Deck 15: Leases

Question 1

Nanotech Inc.leased a new machine having an expected useful life of 20 years from Union Co.Terms of the noncancelable 15-year lease were that Nanotech would gain title to the property upon payment of a sum equal to the fair market value of the machine at the termination of the lease.Nanotech accounted for the lease as a capital lease and recorded an asset and a liability in the financial records.The asset recorded under this lease should properly be amortized over

A) 5 years (the period of actual ownership).
B) 15 years (75 percent of the 20-year asset life).
C) 20 years (the total asset life).
D) 15 years (the term of the lease).

Answer 1

D

Question 2

Which of the following statements characterizes lessor accounting for residual values?

A) Guaranteed residual values are included in the gross investment amount,but unguaranteed residual values are excluded from the gross investment.
B) Unguaranteed residual values are included in the gross investment amount,but guaranteed residual values are excluded from the gross investment.
C) Guaranteed residual values and unguaranteed residual values are excluded from the gross investment.
D) Guaranteed residual values and unguaranteed residual values are included in the gross investment.

Answer 2

D

Question 3

McCabe Institute leased a new machine having an expected useful life of 12 years.The noncancelable lease term is 10 years,and McCabe may exercise a purchase option at the end of the noncancelable term.The machine should be capitalized by McCabe and depreciated over

A) 10 or 12 years at McCabe's option.
B) 12 years.
C) 10 years.
D) 9 years.

Answer 3

A

Question 4

Lease X does not contain a bargain purchase option,but the lease term is equal to 90 percent of the estimated economic life of the leased property.Lease Y does not transfer ownership of the property to the lessee by the end of the lease term,but the lease term is equal to 75 percent of the estimated economic life of the leased property.How should the lessee classify these leases? Lease X Lease Y

A) Capital lease Operating lease
B) Capital lease Capital lease
C) Operating lease Capital lease
D) Operating lease Operating lease

Question 5

In a lease that is recorded as an operating lease by the lessee,the equal monthly rental payments should be

A) allocated between interest expense and depreciation expense.
B) allocated between a reduction in the liability for leased assets and interest expense.
C) recorded as a reduction in the liability for leased assets.
D) recorded as rental expense.

Question 6

Which of the following statements concerning guaranteed residual values is appropriate for the lessee?

A) The asset and related liability should be increased by the amount of the residual value.
B) The asset and related liability should be decreased by the amount of the residual value.
C) The asset and related liability should be decreased by the present value of the residual value.
D) The asset and related liability should be increased by the present value of the residual value.

Question 7

One of the four general criteria for a capital lease specifies that the lease term be equal to or greater than

A) the estimated economic life of the property.
B) 90 percent of the estimated economic life of the property.
C) 75 percent of the estimated economic life of the property.
D) 50 percent of the estimated economic life of the property.

Question 8

For a capital lease,the amount recorded initially by the lessee as a liability should

A) exceed the present value at the beginning of the lease term of minimum lease payments during the lease term.
B) exceed the total of the minimum lease payments during the lease term.
C) not exceed the fair value of the leased property at the inception of the lease.
D) equal the total of the minimum lease payments during the lease term.

Question 9

What are the three types of period costs that a lessee experiences with capital leases?

A) Interest expense,amortization expense,executory costs
B) Amortization expense,executory costs,lease expense
C) Executory costs,interest expense,lease expense
D) Lease expense,executory costs,initial costs

Question 10

Which of the following statements characterizes a sales-type lease?

A) The lessor recognizes a dealer's profit at lease inception and interest revenue over the lease term.
B) The lessor recognizes only interest revenue over the lease term.
C) The lessor recognizes only interest revenue over the life of the asset.
D) The lessor recognizes a dealer's profit at lease inception and interest revenue over the asset life.

Question 11

Which of the following statements characterizes an operating lease?

A) The lessee records depreciation and interest.
B) The lessee records the lease obligation related to the leased asset.
C) The lessor records depreciation and lease revenue.
D) The lessor transfers title of the leased property to the lessee for the duration of the lease term.

Question 12

Kurtain Corp.leased a new building and land from Harlow Leasing Inc.for 20 years.At the inception of the lease the building and land have fair market values of $150,000 and $20,000,respectively.The building has an expected economic life of 25 years.Which of the following statements is correct regarding Kurtain's treatment of the lease?

A) Kurtain should treat the lease as a capital lease provided that the land and building are recorded in separate asset accounts and accounted for separately.
B) Kurtain should treat the lease as a capital lease only if there is either a bargain purchase option or an automatic transfer of ownership at the termination of the lease.
C) Kurtain should treat the lease as a capital lease even though there is no bargain purchase option and no automatic transfer of ownership at the termination of the lease.
D) Kurtain should treat the lease as a capital lease only if Harlow treats the transaction as a leveraged lease.

Question 13

Which one of the following items is not part of the minimum lease payments from the standpoint of the lessee?

A) The minimum rental payments called for by the lease
B) Any guarantee the lessee is required to make at the end of the lease term regarding any deficiency from a specified minimum
C) Any estimated residual value at the end of the lease term
D) Any payment the lessee must make at the end of the lease term to purchase the leased property under a bargain purchase option

Question 14

A lease contains a bargain purchase option.In determining the lessee's capitalizable cost at the beginning of the lease term,the payment called for by the bargain purchase option would be

A) subtracted at its present value.
B) added at its exercise value.
C) added at its present value.
D) subtracted at its exercise price.

Question 15

An eight-year capital lease specifies equal minimum annual lease payments.Part of this payment represents interest and part represents a reduction in the net lease liability.The portion of the minimum lease payment in the fourth year applicable to the reduction of the net lease liability should be

A) the same as in the third year.
B) less than in the third year.
C) less than in the fifth year.
D) more than in the fifth year.

Question 16

Generally accepted accounting principles require that certain lease agreements be accounted for as purchases.The theoretical basis for this treatment is that a lease of this type

A) effectively conveys all of the benefits and risks incident to the ownership of property.
B) is an example of form over substance.
C) provides the use of the leased asset to the lessee for a limited period of time.
D) must be recorded in accordance with the concept of cause and effect.

Question 17

One of the four general criteria for a capital lease is that the present value at the beginning of the lease term of the minimum lease payments equals or exceeds

A) the property's fair market value.
B) 90 percent of the property's fair market value.
C) 75 percent of the property's fair market value.
D) 50 percent of the property's fair market value.

Question 18

Equal monthly rental payments for a particular lease should be charged to Rental Expense by the lessee for which of the following? Capital Lease Operating Lease

A) Yes No
B) Yes Yes
C) No No
D) No Yes

Question 19

Initial direct costs incurred by a lessor in consummating a sales-type lease are

A) charged to unearned income in the first period of the lease term.
B) charged to cost of sales in the first period of the lease term.
C) deferred and allocated over the lease term in proportion to the recognition of rent revenue.
D) deferred and allocated over the lease term on a straight-line basis.

Question 20

The lessee's balance sheet liability for a capital lease would be periodically reduced by the

A) minimum lease payment.
B) minimum lease payment plus the amortization of the related asset.
C) minimum lease payment less the amortization of the related asset.
D) minimum lease payment less the portion of the minimum lease payment allocable to interest.

Question 21

Modesto,Inc.leased machinery with a fair value of $250,000 from Layton Machine Co.on December 31,2014.The contract is a six-year noncancelable lease with an implicit interest rate of 10 percent.The lease requires annual payments of $50,000 beginning December 31,2014.Modesto appropriately accounted for the lease as a capital lease.Modesto's incremental borrowing rate is 12 percent.Assuming the present value of an annuity due of 1 for 6 years at 10 percent is 4.7908 and the present value of an annuity due of 1 for 6 years at 12 percent is 4.6048,what is the lease liability that Modesto should report on the balance sheet at December 31,2014?

A) $189,540
B) $200,000
C) $230,240
D) $239,540

Question 22

Which of the following would be considered an executory cost?

A) Minimum lease payments
B) Interest expense incurred
C) Bargain purchase option
D) Maintenance costs

Question 23

If the residual value of a leased asset is greater than the amount guaranteed by the lessee,the lessee

A) pays the lessor for the difference.
B) recognizes a gain at the end of the lease term.
C) has no obligation related to the residual value.
D) pays the lessor for the difference.

Question 24

Canarsie Company leased equipment to Fulton Inc.on January 1,2014.The lease is for an eight-year period expiring December 31,2021.The first of eight equal annual payments of $900,000 was made on January 1,2014.Canarsie had purchased the equipment on December 29,2013,for $4,800,000.The lease is appropriately accounted for as a sales-type lease by Canarsie.Assume that the present value at January 1,2014,of all rent payments over the lease term discounted at a 10 percent interest rate was $5,280,000.What amount of interest revenue should Canarsie record in 2015 (the second year of the lease period)as a result of the lease?

A) $490,000
B) $480,000
C) $438,000
D) $391,800

Question 25

Scher Co.leased a machine on December 31,2014.Annual payments under the lease are $110,000 (which includes $10,000 annual executory costs)and are due on December 31 each year,for a ten-year period.The first payment was made on December 31,2014,and the second payment was made on December 31,2015.According to the agreement,the lease payments are discounted at 10 percent over the lease term.Assume the present value of minimum lease payments at the inception of the lease and before the first annual payment was $615,000 and Scher appropriately classified the lease as a capital lease.What is the lease liability Scher should report in its December 31,2015,balance sheet?

A) $466,500
B) $515,000
C) $534,150
D) $576,500

Question 26

On January 1,2014,O'neil,Inc.signed a noncancelable lease for a silver polishing machine.The machine has an estimated useful life of nine years.The term of the lease is a six-year term with title passing to O'neil at the end of the lease.The agreement called for annual payments of $40,000 starting at the end of the first year.Assume aggregate lease payments were determined to have a present value of $200,000,based on implicit interest of 12 percent.What amount of interest expense should O'neil report in its 2014 income statement from this lease transaction?

A) $0
B) $16,000
C) $24,000
D) $33,333

Question 27

Wrench Repairs acquires equipment under a noncancelable lease at an annual rental of $45,000,payable in advance for five years.After five years,there is a bargain purchase option of $75,000.The appropriate interest rate is 12 percent.What is the total present value of the lease and the first year's interest expense?

A) $224,234 and $26,908
B) $224,234 and $21,508
C) $204,771 and $21,508
D) $204,771 and $19,173

Question 28

On January 1,Blalock Company as lessee signed a ten-year noncancelable lease for a machine with annual payments of $60,000.The first payment was also made on January 1.Blalock appropriately treated this transaction as a capital lease.The ten lease payments have a present value of $405,000 at January 1,based on implicit interest of 10 percent.For the first year,Blalock should record interest expense of

A) $0.
B) $6,000.
C) $34,500.
D) $40,500.

Question 29

On December 31,2014,Behring Enterprises leased equipment from R & R Equipment Rental.Pertinent lease transaction data are as follows: Behring should record the equipment on the books at

A) $2,100,000.
B) $1,533,000.
C) $1,467,000.
D) $0.

Question 30

Which of the following is NOT a required disclosure for lessors?

A) Total of minimum sublease rentals to be received in the future under noncancelable subleases
B) Unearned interest revenue
C) Unguaranteed residual values accruing to the benefit of the lessor
D) A general description of the lessor's leasing arrangements

Question 31

Parlor Company manufactures equipment that they sell or lease.On December 31,2014,Parlor leased equipment to Liner Company for a five-year period after which ownership of the leased asset will be transferred to Liner.The lease calls for equal annual payments of $60,000,due on December 31 of each year.The first payment was made on December 31,2014.The normal sales price of the equipment is $320,000,and cost is $276,000.For the year ended December 31,2014,what amount of income should Parlor report from the lease transaction?

A) $10,000
B) $30,000
C) $44,000
D) $74,000

Question 32

Security Inc.manufactures equipment that is sold or leased.On December 31,2014,Security leased equipment to Quirky for a five-year period expiring December 31,2019,at which date ownership of the leased asset will be transferred to Quirky.Equal $40,000 payments under the lease are due on December 31 of each year.The first payment was made on December 31,2014.Collectibility of the remaining lease payments is reasonably assured,and Security has no material cost uncertainties.The normal sales price of the equipment is $144,000 and cost is $110,000.For the year ended December 31,2014,how much income should Security recognize from the lease transaction?

A) $46,000
B) $40,000
C) $34,000
D) $28,000

Question 33

Avionics Inc. ,a dealer in machinery and equipment,leased equipment to Benchmark Products on July 1,2014.The lease is appropriately accounted for as a sale by Avionics and as a purchase by Benchmark.The lease is for a ten-year period (the useful life of the asset)expiring June 30,2021.The first of ten equal annual payments of $250,000 was made on July 1,2014.Avionics had purchased the equipment for $1,337,500 on January 1,2014,and established a list selling price of $1,687,500 on the equipment.Assume that the present value at July 1,2014,of the rent payments over the lease term discounted at 12 percent (the appropriate interest rate)was $1,582,500.What is the amount of profit on the sale and the amount of interest income that Avionics should record for the year ended December 31,2014?

A) $245,000 and $94,950
B) $245,000 and $79,950
C) $350,000 and $79,950
D) $350,000 and $94,950

Question 34

From the standpoint of the lessee,the minimum lease payment includes all of the following except

A) the guaranteed residual value.
B) the lessee's obligation to pay executory costs.
C) the bargain purchase option.
D) any payment that the lessee must make upon failure to extend or renew the lease.

Question 35

In order for a lease to be considered a finance (or capital)lease,international accounting standards require that a lease agreement

A) transfers substantially all risks and rewards incident to ownership of an asset to the lessee.
B) contains a provision requiring transfer of title to the lessee by the end of the lease term.
C) provides that the term of the lease contract be longer than one year.
D) provides for a bargain purchase option.

Question 36

On January 1,2014,A1A Company leased a warehouse to Elisha under an operating lease for ten years at $80,000 per year,payable the first day of each lease year.A1A paid $36,000 to a real estate broker as a finder's fee.The warehouse is depreciated at $20,000 per year.During 2014,A1A incurred insurance and property tax expense totaling $15,000.A1A's net rental income for 2014 should be

A) $9,000.
B) $41,400.
C) $44,000.
D) $45,000.

Question 37

Which of the following is true regarding the lease term?

A) The lease term does not include all periods covered by bargain renewal options.
B) The lease term includes all periods for which failure to renew imposes a penalty sufficiently high that the lessee probably will renew.
C) The lease term may extend beyond the date a bargain purchase option becomes exercisable.
D) The lease term does not include all periods representing renewals or extensions of the lease at the lessor's option.

Question 38

Which of the following is (are)NOT correct regarding disclosure requirements lessees?

A) I only
B) II only
C) Both I and II
D) Both III and IV

Question 39

On March 1,2014,Hardy Corp.became the lessee of new equipment under a noncancelable six-year lease.The total estimated economic life of this equipment is ten years.The fair value of this equipment on March 1,2014,was $100,000.The lease does not meet the criteria for classification as a capital lease with respect to transfer of ownership of the leased asset,or bargain purchase option,or lease term.Nevertheless,Hardy must classify this lease as a capital lease if,at inception of the lease,the present value of the minimum lease payments (excluding executory costs)is equal to at least

A) $67,500.
B) $75,000.
C) $90,000.
D) $100,000.

Question 40

Brooke Distributing leased a machine for a period of eight years,contracting to pay $200,000 at the beginning of the lease term on December 31,2014,and $200,000 annually on December 31 for each of the next seven years.The present value of the eight rent payments over the lease term,appropriately discounted at 10 percent,is $1,174,000.On its December 31,2015,balance sheet,Brooke should report a liability under capital lease of

A) $871,400.
B) $876,600.
C) $974,000.
D) $1,091,400.

Question 41

An asset with a market value of $100,000 is leased on January 1,2014.Five annual lease payments are due each January 1 beginning January 1,2014.The lessee guarantees the $40,000 residual value of the asset as of the end of the lease term on December 31,2018.The lessor's implicit interest rate is 8%. What is the annual lease payment?

A) $18,227
B) $16,877
C) $23,191
D) $25,046

Question 42

A lessee wants to lease an asset on a long-term noncancelable basis,but wants to avoid capitalizing the lease.The lessee is considering the following strategies to accomplish its objective: Which of the strategies above will provide the desired result?

A) only 2
B) 1 and 3
C) 1 and 4
D) None

Question 43

The inception of a lease is January 1,2014.A third party guarantees the residual value of the asset under the lease,estimated to be $12,000 at January 1,2019,the end of the lease term.Annual lease payments are $10,000 due each December 31,beginning December 31,2014.The last payment is due December 31,2018.Both the lessor and lessee use 10% as the interest rate.The remaining useful life of the asset was six years at the inception of the lease. What is the net asset balance for the lessor,and net liability balance for the lessee,at the date of the inception of the lease?
Net Asset (Lessor) Net Liability (lessee)

A) $45,359 $45,359
B) $37,908 $37,908
C) $45,359 $37,908
D) $37,908 $45,359

Question 44

Hydra Company entered into a direct-financing lease with Bridges Company for the use of an asset which cost Hydra $195,000.The lease agreement contained a bargain purchase option effective immediately after the fifth rental,which provided that Bridges could purchase the asset at that time.The estimated life of the asset was 10 years with an estimated residual value of $500.Assuming that Bridges uses straight-line depreciation,Bridges's annual depreciation expense would be

A) $19,500
B) $19,450
C) $19,550
D) $19,000

Question 45

A lease agreement included the following provisions: How much interest revenue is recognized in 2014 by the lessor,assuming a calendar-year fiscal year?

A) $3,600
B) $3,419
C) $2,550
D) $2,118

Question 46

The lessor capitalizes and amortizes initial direct costs for all types of leases except

A) sales-type leases.
B) operating leases.
C) direct-financing leases.
D) There are no exceptions.

Question 47

On December 1,2014,Boron Inc.signed an operating lease for a warehouse for ten years at $15,000 per year.Upon execution of the lease,Boron paid $30,000 covering rent for the first two years.How much should be shown in Boron's income statement for the year ended December 31,2014,as rent expense?

A) $0
B) $1,250
C) $15,000
D) $30,000

Question 48

In a lease that is recorded as a direct financing lease by the lessor,unearned revenue

A) should be amortized over the period of the lease using the 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 in full at the inception of the lease.

Question 49

In a lease that is recorded as an operating lease by the lessee,the equal monthly rental payments should be

A) allocated between interest expense and depreciation expense.
B) allocated between a reduction of the liability for leased assets and interest expense.
C) recorded as a reduction in the liability for leased assets.
D) recorded as a rental expense.

Question 50

Kaye Corporation agreed to lease a computer,at cost,to Lumbar Company for $36,000 payable each year-end for seven years without a bargain purchase option,or,as an equivalent alternative,for $33,000 per year with a bargain purchase option,after the seventh rental.If the lease is a direct financing lease,and Kaye expects to earn a 12 percent return,the amount of cash Lumbar Company would need to pay for the bargain purchase option is

A) $30,266.
B) $26,340.
C) $21,000.
D) $9,948.

Question 51

For 2014,Celestion should report interest revenue of

A) $317,964.
B) $344,000.
C) $413,964.
D) $517,455.

Question 52

Tammy Corporation leased used equipment to Waller,Inc.The equipment originally had a 10-year life and the lease to Waller is for the last two of the ten-year life of the asset.The lease calls for four semiannual lease payments of $2,000 to be made at the end of each year in the life of the lease.The lease agreement contains no transfer of title or bargain purchase option provisions. What is the amount of the leased asset that should be recorded on Waller's books at the beginning of the lease?

A) $2,000
B) $7,092
C) $4,000
D) $-0-

Question 53

Sanborn,Inc. ,leased equipment from Chase Supply on December 31,2014.The lease term is for the 10-year period expiring December 30,2021.The useful life of the leased asset is 10 years.Equal annual payments under the lease are $100,000 due on December 31 of each year.The first payment was made on December 31,2014.Sanborn's incremental borrowing rate was 12% at December 31,2014.Chase's implicit rate for the lease is 10% and is known by Sanborn.Sanborn appropriately accounts for the lease as a capital lease. What is the balance in Sanborn's "Liability Under Lease Agreements" account at December 31,2015?

A) $533,492
B) $545,010
C) $643,492
D) $800,000

Question 54

On January 2,2014,Commack Corporation entered into a 10-year noncancelable lease requiring year-end payments of $60,000.The incremental borrowing rate for Commack is 10%.The lessor's implicit rate (which is known by Commack)is 12%.The lease contains no transfer of title or bargain purchase option provisions.The leased property has an estimated economic life of 12 years.At what amount should the lease be capitalized by Commack?

A) $0
B) $339,012
C) $368,676
D) $600,000

Question 55

On January 1,Landau Company signed a ten-year noncancelable lease for a new machine,requiring $45,000 annual payments at the beginning of each year.The machine has a useful life of 15 years,with no salvage value.Title passes to Landau at the lease expiration date.Landau uses straight-line depreciation for all of its plant assets.Aggregate lease payments have a present value on January 1 of $352,000,based on an appropriate rate of interest.For the first year,Landau should record depreciation (amortization)expense for the leased machine at

A) $45,000
B) $35,200
C) $23,467
D) $21,533

Question 56

Patrol,Inc. ,leased a machine from Ravel Company.The lease term was for a five-year period beginning January 1,2014.Equal annual lease payments of $3,000 are due on December 31 of each year.The implicit rate of the lease is 10% and is known to Patrol.Patrol has properly applied the lease capitalization criteria and as a result,accounts for the lease as a capital lease.The first payment under the lease was made on December 31,2014 as scheduled. How much should Patrol classify as the current portion of the lease liability at December 31,2014?

A) $2,049
B) $7,460
C) $3,000
D) $9,509

Question 57

On December 31,2014,Endive Company leased a machine under a capital lease for a period of ten years,contracting to pay $100,000 on signing the lease and $100,000 annually on December 31 of the next nine years.The present value at December 31,2014,of the ten lease payments over the lease term discounted at 10 percent was $676,000.At December 31,2015,Endive's total capital lease liability is

A) $486,000.
B) $518,000.
C) $533,600.
D) $607,960.

Question 58

Celestion,Inc. ,leased equipment to Speaker Company on January 1,2014.The lease is for a five-year period ending January 1,2019.The first equal annual payment of $1,200,000 was made on January 1,2014.The cash selling price of the equipment is $5,174,552,which is equal to the present value of the lease payments at 8%.Celestion purchased the equipment for $4,300,000.
Celestion should account for this lease as

A) an operating lease.
B) a direct-financing lease.
C) a sale-type lease.
D) leveraged lease.

Question 59

On January 1,2014,Bullitt Corporation sold a machine to Sting Corporation and simultaneously leased it back for ten years.The following information is available regarding the lease: How much profit should Bullitt recognize on January 1,2014,on the sale of the machine?

A) $0.
B) $37,211
C) $90,000
D) $37,500

Question 60

Mercury Package Express Service properly capitalized at $93,598 a large truck it had leased on January 1,2014.The truck has a 14-year useful life.Title to the truck passes to Mercury at the end of the 12-year lease term.Mercury depreciates other similar trucks on the straight-line method with no salvage value.The lease agreement calls for annual payments of $11,500 at the beginning of each year of the lease term.The interest rate implicit in the lease (which is known by the lessee)is 8%. How much depreciation and interest expense should Mercury record for 2015?
Depreciation Interest
Expense Expense

A) $7,803 $6,568
B) $6,686 $6,568
C) $6,686 $6,173
D) $7,830 $6,173

Question 61

Current generally accepted accounting principles do not require operating leases to be shown on the balance sheet.Consider the case of Barren Company.If the operating leases of Barren Company were added to the company's liabilities at December 31,2014,the company's current ratio would decline from 0.69 to 0.57 and total debt would increase from $239 million to $1,105 million.Significant changes would also occur in the return on assets since assets would be increased and the related increase in depreciation and interest expense would exceed the rent expense currently included in the company's income statement.
Required:

Question 62

Daniels Company entered into a direct-financing lease with Old 7 Corporation,which called for seven annual rentals of $3,500 at an interest rate of 12 percent.The payments are to be paid at the end of each year.The lease also contained a bargain purchase option allowing Old 7 to purchase the asset for $2,500 after making the seventh annual rental payment. What was the cost of the asset?

A) $17,104
B) $18,473
C) $25,631
D) $27,000

Question 63

Governor Corporation entered into a direct financing lease (interest rate 12 percent)to lease Pleasant an asset that cost Governor $90,000.The lease specified annual year-end payments for seven years.The lease also specified that,along with the last payment,Pleasant could purchase the asset for $8,000 cash.Under this lease agreement,Pleasant will be required to pay annual payments of

A) $11,714.
B) $12,858.
C) $17,966.
D) $18,928.

Question 64

Always Distributing entered into a leasing agreement with R & D Rental.The lease qualifies as a capital lease and calls for payments of $5,000 for 5 years with the first payment being made on January 1,2014,and subsequent payments being made on December 31 of each year.Always's incremental borrowing rate is 12 percent.
Prepare a schedule amortizing Always's lease obligation.

Question 65

Pralow,Inc. ,leased an asset to Bender Corporation.The cost of the asset to Pralow was $8,000.Terms of the lease specify four-year life for the lease,an annual interest rate of 15 percent,and four year-end rental payments.The lease qualifies as a capital lease and is classified as a direct-financing lease.The asset reverts to Pralow after the fourth year,when its residual value is estimated to be $1,000.The amount of each rental payment is

A) $2,000.
B) $2,335.
C) $2,501.
D) $2,602.

Question 66

Keefer Inc.uses leases as a means of selling its equipment.On January 1,2014,the company leased a machine to Jeremy Manufacturing Inc.The cost of the machine to Keefer was $78,450.The fair market value (which was the sales price)was $101,184 at the time of the lease.Annual lease payments are $13,500 and are payable in advance for 12 years.At the end of the lease term,title to the machine will pass to Jeremy Manufacturing.

Question 67

On July 1,2014,Biplane Aviation leased two company jets from SeeBee Aircraft for an initial period of 12 months with a provision for a continuation on a month-to-month basis.The lease is properly classified as an operating lease.Lease payments are to be made as follows:
After the first year,the rent continues at $6,000 per month.Provide the entries required to record the lease payments for the first year on the books of

Question 68

If the lessee and the lessor use different interest rates to account for a capital lease,then

A) the lease will never be accounted for as a capital lease by the lessee.
B) total expenses (or revenues)will be equal for both lessee and lessor.
C) total expenses (or revenues)will be different for the lessee and the lessor.
D) GAAP has been violated since the lessor and the lessee are not allowed to use different interest rates in accounting for capital leases.

Question 69

Bayou Inc.leases equipment to its customers under noncancelable leases.On January 1,2014,Bayou leased equipment costing $400,000 to Rockwell Co. ,for nine years.The rental cost was $44,000 payable in advance semiannually (January 1 and July 1),plus $2,000 semiannually for executory costs.The equipment had an estimated life of 15 years and sold for $533,025 with an estimated unguaranteed residual value of $80,000.The implicit interest rate is 12 percent.
Prepare all journal entries for 2014 on Bayou's and Rockwell's books.Round all calculations to the nearest dollar.Use straight-line depreciation.

Question 70

On January 1,2014,Benjamin Industries leased equipment on an eight-year term at $15,000 annual rental payments,paid in advance.There is a bargain purchase option on December 31,2021 (end of lease),of $24,000.The economic life of the equipment is estimated to be 15 years.The interest rate is 12 percent.

Question 71

Ollie Company entered into a lease agreement with Costello,Inc. ,to lease an asset that cost Ollie $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.Ollie's implicit rate on the lease is 15 percent. Ollie's dealer profit on this lease would be

A) $14,086 loss.
B) $14,086 gain.
C) $18,000 gain.
D) $80,000 gain.

Question 72

Soundesign Company entered into a lease of special equipment to LabCorp Company.The lease term was six years.The equipment cost Soundesign $40,000 and Soundesign plans to earn a $4,000 dealer profit.Soundesign's implicit rate on the lease is 12 percent. As a result of this agreement,Soundesign will receive year-end lease payments of

A) $7,333.
B) $8,213.
C) $10,702.
D) $12,090.

Question 73

Jefferson Financing,Inc.purchased a packing machine to lease to Puyallup Fruits.The lease qualifies as a direct financing lease and requires lease payments of $58,860 per year,payable in advance,over a ten-year period.There is no expected residual value.The fair market value of the packing machine is $330,000--the same amount paid by Jefferson to purchase the asset.The lease term begins on January 1,2014.
Provide the journal entries required on Jefferson's books to

Question 74

Neils Company leased an asset for use in its factory.The lease agreement specifies that Neils is to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct-financing lease since Neils was allowed to lease the asset at its cost of $14,000 (the present value of the lease payments).The lessor receives a 12 percent rate of return on the lease.The estimated residual value at the end of the lease term is zero. If the lease was classified as a capital lease by Neils,how much annual depreciation would Neils record using the straight-line method?

A) $1,400
B) $1,310
C) $1,750
D) $2,818

Question 75

NPR leased a special crane to WLRN that cost NPR $40,000.The lease term was six years and the annual rentals were $10,000 per year,payable at the end of each year.The implicit interest rate was 10 percent.NPR recognized a gross margin of

A) $3,553.
B) $4,000.
C) $20,000.
D) $24,000.

Question 76

On January 1,2014,J.M.Rodriguez,owner of JMR Sound,sold the building the studio currently occupies to Rave Up Events Company for the current market value of the building of $9,000,000.Prior to the sale,the carrying value of the building was $7,000,000.The estimated remaining useful life of the building is 10 years,with no residual value at that time.Straight-line depreciation is used to depreciate the building.
On the same day as the sale,January 1,2014,Rodriguez signed a 10-year noncancelable leaseback agreement that has a 15 percent implicit rate of return for the lessor.The lessee's incremental borrowing rate also is 15 percent.Annual payments begin on January 1,2014.During 2014,Rodriguez will pay $10,000 executory costs if the transaction qualifies as a direct-financing lease.If the agreement qualifies as an operating lease,this $10,000 will be paid by the buyer-lessor.For convenience,provide all amounts in your solution in $000.
Required:

Question 77

On January 1,2014,Logan Company leased a machine to Glasgow Company.The machine had an original cost of $60,000.The lease term was five years and the implicit interest was on the lease was 15 percent.The lease is properly classified as a direct-financing lease.The annual lease payments of $17,306 are made each December 31.The machine reverts to Logan at the end of the lease term,at which time the residual value of the machine will be $4,000.The residual value is not guaranteed. At the inception of the lease,the balance of Logan's net receivable and Glasgow's liability would be
Logan Receivable Glasgow Liability

A) $60,000 $60,000
B) $58,011 $58,011
C) $60,000 $58,011
D) $58,011 $60,000

Question 78

Which of the following is true regarding the deferral of sale profits on a sale-leaseback under IAS 17,"Accounting for Leases?

A) Any profit on a sale-leaseback resulting in an operating lease is deferred and recognized over the subsequent lease period,whereas any loss is recognized immediately.
B) Both profits and losses on a sale followed by an operating lease leaseback are recognized immediately if the transaction is established at fair value.
C) Profit from the sale should be deferred and amortized in proportion to the amortization of the leased asset if a capital lease results from the sale-leaseback.
D) Profit from the sale should be amortized in proportion to the rental payments it an operating lease results from the sale-leaseback.

Question 79

Monsieur Retail Stores is negotiating three leases for store locations.Monsieur's incremental borrowing rate is 12 percent.Each store will have an economic useful 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 capital lease.The purchase price for each property is listed as an alternative to leasing.
Determine whether each of the leases should be classified by Monsieur as an operating lease or a capital lease.Show computations and reasons to support your answers.