Question 1

B Corp.has a debt/equity ratio of 2 to 1.Not including any indirect effects on earnings,the debt/equity ratio is increased when B records:

Accepted Answer

The answer of B Corp.has a debt/equity ratio of 2...

Question 2

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs.Initial direct costs are expensed at the inception of the lease in:

Accepted Answer

The answer of Costs incurred by the lessor that are...

Question 3

Damon is the lessee in connection with a Type A lease.Under the new ASU,Damon would not record:

Accepted Answer

Under a Type A lease, which is similar to a finance lease, Damon would record amortization expense, interest expense, and a right-of-use asset, but not depreciation expense, as the asset is amortized, not depreciated.

Question 4

N Corp.entered into a nine-year capital lease on a warehouse on December 31,2016.Lease payments of $26,000,which includes real estate taxes of $1,000,are due annually,beginning on December 31,2017,and every December 31 thereafter.N does not know the interest rate implicit in the lease;N's incremental borrowing rate is 9%.The rounded present value of an ordinary annuity for nine years at 9% is 6.0.What amount should N report as capitalized lease liability at December 31,2016?

Accepted Answer

The capitalized lease liability is the present value of the lease payments, which is $150,000 ($26,000 x 6.0).

Question 5

M Corp.recorded a capital lease in February using an annuity due present value table.The company's December 31 statement of cash flows using the direct method will report:

Accepted Answer

A capital lease involves a cash outflow for the lease payments, which is reported as a financing activity in the statement of cash flows when using the direct method.

Question 6

Which of the following statements characterizes a sale-leaseback arrangement?

Accepted Answer

In a sale-leaseback arrangement, the lessee sells an asset to the lessor and then leases it back. Therefore, the lessee also acts as the seller.

Question 7

Matt Co.is the lessor in connection with a Type B lease.Under the new ASU,Matt Co.would record:

Accepted Answer

The answer of Matt Co.is the lessor in connection with...

Question 8

If the leaseback portion of a sale-leaseback transaction is classified as an operating lease:

Accepted Answer

If the leaseback portion of a sale-leaseback transaction is classified as an operating lease, any gain is deferred and recognized as a reduction of rent expense over the term of the lease. This is because an operating lease is treated as a rental expense and not a capital lease, so any gain should be recognized over the term of the lease rather than immediately.

Question 9

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs.Initial direct costs are matched with the interest revenues they help generate in:

Accepted Answer

In a direct financing lease, initial direct costs are deferred and amortized over the lease term, matching them with the interest revenue generated from the lease.

Question 10

J Corp.entered into an operating lease in February.The company's December 31 statement of cash flows will report:

Accepted Answer

An operating lease is considered an operating activity, so the cash flow related to it will be reported under operating activities on the statement of cash flows. There may be no cash outflow if the lease payments are made in the future, but if any payments were made during the current period, they would be reported as a cash outflow under operating activities. There would be no impact on investing or financing activities.

Question 11

C Corp.has a rate of return on assets of 10%.Not including any indirect effects on earnings,the rate of return on assets is immediately increased when C records:

Accepted Answer

The answer of C Corp.has a rate of return on...

Question 12

In a sale-leaseback arrangement,the lessee is also:

Accepted Answer

In a sale-leaseback arrangement, the lessee is the seller of the property, who sells it and then leases it back from the buyer. Therefore, the correct choice is D, the seller.

Question 13

L Corp.recorded a capital lease in February using an annuity due present value table.The company's December 31 statement of cash flows using the indirect method will report:

Accepted Answer

When using the indirect method, depreciation is added back to net income in the operating activities section because it is a non-cash expense.

Question 14

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

Accepted Answer

If the lessee and lessor use different interest rates to account for a capital lease, it means they have different assumptions about the value of the lease payments and the asset being leased. As a result, the total expenses for the lessee will be different from the lessor's total revenues, leading to a mismatch in their financial statements. This violates the principle of consistency in GAAP and can create confusion for investors and analysts trying to evaluate the financial performance of both parties.

Question 15

On December 31,2016,B Corp.sold a machine to Royal and simultaneously leased it back for one year.Pertinent information at this date follows: 
In B's December 31,2016,balance sheet,the deferred revenue from the sale of this machine should be:

Accepted Answer

The answer of On December 31,2016,B Corp.sold a machine to...

Question 16

P Corp.leased an asset to L Corp.using an operating lease in February.P Corp.'s December 31 statement of cash flows will report:

Accepted Answer

The cash received for the operating lease will be reported as cash inflow from operating activities in P Corp.'s December 31 statement of cash flows. There will be no cash outflows as the asset was already owned by P Corp. and was only leased to L Corp.

Question 17

On December 31,2016,Perry Corporation leased equipment to Admiral Company for a five-year period.The annual lease payment,excluding executory costs,is $40,000.The interest rate for this lease is 10%.The payments are due on December 31 of each year.The first payment was made on December 31,2016.The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000.For the year ended December 31,2016,by what amount will Perry's pretax earnings increase due to this lease?

Accepted Answer

The lease payment is $40,000 per year, and the interest rate is 10%, so the implicit interest in the lease is $12,500 ($125,000 - $105,000). Therefore, Perry will recognize $27,500 ($40,000 - $12,500) of income related to the lease in 2016, which will increase its pretax earnings by $27,500.

Question 18

If the leaseback portion of a sale-leaseback transaction is classified as a capital lease:

Accepted Answer

The answer of If the leaseback portion of a sale-leaseback...

Question 19

S Corp.has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1.Not including any indirect effects on earnings,the immediate impact of recording a capital lease on these ratios is a(an):

Accepted Answer

The answer of S Corp.has a rate of return on...

Question 20

Under both U.S.GAAP and IFRS,a lease is a capital lease (called a finance lease under IFRS)if substantially all risks and rewards of ownership are transferred.In making this determination,more judgment,and less specificity,is applied using:

Accepted Answer

IFRS requires more judgment and less specificity compared to U.S. GAAP when determining if a lease is a finance lease, as IFRS focuses on the substance of the transaction rather than specific criteria.

Quiz 15: Leases