Deck 18: Accounting for Leases

Question 1

Which will decrease the "agency cost of leasing"?

A)Leased assets that are easy to damage.
B)Leased assets that require no maintenance and care by the lessee.
C)Having lease terms that cover small portions of the asset's useful life.
D)Having an unguaranteed residual value by the lessee.

Answer 1

B

Question 2

Which condition would not result in a finance lease?

A)Risk of breakage is with the lessee.
B)Reward of high resale value is with the lessor.
C)Risk of change in rental rates is with the lessee.
D)Reward of longer than expected useful life for the leased asset is with the lessee.

Answer 2

B

Question 3

On January 1,2011,Travic Company entered a lease to rent office space.The lease requires Travic to pay $390,000 per year,at the end of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Travic's incremental borrowing rate is 10%.
Requirement:
Classify this lease for Travic Company and record the journal entries for the first year of the lease.

Answer 3

This is an operating lease because it does not transfer substantially all risks and rewards of ownership.Evaluation of the specific indicators is as follows: Journal entries for first year of lease: $\begin{array}{cccc}\text{Dec. 31,2011} &\text{Dr. Rent expense}&390,000\\\\&\text{Cr. Prepaid rent}&&390,000\end{array}$

Question 4

The following are the characteristics of a lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 150,000 \\\hline \text { Lease payments } 30,500 & 30,500 \\\hline \text { Lease term } & 7 \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & \text { None } \\\hline \text { Interest rate implicit in lease } & 8 \% \\\hline\end{array}$$ Requirement:
Determine the present value of minimum lease payments (MLP)and the appropriate classification of this lease for the lessee.

Question 5

Which will not reduce the "agency cost of leasing"?

A)Maintenance requirements by lessee over the leased asset.
B)Regulations to require a degree of care over the leased asset.
C)Bargain purchase option.
D)Shorter lease terms

Question 6

What are executory costs?

A)Maintenance costs that are applicable to only operating leases.
B)Maintenance costs that are incurred only when the asset is leased.
C)Maintenance costs that are incurred whether the asset is purchased or leased.
D)Maintenance costs that are applicable to only finance leases.

Question 7

Which statement is correct?

A)In an operating lease,the lessee uses the asset for most of the asset's useful life.
B)The lessee expenses the cost of the lease in the period the benefits are received in an operating lease.
C)An operating lease transfers the risks and rewards from the lessor to the lessee.
D)In an operating lease,the lessee records an asset for the property being used.

Question 8

Which will increase the "agency cost of leasing"?

A)Having a bargain purchase option in the lease agreement.
B)Having maintenance requirements for the leased asset.
C)Leasing assets that are easy to damage.
D)Having a guaranteed residual value by the lessee.

Question 9

The following are the characteristics of a lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 150,000 \\\hline \text { Lease payments } & 25,500 \\\hline \text { Lease term } & 7 \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & \text { None } \\\hline \text { Interest rate implicit in lease } & 8 \% \\\hline\end{array}$$ Requirement:
Determine the present value of minimum lease payments (MLP)and the appropriate classification of this lease for the lessee.

Question 10

Identify whether the following characteristics/facts are relevant to a finance (capital)lease.

Question 11

Which statement is correct about "agency cost of leasing"?

A)Conditions can be added to the lease agreement to increase agency costs.
B)Agency costs are nil if the lease contract covers the entire useful life of the asset.
C)Assets that are difficult to damage are better candidates for leasing.
D)Assets that are difficult to damage have higher agency costs.

Question 12

On January 1,2011,Rushabh Company entered a lease to rent office space.The lease requires Rushabh to pay $190,000 per year,at the end of each year,for 10 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Rushabh's incremental borrowing rate is 9%.
Requirement:
Classify this lease for Rushabh Company and record the journal entries for the first year of the lease.

Question 13

On January 1,2011,Pelvisee Company entered a lease to rent office space.The lease requires Pelvisee to pay $390,000 per year,at the beginning of each year,for 15 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Pelvisee's incremental borrowing rate is 9%.
Requirement:
Classify this lease for Pelvisee Company and record the journal entries for the first year of the lease.

Question 14

Which statement is correct about "agency cost of leasing"?

A)The lease payments are lowered to compensate for the agency cost of leasing.
B)Shorter lease terms decrease the agency cost of leasing.
C)Agency cost of leasing is an illustration of the "moral hazard" problem.
D)Agency cost of leasing is an illustration of the "adverse selection" problem.

Question 15

On January 1,2011,Troy Company entered a lease to rent office space.The lease requires Troy to pay $190,000 per year,at the beginning of each year,for 10 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Troy's incremental borrowing rate is 9%.
Requirement:
Classify this lease for Troy Company and record the journal entries for the first year of the lease.

Question 16

Which statement is not correct?

A)A finance lease transfers risks and rewards from the lessor to the lessee.
B)The "lessor" is the owner of the asset in a lease arrangement.
C)A lease is a written contract that allows another party to use an owner's property.
D)The "lessee" is the renter of the asset in a lease arrangement.

Question 17

Which statement is correct?

A)In a finance lease,the lessee uses the asset for only a short fraction of the asset's useful life.
B)The lessee expenses the cost of the lease in the period the benefits are received in a finance lease.
C)A finance lease transfers the risks and rewards from the lessee to the lessor.
D)In a finance lease,the lessee records an asset for the property being used.

Question 18

Which condition would result in an operating lease?

A)Risk of breakage is with the lessee.
B)Reward of high resale value is with the lessor.
C)Risk of change in rental rates is with the lessee.
D)Reward of longer than expected useful life for the leased asset is with the lessee.

Question 19

The following are the characteristics of a lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 104,000 \\\hline \text { Lease payments } & 15,500 \\\hline \text { Lease term } & 10 \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & \text { None } \\\hline \text { Interest rate implicit in lease } & 8 \% \\\hline\end{array}$$ Requirement:
Determine the present value of minimum lease payments (MLP)and the appropriate classification of this lease for the lessee.

Question 20

Which is not an indicator to classify the lease as a "finance" lease?

A)Transfer of ownership to the lessee at the end of the lease term.
B)A lease term that is 51% of the of asset's useful life.
C)A lease term that contains a bargain purchase option.
D)Minimum lease payments comprising 90% or more of the asset's fair value.

Question 21

Which entries are not needed by the lessee for a finance lease?

A)Recording of interest expense.
B)Recording of the lease obligation.
C)Recording of rental expense.
D)Recording of depreciation expense.

Question 22

Channel leased equipment to Montage Company on November I,2010.The terms of the lease are as follows:
$$\begin{array} { | l | l | } \hline \text { Lease term } & 12 \text { years } \\\hline \text { Economic life of leased asset } & 13 \text { year } \\\hline \text { Fair value of leased asset } & 105,000 \\\hline \text { Guaranteed residual value } & 10,000 \\\hline \text { Lease payments, due at the end of the year, } & \\\text { starting Nov 1, 2011 } & 11,000 \\\hline \text { Lessee's incremental borrowing rate } & 5 \% \\\hline\end{array}$$ Montage uses straight-line depreciation for its property,plant,and equipment.
Requirements:
Prepare the journal entries for the lease from November 1 through December 31,2010.

Question 23

What entry is required for the lessor in a operating lease?

A)Gain/loss on asset sale.
B)Loan receivable.
C)Interest income.
D)Depreciation expense.

Question 24

On July 1,2010,Jupiter Company leased equipment to Planet Company.The terms of the lease are as follows:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 70,000 \\\hline \text { Lease payments, due each Jul } 1 & 12,000 \\\hline \text { Lease term } & 9 \text { years } \\\hline \text { Economic life of leased asset } & 10 \text { years } \\\hline \text { Guaranteed residual value } & 6,000 \\\hline \text { Lessee's incremental borrowing rate } & 15 \% \\\hline\end{array}$$ Planet uses straight-line depreciation for its property,plant,and equipment,and its year -end is December 31.
Requirement:
Prepare the journal entries for the lease from July 1 through December 31,2010.

Question 25

On January 1,2011,Granite Company entered a lease to rent office space.The lease requires $350,000 per year,at the beginning of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.The incremental borrowing rate is 5%.
Requirement:
Classify this lease and record the journal entries for the first year of the lease.

Question 26

Chambers leased equipment to Montga Company on November I,2010.The terms of the lease are as follows:
$$\begin{array} { | l | l | } \hline \text { Lease term } & 10 \text { years } \\\hline \text { Economic life of leased asset } & 12 \text { year } \\\hline \text { Fair value of leased asset } & 104,000 \\\hline \text { Guaranteed residual value } & 10,000 \\\hline \text { Lease payments, due each Nov } 1 & 12,000 \\\hline \text { Lessee's incremental borrowing rate } & 5 \% \\\hline\end{array}$$ Montga uses straight-line depreciation for its property,plant,and equipment.
Requirements:
a.Prepare the journal entries for the lease from November 1 through December 31,2010.
b.You and the director of finance for Montga Company.You are concerned about the impact the lease will have on your key performance indicator,the total debt to total assets ratio.Discuss the impact the lease will have on this performance indicator.

Question 27

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 250,000 \\\hline \text { Lease term } & 10 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 0 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 9 \% \\\hline \text { Lessee's incremental borrowing rate } & 9 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.
c.Compute the present value of minimum lease payments for the lessor.
d.Evaluate whether the lessee should classify the lease as operating or finance.

Question 28

When would lessor classify the lease as an operating lease?

A)Lessor retains risk of breakage to leased asset.
B)Lessor has reward of high resale value.
C)Lessor does not have risk of change in demand for the leased asset.
D)Lessor does not have guaranteed residual value.

Question 29

What entry is required for the lessor in a finance lease?

A)Loan receivable.
B)Rental income.
C)Interest expense.
D)Depreciation expense.

Question 30

On July 1,2011,Janus Company leased equipment to Pluto Company.The terms of the lease are as follows:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 60,000 \\\hline \text { Lease payments, due at end of lease term } & \\\text { starting June } 30,2012 & 12,000 \\\hline \text { Lease term } & 9 \text { years } \\\hline \text { Economic life of leased asset } & 10 \text { years } \\\hline \text { Guaranteed residual value } & 6,000 \\\hline \text { Lessee's incremental borrowing rate } & 15 \% \\\hline\end{array}$$ Pluto uses straight-line depreciation for its property,plant,and equipment,and its year-end is December 31.
Requirement:
Prepare the journal entries for the lease from July 1 through December 31.

Question 31

Which entry is needed by the lessee for an operating lease?

A)Recording of interest expense.
B)Recording of the lease obligation.
C)Recording of rental expense.
D)Recording of depreciation expense.

Question 32

What is the meaning of "minimum lease payments"?

A)Payments over the lease term including executory costs.
B)Payments over the lease term excluding executory costs.
C)Payments over the lease term until the bargain purchase option is exercised.
D)Payments over the lease term until guaranteed residual value is received.

Question 33

What is the incremental borrowing rate?

A)The interest rate that the lessor would have to pay on a similar lease or loan.
B)The interest rate that the lessee would have to pay on a similar lease or loan.
C)The risk adjusted interest rate from the cash flow stream expected by the lessor.
D)The risk adjusted interest rate from the cash flow stream expected by the lessee.

Question 34

The following are characteristics of a lease:
$$\begin{array} { | l | l | } \hline \text { Price of leased asset from manufacturer } & 193,000 \\\hline \text { Lease payments } & 50,000 \\\hline \text { Lease term } & 5 \text { years } \\\hline \text { Lease frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 35,000 \\\hline \text { Interest rate implicit in the lease agreement } & 14 \% \\\hline\end{array}$$ Requirement
Determine the appropriate classification for this lease for the lessor (who is not the manufacturer)and record the journal entries for the lessor for the first year of the lease.

Question 35

The following are characteristics of a lease:
$$\begin{array} { | l | l | } \hline \text { Price of leased asset from manufacturer } & 312,100 \\\hline \text { Lease payments } & 75,000 \\\hline \text { Lease term } & 4 \text { years } \\\hline \text { Lease frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 15,000 \\\hline \text { Interest rate implicit in the lease agreement } & 5 \% \\\hline\end{array}$$ Requirement:
Determine the appropriate classification for this lease for the lessor (who is not the manufacturer)and record the journal entries for the lessor for the first year of the lease.

Question 36

Which statement is correct about the "guaranteed residual value"?

A)It is assurance that the lessee will take care of the property.
B)It is provided by the lessor.
C)Lessor assumes the risk of the property falling below the guaranteed amount.
D)It is not included in the minimum lease payment calculation.

Question 37

Which statement is correct about the "guaranteed residual value"?

A)It is included in the minimum lease payment calculation.
B)Lessee assumes the risk of the property falling below the guaranteed amount.
C)Lessor assumes the risk of the property falling below the guaranteed amount.
D)It is an executory cost in the lease arrangement.

Question 38

Which statement is correct about the bargain purchase option (BPO)?

A)It is cash that the lessee will receive at the end of the lease.
B)It cannot be assumed that the BPO will be exercised.
C)It is excluded in the minimum lease payment calculation.
D)It means that ownership will transfer to the lessee.

Question 39

On January 1,2011,Brownee Company entered a lease to rent office space.The lease requires $350,000 per year,at the end of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 40 years,and its current fair value is estimated to be $6 million.The incremental borrowing rate is 5%.
Requirement:
Classify this lease for and record the journal entries for the first year of the lease.

Question 40

The following are characteristics of a lease:
$$\begin{array} { | l | l | } \hline \text { Price of leased asset from manufacturer } & 312,100 \\\hline \text { Lease payments } & 100,000 \\\hline \text { Lease term } & 4 \text { years } \\\hline \text { Lease frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 35,000 \\\hline \text { Interest rate implicit in the lease agreement } & 14 \% \\\hline\end{array}$$ Requirement:
Determine the appropriate classification for this lease for the lessor (who is not the manufacturer)and record the journal entries for the lessor for the first year of the lease.

Question 41

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 65,000 \\\hline \text { Lease term } & 10 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 0 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 4 \% \\\hline \text { Lessee's incremental borrowing rate } & 4 \% \\\hline\end{array}$$ Requirement:
Determine the amount of lease payment that the lessor would require to lease the asset.

Question 42

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 150,000 \\\hline \text { Lease term } & 8 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 5,000 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 6 \% \\\hline \text { Lessee's incremental borrowing rate } & 8 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.

Question 43

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 250,000 \\\hline \text { Lease term } & 4 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 25,000 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 14 \% \\\hline \text { Lessee's incremental borrowing rate } & 16 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.
c.Compute the present value of minimum lease payments for the lessor.
d.Evaluate whether the lessee should classify the lease as operating or finance.

Question 44

Under IFRS,assuming all information is available,which rate is used by the lessee in the minimum lease calculation?

A)Implicit borrowing rate.
B)Lessee's incremental borrowing rate.
C)Lower of the incremental and implicit rate.
D)Either the incremental or implicit rate.

Question 45

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 500,000 \\\hline \text { Lease term } & 10 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 0 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 6 \% \\\hline \text { Lessee's incremental borrowing rate } & 6 \% \\\hline\end{array}$$ Requirement:
Determine the amount of lease payment that the lessor would require to lease the asset.

Question 46

Salisbury Creamery leases its ice cream making equipment from Little Rock Finance Company under the following lease terms:
• The lease term is five years,non-cancellable,and requires equal rental payments of $56,926 due at the beginning of each year starting January 1,2011.
• Upon inception of the lease on January 1,2011,Little Rock purchased the equipment at its fair value of $280,000 and immediately transferred it to Salisbury Creamery.The equipment has an estimated economic life of five years,and a $20,000 residual value that is guaranteed by Salisbury Creamery.
• The lease contains no renewal options,and the equipment reverts to Little Rock Finance Company upon termination of the lease.
• Salisbury's incremental borrowing rate is 4%; the rate implicit in the lease is also 4%.
• Salisbury depreciates similar equipment that it owns on a straight-line basis.
• Both companies have December 31 year-ends.
Requirements:
a.Evaluate how the lessee should account for the lease transaction.
b.Evaluate how the lessor should account for the lease transaction.
c.Prepare the lessee's amortization schedule for this lease.
d.Prepare the journal entries on January 1,2011 for both parties.
e.Prepare the journal entries on December 31,2011 and January 1,2012 for both parties.

Question 47

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 150,000 \\\hline \text { Lease term } & 8 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Guaranteed residual value } & 25,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 9 \% \\\hline \text { Lessee's incremental borrowing rate } & 8 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.

Question 48

Zarlon Leasing Company agrees on January 1,2012 to rent Killington Winery the equipment that Killington requires to expand its production capacity to meet customers' demands for its products.The lease agreement calls for five annual lease payments of $11 0,000 at the end of each year.Killington has identified this as a finance lease.Furthermore,the company has determined that the present value of the lease payments,discounted at 4%,is $489,700.The leased equipment has an estimated useful life of five years and no residual value.Killington uses the straight-line method for depreciating similar equipment that it owns.
Requirements:
a.Prepare a lease amortization schedule for this lease.
b.Prepare the necessary journal entries for the first year of the lease.

Question 49

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 88,000 \\\hline \text { Useful life } & 10 \text { years } \\\hline \text { Lease term } & 7 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Guaranteed residual value } & 10,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 10 \% \\\hline \text { Lessee's incremental borrowing rate } & 8 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.

Question 50

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 50,000 \\\hline \text { Lease term } & 3 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Guaranteed residual value } & 15,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 9 \% \\\hline \text { Lessee's incremental borrowing rate } & 3 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.
c.Compute the present value of minimum lease payments for the lessor.
d.Evaluate whether the lessee should classify the lease as operating or finance.

Question 51

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 120,000 \\\hline \text { Useful life } & 10 \text { years } \\\hline \text { Lease term } & 7 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Unguaranteed residual value } & 10,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 15 \% \\\hline \text { Lessee's incremental borrowing rate } & 14 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.
c.Compute the present value of minimum lease payments for the lessor.
d.Evaluate whether the lessee should classify the lease as operating or capital lease using the quantitative guidelines in ASPE.

Question 52

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 50,000 \\\hline \text { Lease term } & 4 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 25,000 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 5 \% \\\hline \text { Lessee's incremental borrowing rate } & 8 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.

Question 53

What is the implicit rate?

A)The interest rate that the lessor would have to pay on a similar lease or loan.
B)The interest rate that the lessee would have to pay on a similar lease or loan.
C)The risk adjusted interest rate from the cash flow stream expected by the lessor.
D)The risk adjusted interest rate from the cash flow stream expected by the lessee.

Question 54

Which statement is correct for the lessee?

A)Using the higher of the incremental or implicit rate maximizes the minimum lease payment calculation.
B)Using the lower of the incremental or implicit rate maximizes the minimum lease payment calculation.
C)Using the incremental rate maximizes the minimum lease payment calculation.
D)Using the implicit rate maximizes the minimum lease payment calculation.

Question 55

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 80,000 \\\hline \text { Useful life } & 10 \text { years } \\\hline \text { Lease term } & 7 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Guaranteed residual value } & 10,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 10 \% \\\hline \text { Lessee's incremental borrowing rate } & 8 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.
c.Compute the present value of minimum lease payments for the lessor.
d.Evaluate whether the lessee should classify the lease as operating or capital lease using the quantitative guidelines in ASPE.

Question 56

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 500,000 \\\hline \text { Lease term } & 15 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 0 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 5 \% \\\hline \text { Lessee's incremental borrowing rate } & 5 \% \\\hline\end{array}$$ Requirement:
Determine the amount of lease payment that the lessor would require to lease the asset.

Question 57

Which statement is correct for the lessee?

A)If the minimum lease payments exceed fair value of the leased asset,the asset will be recorded on the balance sheet at the higher amount.
B)If the minimum lease payments exceed fair value of the leased asset,the asset will be recorded on the balance sheet at the fair value amount.
C)If the minimum lease payments are lower that the fair value of the leased asset,the asset will be recorded on the balance sheet at the unguaranteed residual value amount.
D)If the minimum lease payments are lower that the fair value of the leased asset,the implicit rate must be used.

Question 58

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 150,000 \\\hline \text { Lease term } & 8 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Guaranteed residual value } & 25,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 11 \% \\\hline \text { Lessee's incremental borrowing rate } & 9 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.

Question 59

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 50,000 \\\hline \text { Lease term } & 5 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 0 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 5 \% \\\hline \text { Lessee's incremental borrowing rate } & 5 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.

Question 60

Here are the terms of a lease agreement:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 175,000 \\\hline \text { Lease term } & 8 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { End of year } \\\hline \text { Guaranteed residual value } & 15,000 \\\hline \text { Interest rate implicit in lease (known to lessee) } & 6 \% \\\hline \text { Lessee's incremental borrowing rate } & 8 \% \\\hline\end{array}$$ Requirement:
Determine the amount of lease payment that the lessor would require to lease the asset.

Question 61

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 23,150 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 8 \% \\\hline \text { Implicit rate (knownto lessee) } & 6 \% \\\hline \text { Guaranteed residual value } & 10,000 \\\hline\end{array}$$

A)92,431
B)97,516
C)99,237
D)104,989

Question 62

Under ASPE,assuming all information is available,which rate is used by the lessee in the minimum lease calculation?

A)Implicit borrowing rate.
B)Lessee's incremental borrowing rate.
C)Lower of the incremental and implicit rate.
D)Either the incremental or implicit rate.

Question 63

Assume that Speery agrees to lease a new machine from LEERY on January 1,2011,for $30,000 per year,paid in advance (i.e.,at the beginning of the year).The lease term is 10 years and the asset's useful life is 8 years.There is no bargain purchase option.The unguaranteed residual value is $10,000.Which statement is correct?

A)The unguaranteed residual will be recorded on Speery's balance sheet.
B)The lease is an operating lease.
C)The lease is a finance lease.
D)More information is needed to determine the accounting treatment.

Question 64

For the following lease,determine the minimum lease payments for the lessor. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 23,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (knownto lessee) } & 8\% \\\hline \text { Unguaranteed residual value } & 5,000 \\\hline \text { Guaranteed residual value } & 00,000 \\\hline\end{array}$$

A)91,832
B)102,711
C)105,444
D)108,846

Question 65

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8 \% \\\hline \text { Executory costs } & 5,000 \\\hline\end{array}$$

A)64,443
B)67,876
C)83,397
D)87,840

Question 66

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 23,104 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8\% \\\hline \text { Unguaranteed residual value } & 10,000 \\\hline \text { Guaranteed residual value } & 20,000 \\\hline\end{array}$$

A)87,582
B)93,792
C)100,001
D)106,210

Question 67

For the following lease,determine the minimum lease payments for the lessor. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 32,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 11 \% \\\hline \text { Implicit rate (knownto lessee) } & 9 \% \\\hline \text { Executory costs } & 10,000 \\\hline\end{array}$$

A)81,310
B)85,572
C)118,269
D)124,469

Question 68

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8\% \\\hline \text { Unguaranteed residual value } & 15,000 \\\hline \text { Bargain purchase option } & 5,000 \\\hline\end{array}$$

A)86,502
B)91,243
C)95,816
D)101,451

Question 69

Assume that Souse agrees to lease a new machine from LAIRD on January 1,2011,for $40,000 per year,paid in advance (i.e.,at the beginning of the year).Executory costs are $1,000.The lease term is 11 years and the asset's useful life is 10 years.There is no bargain purchase option.The guaranteed residual value is $10,000.Which statement is correct?

A)The executor costs will be included in the minimum lease payments.
B)The guaranteed residual will be excluded in the minimum lease payments.
C)This is an operating lease because there is no bargain purchase option.
D)This is a finance lease since the lease term is for most of the economic life of the asset.

Question 70

What entry is needed by the lessor for a finance lease?

A)Obligation for lease.
B)Interest expense.
C)Depreciation expense.
D)Lease receivable.

Question 71

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & 15,000 \\\hline\end{array}$$

A)83,400
B)92,711
C)98,048
D)102,304

Question 72

For the following lease,determine the minimum lease payments for the lessor. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & 15,000 \\\hline\end{array}$$

A)83,400
B)92,711
C)98,048
D)102,304

Question 73

For the following lease,determine the minimum lease payments for the lessor. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 30,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & 28,000 \\\hline\end{array}$$

A)113,723
B)119,781
C)131,109
D)138,838

Question 74

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 23,104 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8\% \\\hline \text { Unguaranteed residual value } & 10,000 \\\hline \text { Guaranteed residual value } & 20,000 \\\hline\end{array}$$

A)99,053
B)100,001
C)105,859
D)106,210

Question 75

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 23,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (knownto lessee) } & 8\% \\\hline \text { Unguaranteed residual value } & 5,000 \\\hline \text { Guaranteed residual value } & 20,000 \\\hline\end{array}$$

A)91,832
B)102,711
C)105,444
D)108,847

Question 76

Which statement is correct?

A)Lessees prefer finance leases.
B)Lessees prefer operating leases.
C)Operating leases are more favourable to the lessor in the short term.
D)Finance leases are more favourable to the lessee in the short term.

Question 77

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 25,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 7 \% \\\hline \text { Implicit rate (knownto lessee) } & 6 \% \\\hline \text { Executory costs } & 2,000 \\\hline\end{array}$$

A)94,305
B)96,884
C)102,505
D)105,309

Question 78

For the following lease,determine the minimum lease payments for the lessee. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 30,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8 \% \\\hline \text { Guaranteed residual value } & 28,000 \\\hline\end{array}$$

A)113,723
B)119,781
C)131,109
D)138,838

Question 79

For the following lease,determine the minimum lease payments for the lessor. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8 \% \\\hline \text { Executory costs } & 5,000 \\\hline\end{array}$$

A)67,548
B)71,279
C)86,502
D)91,243

Question 80

For the following lease,determine the minimum lease payments for the lessor. $$\begin{array} { | l | l | } \hline \text { Annual lease payment at the end of the end } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental rate } & 10 \% \\\hline \text { Implicit rate (unknown to lessee) } & 8\% \\\hline \text { Unguaranteed residual value } & 15,000 \\\hline \text { Bargain purchase option } & 5,000 \\\hline\end{array}$$

A)86,502
B)91,243
C)95,816
D)101,451