
$\begin{array}{llr} \text { Present value of \( \$ 1 \) for \( n=1 \)} &0.909091\\ \text { Present value of \( \$ 1 \) for \( n=5 \) } &0.620921\\ \text { Present value of an ordinary annuity for \( n=5 \) } &3.790787\\ \text { Present value of an annuity due for \( n=5 \) } &4.169865\\\end{array}$



- Refer to Exhibit 21-3.The sales revenue to be recognized by Quincy on January 1, 2010, is

A)$143, 791
B)$150, 000
C)$ 50, 000
D)$ 0

Question 65

Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be

A)expensed in the same period that the expenditure is made
B)recorded as a prepaid asset and allocated to expense over the lease term
C)deferred and recognized as a reduction in the interest rate implicit in the lease
D)directly charged (debited)to Retained Earnings

Question 66

One of the distinguishing characteristics of a direct financing lease is that

A)the lessor is normally a dealer or manufacturer
B)the net investment in the lease is equal to the cost of the asset or carrying value of the asset
C)the lease has two sources of earnings: interest revenue and profit or loss from the asset exchange
D)the property related to the lease remains on the lessor's balance sheet during the term of the lease

Question 67

Which of the following facts would require a lessor to classify a lease as an operating lease?

A)No important uncertainties exist about unreimbursable costs yet to be incurred by the lessor.
B)The collectibility of the minimum lease payments is reasonably assured.
C)The lease term is 75% of the estimated economic life of the leased property.
D)The sum of the minimum lease payments is 90% of the fair value of the leased property to the lessor.

Question 68

Which of the following items should be included in the calculation of the lessor's gross receivable? $\begin{array}{llll}&\text { Periodic Lease } & \text { ExecutoryCosts } & \text { Unguaranteed } \\&\text { Rental Payments } & \text { Paid by Lessee } & \text { Residual Value }\\\text { I. } & \text { Yes } & \text { Yes } & \text { Yes } \\\text { II. } & \text { Yes } & \text { Yes } & \text { No } \\\text { III. } & \text { Yes } & \text { No } & \text { No } \\\text { IV } & \text { Vees } & \text { No } & \text { Yes }\end{array}$

A)I
B)II
C)III
D)IV

Question 69

Dillon Co., a lessor, signed a direct financing lease on January 1.The cost and fair value of the machine that was leased was $60, 000.The implicit interest rate was 6%.The lease period was seven years, with the first payment due immediately.Actuarial information for 6% follows: $\begin{array}{llcc}& 6 \text { Years }& 7 \text { Years }& 8 \text { Years }\\\text { Present value of ordinary anuity of } \$ 1&4.91732&5.58238&6.20979 \\\end{array}$
What is the annual lease payment to be collected by Dillon?

A)$ 8, 571.43
B)$ 9, 115.25
C)$10, 139.72
D)$11, 516.78

Question 70

A six-year operating lease requires annual rent payments of $15, 000 for years 1, 2, and 3, and annual rent payments of $10, 000 for years 4, 5, and 6.The agreement also requires the lessor to pay a $1, 800 annual insurance premium for the leased property.Which of the following amounts should be recognized as the rental revenue in year 1 by the lessor?

A)$10, 000
B)$13, 500
C)$15, 000
D)$16, 800

Question 71

Which of the following is a required disclosure by a lessee of a capital lease?

A)total contingent rentals incurred for each period
B)lease assets, accumulated amortization, amortization expense, and liabilities
C)future minimum lease payments in total as of the balance sheet date and for each of the five succeeding fiscal years
D)all of these

Question 72

Exhibit 21-4 On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee Company.The lease agreement calls for five equal annual payments of $60, 000 at the beginning of each year with the first payment due on January 1, 2010.The leased property has an estimated residual value of $10, 000, which Lee does not guarantee.The property remains the property of General at the end of the lease term.General desires a 12% rate of return.Present value factors for a 12% interest rate are as follows:
$\begin{array}{llr} \text { Present value of \( \$ 1 \) for \( n=1 \)} &0.892857\\ \text { Present value of \( \$ 1 \) for \( n=5 \) } &0.567427\\ \text { Present value of an ordinary annuity for \( n=5 \) } &3.604776\\ \text { Present value of an annuity due for \( n=5 \) } &4.037349\\\end{array}$



- Refer to Exhibit 21-4.The cost of the leased property to General is (round the answer to the nearest dollar)

A)$247, 915
B)$242, 241
C)$226, 287
D)$221, 961

Question 73

When a lessor receives cash on an operating lease, which of the following accounts is increased?

A)Interest Revenue: Leases
B)Lease Rental Revenue
C)Lease Receivable
D)Unearned Interest: Leases

Question 74

In a sales-type lease

A)sales revenue ignores the present value of the guaranteed residual value
B)sales revenue includes the present value of unguaranteed residual value
C)cost of goods sold is reduced by the amount of unguaranteed residual value
D)both sales and cost of goods sold are increased by the present value of any unguaranteed residual values

Question 75

A lessor enters into a sales-type lease.Which of the following statements is true if the leased asset has an unguaranteed residual value?

A)The gross profit recognized is less than it would be if the residual was guaranteed.
B)The gross profit recognized is more than it would be if the residual was guaranteed.
C)The lessor should decrease the cost of goods sold by the amount of the unguaranteed residual value.
D)The gross profit is the same as it would be if the residual was guaranteed.

Question 76

Depreciation expense will be recorded in the accounts of the

A)lessee for operating leases
B)lessor for operating leases
C)lessor for direct financing leases
D)lessor for sales-type leases

Question 77

On January 1, 2010, Stanley Corp., a lessor, signed a direct financing lease.Stanley was to receive annual year-end payments of $8, 000 for ten years, after which there was a guaranteed residual value of $6, 000.The implicit interest rate was 8%.Actuarial information for 8%, ten periods follows: $\begin{array}{llr} \text {Present value of ordinary annuity of \( \$ 1 \) } &6.71008\\ \text {Present value of amount of \( \$ 1 \) } &0.46315\\\end{array}$
On January 1, 2010, Stanley should record a debit to Lease Receivable for

A)$53, 680.64
B)$56, 459.78
C)$80, 000.00
D)$86, 000.00

Question 78

Exhibit 21-4 On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee Company.The lease agreement calls for five equal annual payments of $60, 000 at the beginning of each year with the first payment due on January 1, 2010.The leased property has an estimated residual value of $10, 000, which Lee does not guarantee.The property remains the property of General at the end of the lease term.General desires a 12% rate of return.Present value factors for a 12% interest rate are as follows:
$\begin{array}{llr} \text { Present value of \( \$ 1 \) for \( n=1 \)} &0.892857\\ \text { Present value of \( \$ 1 \) for \( n=5 \) } &0.567427\\ \text { Present value of an ordinary annuity for \( n=5 \) } &3.604776\\ \text { Present value of an annuity due for \( n=5 \) } &4.037349\\\end{array}$




- Refer to Exhibit 21-4.What is the amount of the credit to Unearned Interest: Leases to be recorded by General Leasing on January 1, 2010? (Round the answer to the nearest dollar.

A)$73, 713
B)$68, 039
C)$67, 759
D)$62, 085

Question 79

Exhibit 21-3 On January 1, 2010, Quincy Company enters into a five-year sales-type lease with Andy Company.The lease requires Andy to make five annual payments at the beginning of the year, with the first payment due January 1, 2010.The lease includes a bargain purchase price of $10, 000.Quincy requires a 10% rate of return.The cost to Quincy of the property is $100, 000, and it has a fair value of $150, 000.Present value factors for a 10% interest rate are as follows:
$\begin{array}{llr} \text { Present value of \( \$ 1 \) for \( n=1 \)} &0.909091\\ \text { Present value of \( \$ 1 \) for \( n=5 \) } &0.620921\\ \text { Present value of an ordinary annuity for \( n=5 \) } &3.790787\\ \text { Present value of an annuity due for \( n=5 \) } &4.169865\\\end{array}$


-Refer to Exhibit 21-3.The annual lease payment Quincy would require is (round the answer to the nearest dollar)

A)$35, 972
B)$39, 570
C)$34, 483
D)$37, 931

Question 80

A direct financing lease differs from a sales-type lease in that

A)the direct financing lease does not have a dealer profit, although it may have a dealer loss
B)the direct financing lease provisions cannot include a bargain purchase option
C)the sales-type lease does not have unearned interest income at the inception of the lease
D)the direct financing lease does not have a dealer profit or loss