Deck 21: Accounting for Leases

Question 1

Both a guaranteed and an unguaranteed residual value affect the lessee's computation of amounts capitalized as a leased asset.

Answer 1

False

Question 2

In accounting for the intial direct costs for a sales-type lease, the lessor adds initial direct costs to the net investment in the lease and amortizes them over the life of the lease as a yield adjustment.

Answer 2

False

Question 3

A common method of measuring the current liability portion in ordinary annuity leases is the change-in-the-present-value method.

Answer 3

True

Question 4

Lessors classify and account for all leases that do not qualify as direct-financing or sales-type leases as operating leases.

Question 5

Leasing equipment reduces the risk of obsolescence to the lessee, and passes the risk of residual value to the lessor.

Question 6

A lease that contains a purchase option must be capitalized by the lessee.

Question 7

Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.

Question 8

From the lessee's viewpoint, an unguaranteed residual value is the same as no residual value in terms of computing the minimum lease payments.

Question 9

Lessors classify and account for all leases that don't qualify as sales-type leases as operating leases.

Question 10

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

Question 11

The lessor will recover a greater net investment if the residual value is guaranteed instead of unguaranteed.

Question 12

A capitalized leased asset is always depreciated over the term of the lease by the lessee.

Question 13

The use of an unrealistically low discount rate could lead to a lessee recording a leased asset at an amount exceeding the fair value of the equipment, which is generally prohibited in IFRS.

Question 14

Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.

Question 15

Direct-financing leases are in substance the financing of an asset purchase by the lessee.

Question 16

When the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value, that stated amount is the guaranteed residual value.

Question 17

The IASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.

Question 18

IFRS requires that lessees use the incremental rate to record a lease, unless it is impractical to determine it.

Question 19

The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.

Question 20

A lessee records interest expense in both a finance lease and an operating lease.

Question 21

In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income

A)should be amortized over the period of the lease using the effective interest method.
B)should be amortized over the period of the lease using the straight-line method.
C)does not arise.
D)should be recognized at the lease's expiration.

Question 22

In computing depreciation of a leased asset, the lessee should subtract

A)a guaranteed residual value and depreciate over the term of the lease.
B)an unguaranteed residual value and depreciate over the term of the lease.
C)a guaranteed residual value and depreciate over the life of the asset.
D)an unguaranteed residual value and depreciate over the life of the asset.

Question 23

The IASB requires lessees and lessors to disclose certain information about leases in their financial statements or in the notes.

Question 24

Executory costs include

A)maintenance.
B)property taxes.
C)insurance.
D)All of these answer choices are correct.

Question 25

Mika company leases telecommunication equipment.Assume the following data for equipment leased from Phlash Company.The lease term is 5 years and requires equal rental payments of ¥3,150,000 at the beginning of each year.The present value of the payments was ¥13,135,059.The equipment has a fair value at the inception of the lease of ¥13,900,000, an estimated useful life of 8 years, and no residual value.Mika pays all executory costs directly to third parties.Phlash set the annual rental to earn a rate of return of 10%, and this fact is known to Mika.The lease does not transfer title or contain a bargain-purchase option.Based on this information, which of the following statement is true?

A)The lease should be classified as an operating lease.
B)The lease meets the economic life test to be classified as a finance lease.
C)The lease should be classified as a finance lease based on passing the recovery of investment test.
D)The lease is classified as an operating lease for Mika and a finance lease for Phlash.

Question 26

Which of the following is a correct statement of one of the capitalization criteria?

A)The lease transfers ownership of the property to the lessor.
B)The lease contains a purchase option.
C)The lease term is equal to or more than 75% of the estimated economic life of the leased property.
D)The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

Question 27

In computing the present value of the minimum lease payments, the lessee should

A)use its incremental borrowing rate in all cases.
B)use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
C)use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
D)None of these answer choices are correct.

Question 28

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

A)No impact as the option does not enter into the transaction until the end of the lease term.
B)The lessee must increase the present value of the minimum lease payments by the present value of the option price.
C)The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
D)The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

Question 29

The gross profit amount in a sales-type lease is greater when a guaranteed residual value exists.

Question 30

Which of the following best describes current practice in accounting for leases?

A)Leases are not capitalized.
B)Leases similar to installment purchases are capitalized.
C)All long-term leases are capitalized.
D)All leases are capitalized.

Question 31

Minimum lease payments may include a

A)penalty for failure to renew.
B)bargain purchase option.
C)guaranteed residual value.
D)any of these answer choices.

Question 32

Which of the following would not be included in the Lease Receivable account?

A)Guaranteed residual value
B)Unguaranteed residual value
C)A bargain purchase option
D)All of these answer choices would be included

Question 33

The amount to be recorded as the cost of an asset under a finance lease is equal to the

A)present value of the minimum lease payments.
B)present value of the minimum lease payments or the fair value of the asset, whichever is lower.
C)present value of the minimum lease payments plus the present value of any unguaranteed residual value.
D)carrying value of the asset on the lessor's books.

Question 34

A lessee with a finance lease containing a bargain purchase option should depreciate the leased asset over the

A)asset's remaining economic life.
B)term of the lease.
C)life of the asset or the term of the lease, whichever is shorter.
D)life of the asset or the term of the lease, whichever is longer.

Question 35

If the residual value of a leased asset is guaranteed by a third party

A)it is treated by the lessee as no residual value.
B)the third party is also liable for any lease payments not paid by the lessee.
C)the net investment to be recovered by the lessor is reduced.
D)it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

Question 36

Together the FASB and IASB hope to craft a new lease accounting standard that will eliminate the notion of the operating lease.

Question 37

In the earlier years of a lease, from the lessee's perspective, the use of the

A)finance method will enable the lessee to report higher income, compared to the operating method.
B)finance method will cause debt to increase, compared to the operating method.
C)operating method will cause income to decrease, compared to the finance method.
D)operating method will cause debt to increase, compared to the finance method.

Question 38

Which of the following is not an advantage of leasing?

A)Off-balance-sheet financing
B)Less costly financing
C)100% financing at fixed rates
D)All of these answer choices are advantages.

Question 39

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable.The lease receivable in a direct-financing lease is best defined as

A)the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.
B)the difference between the lease payments receivable and the fair value of the leased property.
C)the present value of minimum lease payments.
D)the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.

Question 40

The methods of accounting for a lease by the lessee are

A)operating and finance lease methods.
B)operating, sales, and finance lease methods.
C)operating and leveraged lease methods.
D)None of these answer choices are correct.

Question 41

Use the following information for Questions
Yueve's Company is negotiating leases for three store locations.Yueve's incremental borrowing rate is 12 percent and the lessor's implicit rate is unknown (it is impracticable to determine).
Each store will have a useful economic life of 30 years.Lease payments will be made at the end of each year.Based on the data below properly classify each of the leases as an operating lease or a finance lease.The purchase price for each property is listed as an alternative to leasing.
On January 1, 2016, Dean Corporation signed a ten-year noncancelable lease for certain machinery.The terms of the lease called for Dean to make annual payments of $100,000 at the end of each year for ten years with title to pass to Dean at the end of this period.The machinery has an estimated useful life of 15 years and no residual value.Dean uses the straight-line method of depreciation for all of its fixed assets.Dean accordingly accounted for this lease transaction as a finance lease.The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%.With respect to this capitalized lease, Dean should record for 2016

A)lease expense of $100,000.
B)interest expense of $44,734 and depreciation expense of $38,068.
C)interest expense of $53,681 and depreciation expense of $44,734.
D)interest expense of $45,681 and depreciation expense of $67,101.

Question 42

Use the following information for Questions
Yueve's Company is negotiating leases for three store locations.Yueve's incremental borrowing rate is 12 percent and the lessor's implicit rate is unknown (it is impracticable to determine).
Each store will have a useful economic life of 30 years.Lease payments will be made at the end of each year.Based on the data below properly classify each of the leases as an operating lease or a finance lease.The purchase price for each property is listed as an alternative to leasing.
On December 1, 2016, Goetz Corporation leased office space for 10 years at a monthly rental of $90,000.On that date Perez paid the landlord the following amounts: The entire amount of $765,000 was charged to rent expense in 2016.What amount should Goetz have charged to expense for the year ended December 31, 2016?

A)$90,000
B)$94,125
C)$184,125
D)$495,000

Question 43

Use the following information for Questions
Yueve's Company is negotiating leases for three store locations.Yueve's incremental borrowing rate is 12 percent and the lessor's implicit rate is unknown (it is impracticable to determine).
Each store will have a useful economic life of 30 years.Lease payments will be made at the end of each year.Based on the data below properly classify each of the leases as an operating lease or a finance lease.The purchase price for each property is listed as an alternative to leasing.
Based on this information, which test(s) does Location A pass for classifying the lease as a finance lease.

Question 44

Use the following information for Questions
Yueve's Company is negotiating leases for three store locations.Yueve's incremental borrowing rate is 12 percent and the lessor's implicit rate is unknown (it is impracticable to determine).
Each store will have a useful economic life of 30 years.Lease payments will be made at the end of each year.Based on the data below properly classify each of the leases as an operating lease or a finance lease.The purchase price for each property is listed as an alternative to leasing.
Based on this information, which test(s) does Location C pass for classifying the lease as a finance lease.

Question 45

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

A)The minimum lease payments plus the unguaranteed residual value.
B)The present value of the minimum lease payments.
C)The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
D)The present value of the minimum lease payments less the present value of the unguaranteed residual value.

Question 46

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria.Which of the following is not one of the ways to accomplish this goal?

A)Lessee uses a higher interest rate than that used by lessor.
B)Set the lease term at something less than 75% of the estimated useful life of the property.
C)Write in a bargain purchase option.
D)Use a third party to guarantee the asset's residual value.

Question 47

The initial direct costs of leasing

A)are generally borne by the lessee.
B)include internal direct and indirect costs.
C)are expensed in the period of the sale under a sales-type lease.
D)All of these answer choices are true with regard to the initial direct costs of leasing.

Question 48

For a sales-type lease,

A)the sales price includes the present value of the unguaranteed residual value.
B)the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
C)the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
D)None of these answer choices are correct.

Question 49

If companies want to disqualify a lease as a finance lease to the lessee, while having the same lease qualify as a finance (sales or financing) lease to the lessor, which of the following are true?

A)It cannot be done
B)They must make information about the implicit rate unavailable to the lessee and use of the incremental borrowing rate by the lessee when it is higher than the implicit interest rate of the lessor.
C)They must include a bargain purchase option.
D)They must specify the transfer of the property to the lessee.

Question 50

Which of the following is true regarding footnote disclosure of operating lease payments under IFRS and U.S.GAAP?

A)U.S.GAAP does not require as much detail as IFRS.
B)It is more difficult to estimate the impact of the off-balance sheet liabilities for companies that use U.S.GAAP, as compared with IFRS companies.
C)Extensive disclosure of future noncancelable lease payment is required for the next five years and the years thereafter under IFRS.
D)IFRS typically has no detail on the year-by-year breakout of lease payment due.

Question 51

The primary difference between a direct-financing lease and a sales-type lease is the

A)manner in which rental receipts are recorded as rental income.
B)amount of the depreciation recorded each year by the lessor.
C)recognition of the manufacturer's or dealer's profit at the inception of the lease.
D)allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

Question 52

Which of the following statements is correct?

A)In a direct-financing lease, initial direct costs are added to the net investment in the lease.
B)In a sales-type lease, initial direct costs are expensed in the year of incurrence.
C)For operating leases, initial direct costs are deferred and allocated over the lease term.
D)All of these answer choices are correct.

Question 53

Use the following information for Questions
Yueve's Company is negotiating leases for three store locations.Yueve's incremental borrowing rate is 12 percent and the lessor's implicit rate is unknown (it is impracticable to determine).
Each store will have a useful economic life of 30 years.Lease payments will be made at the end of each year.Based on the data below properly classify each of the leases as an operating lease or a finance lease.The purchase price for each property is listed as an alternative to leasing.
Based on this information, which test(s) does Location B pass for classifying the lease as a finance lease.

Question 54

All of the followings are ways in which companies avoid leased assets capitalization in devising lease agreements, except:

A)Ensure that the lease does not specify the transfer of title of the property to the lessee.
B)Do not write in a bargain-purchase option.
C)Arrange for the present value of the minimum lease payments to be sufficiently more than the fair value of the leased property.
D)Set the lease term sufficiently below the estimated economic life of the leased property such that the economic life test is not met.

Question 55

All of the following statements are true with regard to how the statement of financial position will be similarly affected by leasing the assets as opposed to issuing bonds and purchasing the assets, except which statement?

A)Since a long-term, non-cancelable lease which is used as a financing device generally results in the capitalization of the leased assets and recognition of the lease commitment in the statement of financial position, the comparative effect is not very different from purchase and ownership.
B)Assets leased under finance leases would be capitalized at the present value of the future lease payment, which is somewhat equivalent to the purchase price of the assets.
C)Bonds sold at par would be nearly equivalent to the present value of the future lease payments.
D)The specific accounts affected by the transactions would be the same.

Question 56

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
What is the amount of the total annual lease payment?

A)$181,801
B)$581,801
C)$591,801
D)$601,801

Question 57

When lessors account for residual values related to leased assets, they

A)always include the residual value because they always assume the residual value will be realized.
B)include the unguaranteed residual value in sales revenue.
C)recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value.
D)All of these answer choices are true with regard to lessors and residual values.

Question 58

All of the following statements are true regarding the circumvention of accounting rules for leases when determining whether a lease qualifies as an operating or capital lease except

A)the residual value guarantee is a device used by lessees and lessors by transferring some of the risk to a third party to convert financing leases to operating leases.
B)the lessee who does not know exactly the lessor`s implicit interest rate might use a different (higher) incremental borrowing rate.
C)lessors typically try to avoid having lease arrangement classified as operating leases.
D)lessors typically try to avoid having lease arrangement classified as finance leases.

Question 59

The Lease Liability account should be disclosed as

A)all current liabilities.
B)all non-current liabilities.
C)current portions in current liabilities and the remainder in non-current liabilities.
D)deferred credits.

Question 60

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)

A)$181,801
B)$581,801
C)$591,801
D)$601,801

Question 61

Use the following information for questions
On January 1, 2015, Sauder Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period.The equipment has an estimated useful life of 7 years and no residual value.Sauder uses the straight-line method of depreciation for all of its fixed assets.Sauder accordingly accounts for this lease transaction as a finance lease.The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.
In 2015, Sauder should record interest expense of

A)$15,849.
B)$29,151.
C)$20,849.
D)$34,151.

Question 62

Emporia Corporation is a lessee with a finance lease.The asset is recorded at $450,000 and has an economic life of 8 years.The lease term is 5 years.The asset is expected to have a fair value of $150,000 at the end of 5 years, and a fair value of $50,000 at the end of 8 years.The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term.What amount of depreciation expense would the lessee record for the first year of the lease?

A)$90,000
B)$80,000
C)$60,000
D)$50,000

Question 63

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
From the lessor's viewpoint, what type of lease is involved?

A)Sales-type lease
B)Sale-leaseback
C)Direct-financing lease
D)Operating lease

Question 64

Pisa, Inc.leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception.The lease does not transfer ownership, nor is there a bargain purchase option.The equipment has a 4-year useful life and no residual value.Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%.Pisa, Inc.uses the straight-line method to depreciate similar assets.What is the amount of depreciation expense recorded by Pisa, Inc.in the first year of the asset's life?

A)$0 because the asset is depreciated by Tower Company.
B)$71,242
C)$76,942
D)$75,000

Question 65

Pisa, Inc.leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception.The lease does not transfer ownership, nor is there a bargain purchase option.The equipment has a 4-year useful life and no residual value.If Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception?

A)$307,767
B)$272,728
C)$284,969
D)$300,000

Question 66

Use the following information for questions
On January 1, 2015, Sauder Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Sauder to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Sauder at the end of this period.The equipment has an estimated useful life of 7 years and no residual value.Sauder uses the straight-line method of depreciation for all of its fixed assets.Sauder accordingly accounts for this lease transaction as a finance lease.The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%.
In 2016, Sauder should record interest expense of

A)$10,849.
B)$12,434.
C)$15,849.
D)$17,434.

Question 67

Haystack, Inc.manufactures machinery used in the mining industry.On January 2, 2016 it leased equipment with a cost of $200,000 to Silver Point Co.The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year.The equipment has an expected useful life of 5 years.If the selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, what are the equal annual payments?

A)$73,259
B)$67,831
C)$75,822
D)$81,398

Question 68

Use the following information for questions
On January 1, 2015, Ogleby Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Ogleby to make annual payments of $60,000 at the end of each year for five years with title to pass to Ogleby at the end of this period.The equipment has an estimated useful life of 7 years and no residual value.Ogleby uses the straight-line method of depreciation for all of its fixed assets.Ogleby accordingly accounts for this lease transaction as a finance lease.The minimum lease payments were determined to have a present value of $227,448 at an effective interest rate of 10%.
With respect to this capitalized lease, for 2016 Ogleby should record

A)interest expense of $22,745 and depreciation expense of $32,493.
B)interest expense of $20,469 and depreciation expense of $32,493.
C)interest expense of $19,019 and depreciation expense of $32,493.
D)interest expense of $14,469 and depreciation expense of $32,493.

Question 69

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
From the lessee's viewpoint, what type of lease exists in this case?

A)Sales-type lease
B)Sale-leaseback
C)Finance lease
D)Operating lease

Question 70

Pisa, Inc.leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception.The lease does not transfer ownership, nor is there a bargain purchase option.The equipment has a 4-year useful life and no residual value.Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%.Assuming that this lease is properly classified as a finance lease, what is the amount of interest expense recorded by Pisa, Inc.in the first year of the asset's life?

A)$0
B)$24,621
C)$17,738
D)$22,798

Question 71

Haystack, Inc.manufactures machinery used in the mining industry.On January 2, 2016 it leased equipment with a cost of $200,000 to Silver Point Co.The 5-year lease calls for a 10% down payment and equal annual payments of $73,259 at the end of each year.The equipment has an expected useful life of 5 years.Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method.The selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co.What is the book value of the leased asset at December 31, 2016, and what is the balance in the Lease Liability account?

Question 72

Pisa, Inc.leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception.The lease does not transfer ownership, nor is there a bargain purchase option.The equipment has a 4 year useful life and no residual value.Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%.Assuming that this lease is properly classified as a finance lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2?

A)$86,038
B)$61,417
C)$63,240
D)$68,300

Question 73

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee?

A)Sales-type lease
B)Direct-financing lease
C)Operating lease
D)Finance lease

Question 74

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
Yancey, Inc.would record depreciation expense on this storage building in 2016 of (Rounded to the nearest dollar.)

A)$0.
B)$330,000.
C)$400,000.
D)$650,981.

Question 75

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
Metcalf Company leases a machine from Vollmer Corp.under an agreement which meets the criteria to be a finance lease for Metcalf.The six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 per year for maintenance, insurance, and taxes.The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee.The present value of an annuity due of 1 for six years at 10% is 4.79079.The present value of an annuity due of 1 for six years at 8% is 4.99271.Metcalf should record the leased asset at

A)$509,256.
B)$488,661.
C)$434,366.
D)$416,799.

Question 76

Use the following information for questions
On January 1, 2015, Ogleby Corporation signed a five-year noncancelable lease for equipment.The terms of the lease called for Ogleby to make annual payments of $60,000 at the end of each year for five years with title to pass to Ogleby at the end of this period.The equipment has an estimated useful life of 7 years and no residual value.Ogleby uses the straight-line method of depreciation for all of its fixed assets.Ogleby accordingly accounts for this lease transaction as a finance lease.The minimum lease payments were determined to have a present value of $227,448 at an effective interest rate of 10%.
With respect to this capitalized lease, for 2015 Ogleby should record

A)rent expense of $60,000.
B)interest expense of $22,745 and depreciation expense of $45,489.
C)interest expense of $22,745 and depreciation expense of $32,493.
D)interest expense of $30,000 and depreciation expense of $45,489.

Question 77

On December 31, 2016, Kuhn Corporation leased a plane from Bell Company for an eight-year period expiring December 30, 2024.Equal annual payments of $150,000 are due on December 31 of each year, beginning with December 31, 2016.The lease is properly classified as a finance lease on Kuhn's books.The present value at December 31, 2016 of the eight lease payments over the lease term discounted at 10% is $880,264.Assuming the first payment is made on time, the amount that should be reported by Kuhn Corporation as the lease liability on its December 31, 2016 statement of financial position is

A)$880,264.
B)$818,290.
C)$792,238.
D)$730,264.

Question 78

Use the following information for questions
Alt Corporation enters into an agreement with Yates Rentals Co.on January 1, 2016 for the purpose of leasing a machine to be used in its manufacturing operations.The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option.Payments of $287,432 are due on January 1 of each year, starting January 1, 2016.
(b) The fair value of the machine on January 1, 2016, is $800,000.The machine has a remaining economic life of 10 years, with no residual value.The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt's incremental borrowing rate is 10% per year.Alt does not have knowledge of the 8% implicit rate used by Yates.
What type of lease is this from Alt Corporation's viewpoint?

A)Operating lease
B)Finance lease
C)Sales-type lease
D)Direct-financing lease

Question 79

Haystack, Inc.manufactures machinery used in the mining industry.On January 2, 2016 it leased equipment with a cost of $200,000 to Silver Point Co.The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year.The equipment has an expected useful life of 5 years.Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method.The selling price of the equipment is $325,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co.What is the amount of interest expense recorded by Silver Point Co.for the year ended December 31, 2016?

A)$29,250
B)$23,400
C)$26,000
D)$32,500

Question 80

On December 31, 2015, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2023.Equal annual payments of $200,000 are due on December 31 of each year, beginning with December 31, 2015.The lease is properly classified as a finance lease on Lang 's books.The present value at December 31, 2015 of the eight lease payments over the lease term discounted at 10% is $1,173,685.Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total lease liability on its December 31, 2016 statement of financial position.

A)$1,091,054.
B)$1,000,159.
C)$871,054.
D)$1,200,000.