Deck 18: Leases

Question 1

JMR Company leases an asset from KAR Company.The rate implicit in the lease is 12% and JMR's incremental borrowing rate is 11%.JMR is aware of the implicit rate.Assuming that both rates would provide an MLP amount well below the fair value of the leased asset, the rate that JMR should use for discounting the net lease payment is:

A)11% under ASPE and 12% under IFRS.
B)12% under ASPE and 11% under IFRS.
C)12% under both ASPE and IFRS.
D)11% under both ASPE and IFRS.

Answer 1

A

Question 2

On December 31, 2015, JKL leased a new machine from MNO.The following information relates to the lease transaction: * Market value of the machine at inception of lease: $500,000
* the machine has an estimated useful life of seven years, which coincides with the lease term.
* lease rentals consist of seven equal annual payments of $100,000, the first of which was paid on December 31, 2015.
* MNO's implicit interest rate is 12 percent, which is known by JKL.
* JKL's incremental borrowing rate is 14 percent at December 31, 2015.
* present value of an annuity of $1 in advance for seven periods at 12 percent is 5.11.
* present value of an annuity of $1 in advance for seven periods at 14 percent is 4.89.
At the inception of the lease, JKL should record a capitalized lease liability of:

A)$489,000
B)$500,000
C)$411,000
D)$511,000

Answer 2

B

Question 3

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms).
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
Assuming that this qualifies as a finance lease, what would be the amount of DEF Inc's annual depreciation as per ASPE (rounded)?

A)$9,901
B)$5,000
C)$10,000
D)$10,076

Answer 3

D

Question 4

Lease Y contains a bargain purchase option and the lease term is equal to 75 percent of th estimated economic life of the leased property.Lease Z contains a bargain purchase optio and the lease term is less than 75 percent of the estimated economic life of the leased property.How would the lessee classify these leases?

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 5

The amount of finance revenue to be recognized by JKL Inc.during Year 2 would be:

A)$2,104,672
B)$1,965,419
C)$1,637,124
D)$,2,537,864

Question 6

Choose the correct statement regarding including the terms listed in the lessee's (1)minimum lease payments and (2)lease liability for a capitalized lease:

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 7

On January 1, 2014, CDE Company leased an asset from LMN which originally cost the lessor $75,000.The lease agreement was an operating lease and specified that three $10,500 annual rentals were to be paid at the beginning of each year.LMN should make the following entry on January 1, 2014:

A)Please see the following table:

B)Please see the following table:

C)Please see the following table:

D)Please see the following table:

Question 8

In a sale and leaseback situation:

A)the lessor recognizes all losses on the sale immediately but must defer and amortize all gains.
B)if the present value of the lease payments is equal to or less than 90% of the fair value of the property, the lessee recognizes the entire gain or loss on sale immediately.
C)all gains and losses are deferred and amortized by the seller.
D)the lessee immediately recognizes any loss on sale up to the amount of the difference between carrying value and fair value.

Question 9

On December 10, 2014, LMN purchased a special machine for leasing purposes; it cost $10,000.On January 1, 2015, the machine was leased to ABC INC.under the following terms (it is a direct financing lease): a.lease term 4 years; interest rate 10 percent; rentals payable at year-end.b.LMN retains the residual value of $1,000 .There is no guarantee on the residual value.
On January 1, 2015, when the lease term starts, the following accounting amounts should be used:

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 10

The straight-line method is frequently used to amortize non-refundable rental payments made in advance on leased assets because:

A)It is less complex, therefore, less costly.
B)IFRS requires that it be used in all situations.
C)It is more theoretically sound.
D)The interest method may result in unreliable amounts being recognized as expense.

Question 11

Amanda Company leased an office building for six years for an annual rent of $170,000.The lessor agreed to forgive the first year of the lease (i.e.payments would not begin until the second year).The entry in the second year would include a debit to:

A)deferred liability-$28,333
B)deferred liability-$141,667
C)rent expense-some other amount
D)rent expense-$170,000

Question 12

A bargain purchase option in a finance lease affects the:

A)lessee's capitalized cost of the leased asset.
B)incremental target rate of return.
C)guaranteed residual value.
D)dealer's profit in a sales-type lease.

Question 13

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms).
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
What would be the amount of finance revenue recorded by ABC Inc.in the first year of the lease (rounded)?

A)$7,601
B)$9,901
C)$10,000
D)$7,700

Question 14

On January 1, 2014, MU Corporation leased an asset, under an operating lease, to obtain the use of a special machine for three years.The lease payments were $9,000 per year payable at each year-end; the lessee must pay all operating expenses.At the inception date, MU Corporation should:

A)record the asset at the present value of the annual lease payments.
B)record the rent expense of $27,000.
C)make no entry.
D)record the asset at $27,000.
E)record the asset at its fair market value.

Question 15

Choose the correct statement regarding the terms listed in the lessor's (1)minimum lease payments and (2)net lease receivable for a capitalized lease:

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 16

XYZ Rental leased a special crane to ABC INC.that originally cost $40,000.The lease was for six years and the rentals were $10,000 per year, payable at each year-end.The implicit interest rate was 10 percent.XYZ Rental recognized a gross margin (dealer's profit)of (rounded to nearest dollar):

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

Question 17

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

A)total expenses (or revenues)will be equal for each.
B)total expenses (or revenues)will be different for each.
C)the lessee and lessor cannot use different interest rates.
D)the lessor will use different account titles to record the leasing transaction.

Question 18

For a finance lease, an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term, excluding that portion of the payments representing executory costs such as insurance, maintenance, and property taxes to be paid by the lessor, together with any profit thereon, should be recorded by the lessee as a(n):

A)asset but not a liability.
B)expense.
C)liability but not an asset.
D)asset and a liability.

Question 19

Equal monthly rental payments for a particular lease should be charged to rental expense by the lessee for which of the following?

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 20

RST entered into a direct financing lease with ZAB, which called for seven annual rentals of $3,500 (interest rate 12 percent)to be paid at the end of each year.The lease also contained a bargain purchase option allowing ZAB to purchase the asset for $2,500 after making the seventh annual rental payment.The cost of the asset must have been:

A)$25,631
B)$17,105
C)$27,000
D)$18,473

Question 21

When a lessee measures the present value of future rentals to be capitalized under a finance lease, identifiable payments expected to be paid by the lessee to cover taxes, insurance, and maintenance should be:

A)included in the present value of the future rentals to be capitalized.
B)capitalized, but at a different discount rate and reported in a different account than the present value of the future rental payments.
C)excluded from the present value of the future rentals to be capitalized.
D)capitalized, but at a different discount rate and for a relevant period that usually is different than for the future rental payments.

Question 22

JMR Company leases an asset from KAR Company.The rate implicit in the lease is 12% and JMR's incremental borrowing rate is 11%.JMR is aware of the implicit rate.Assuming that both rates would provide an MLP amount well below the fair value of the leased asset, the rate that KAR should use for discounting the net lease payment is:

A)11% under both ASPE and IFRS.
B)12% under both ASPE and IFRS.
C)12% under ASPE and 11% under IFRS.
D)11% under ASPE and 12% under IFRS.

Question 23

Assume the following facts relating to a lease: Leased asset, new at inception of lease term.Estimated useful life, 14 years.
Lease term, 8 years; asset returns to lessor.
Interest rate implicit in the lease, 10 percent (known by lessee).Lessee's marginal borrowing rate, 12 percent.
Amount of each lease payment, $2,000.Lessor's cost of the leased asset, $15,164.
Market value of leased asset at inception of the lease term, $15,164 Lease payments are due at the end of each period.
From the perspective of the lessee, this lease should be classified as a(n):

A)operating lease.
B)finance lease.
C)sales-type lease.
D)direct financing lease.

Question 24

With respect to a lessor's indirect costs, under ASPE:

A)These should be expensed for both direct financing and sales-type leases.
B)These should be expensed under direct financing leases and capitalized under sales-type leases.
C)These should be capitalized under direct financing leases and expensed under sales-type leases.
D)These should be capitalized for both direct financing and sales-type leases.

Question 25

A lessor and lessee enter into a lease agreement with the following characteristics: Inception: 1/1/x0 6 annual lease payments of $10,000 are due each Jan.1 beginning 1/1/x0 Assuming the lessee will capitalize this lease, what is the amount of the net lease liability inception, before the first payment is made?

A)$50,166
B)$60,000
C)$64,000
D)$47,908

Question 26

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms).
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
Assuming that this qualifies as a finance lease, at what amount would DEF Inc.capitalize the leased machinery at the inception of the lease as per ASPE (rounded)?

A)$100,764
B)$95,907
C)$99,011
D)$100,000

Question 27

Assume now that JKL Inc.adheres to ASPE.The interest rate used by the company to impute its interest revenue would now be:

A)8)3698%
B)10.4248%
C)12%
D)7)9308%

Question 28

ABC Inc.leased a jet from JKL Inc., a company that leases jet aircraft, on January 1st, Year 1.Terms of the lease are as follows: 6 annual payments of $8,000,000 to be made every January 1st, starting on January 1st, Year 1.
ABC's incremental borrowing rate is 12%.ABC Inc.has not been made aware of JKL's borrowing rate.
Both companies follow IFRS.
The jet has a fair value of $38,000,000 at the start of the lease.JKL estimates that the jet will be worthless at the end of the lease term.
There are no executory costs, however JKL, will incur $2 million in direct costs at the sta of the lease.
ABC Inc.depreciates all assets on a straight line basis.
Both companies have determined that their respective leases qualify as finance leases.
As a result of the information provided above, ABC would show total expenses of which of these following amounts for Year 2?

A)$9,084,963
B)$9,582,522
C)$10,046,510
D)$9,055,557

Question 29

On the first day of its fiscal year, Lessor, Inc., leased certain property at an annual rental o $100,000 receivable at the beginning of each year for ten years.The first payment was received immediately.The leased property, which is new, had cost $650,000 and has an estimated useful life of thirteen years and no salvage value.
Lessor's borrowing rate is 8 percent.The present value of an annuity of $1 payable at the beginning of the period at 8 percent for ten years is 7.247.Lessor had no other costs associated with this lease.Lessor should have accounted for this lease as a sales-type lease, but it mistakenly treated the lease as an operating lease.What was the effect on net earnings during the first year of the lease by having treated this lease as an operating lease rather than as a sales-type lease?

A)Understated
B)The effect depends on the method selected for income tax purposes
C)No effect
D)Overstated

Question 30

One incentive for entering into sale-and-leaseback arrangements is:

A)lessee may be able to reduce finance expense through the refinancing aspects of the sale-leaseback.
B)tax implications are favourable for the lessor.
C)lessee wants to increase return on investment.
D)lessor has an abundance of cash.
E)improvement in cash flow for the lessor.

Question 31

An asset with a market value of $100,000 is leased on 1/1/x0.Five annual lease payments are due each January 1 beginning 1/1/x0.The lessee guarantees the $40,000 residual value as of 12/31/x4, the last day of the lease term.The lessor's implicit interest rate is 8%.What is the annual lease payment?

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

Question 32

CDE leases land and secures the landowner's permission to erect a warehouse on the leased site.The lease has 25 years to run from the time CDE completes the warehouse at a cost of $300,000.The warehouse is expected to last 50 years.In connection with the warehouse, CDE's annual depreciation should be:

A)$7,500
B)$6,000
C)$12,000
D)The entire $300,000 should be expensed the first year.

Question 33

The depreciation period used by the lessee for a depreciable leased asset must be:

A)the remaining life of the asset from the lease inception.
B)the same period that was used by the lessor.
C)the term of the lease.
D)at most the term of the lease but possibly longer if title is transferred at end of lease.

Question 34

If a lessee does not exercise a bargain purchase option prior to its lapse date, the:

A)bargain purchase option cannot lapse because this option was included in computing the annual rental amounts.
B)lessee continues to record depreciation on the lease asset because it was assumed from the beginning that the lessee would retain ownership of the asset.
C)lessee recognizes a gain due to the lapse.
D)lessee recognizes a loss due to the lapse.

Question 35

A 5-year lease contract is signed on 1/1/x1 calling for $4,000 to be paid by the lessee on 12/31/x1, and $6,000 on 12/31/x2, x3, and x4.Total lease payments over the lease term are therefore $22,000.The lessee expects to use the leased asset evenly throughout the lease term, which ends 12/31/x4.No payment is due in 20x2.The entry recorded by the lessee for this operating lease, on 12/31/x1 includes which of the following?

A)dr.rent expense $4,400
B)dr.rent expense $4,000
C)cr.rent payable $200
D)dr.prepaid rent $400

Question 36

LAS owns a building in North Bay.LAS enters into an agreement with BH as follows: LAS sells the building to BH on 1/1/2014 for $2,900,000 (which was the building's fair value on that date)and immediately leases it back for $500,000 per year for 10 years.The historical cost of the building was $9,000,000 and accumulated amortization amounted to $7,000,000.The net effect of this transaction on the statement of comprehensive income in the year of sale would be:

A)a reduction to net income of $400,000.
B)a reduction to net income of $500,000.
C)a reduction to net income of $590,000.
D)a reduction to net income of $410,000.

Question 37

A lessee is attempting to circumvent the accounting rules, which require lease capitalization.Which of the following is most likely to lead to classification of a lease as an operating lease for the lessee?

A)increase the term of the lease.decrease annual executory costs
B)attempt to reduce the lessee's borrowing rate
C)contract provides for a third-party guarantee of residual value
D)contract provides that lessee pays executory costs

Question 38

On January 1, 2014, ABC INC.leased a machine to MNO.The lease was for a 10-year period, which approximated the useful life of the machine.ABC INC.purchased the machine for $120,000 and expects to earn a 10 percent return on its investment, based upon an annual rental of $17,754 payable in advance each January 1st.Assuming that the lease was a direct financing lease, what should be the interest entry on ABC INC.'s books on December 31, 2014?

A)Please see the following table:

B)Please see the following table:

C)Please see the following table:

D)Please see the following table:

Question 39

The inception of a lease is 1/1/x1.A third party guarantees the residual value of the asset under lease, estimated to be $12,000 at 1/1/x6, the end of the lease term.Annual lease payments are $10,000 due each December 31 beginning 12/31/x1.The last payment is due 12/31/x5.Both the lessor and lessee use 10% as the interest rate.The remaining useful life of the asset was 6 years at inception.What is the net asset balance for the lesso and net liability balance for the lessee, at inception (rounded to the nearest dollar)?

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4
E)Choice 5

Question 40

Initial direct costs include lessor costs incurred:

A)after obtaining the commitment of a potential lessee to enter into a lease contract
B)before and after obtaining the commitment of a potential lessee to enter into a lease contract
C)before obtaining the commitment of a potential lessee to enter into a lease contract
D)for the purpose of upgrading an existing lease contract

Question 41

While only certain leases are currently accounted for as a sale or purchase, there is theoretical justification for considering all leases to be sales or purchases.The principle reason that supports this idea is that:

A)during the life of the lease, the lessee can effectively treat the property as if it were owned by the lessee.
B)all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
C)at the end of the lease, the property usually can be purchased by the lessee.
D)a lease reflects the purchase or sale of a quantifiable right to the use of the property.

Question 42

The estimated residual value of a depreciable leased asset at the end of the lease term is:

A)an important factor in how the lessor and lessee must account for the lease.
B)added to the bargain purchase option at the expiration of the lease.
C)used by the lessor to compute the annual amount of depreciation expense.
D)always guaranteed by either the lessor or the lessee.

Question 43

RST entered into a direct financing lease agreement, which required rentals of $9,600, each year-end.The lease term was for ten years and a 14 percent rate of return is expected by RST.The cost of the machine for RST was (rounded to the nearest dollar):

A)$82,560
B)$96,000
C)$109,440
D)$50,075

Question 44

LOR leased a computer to LES which cost the lessor $8,000.The terms of the lease specify four years, an annual interest rate of 15 percent, and four year-end rental payments.The lease qualifies as a finance lease (direct financing).The lessor will get the computer after the fourth year and its residual value at that time is estimated to be $1,000.The amount of each rental payment is (round to the nearest dollar):

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

Question 45

On December 1, 2014, XYZ leased office space for its own use for 10 years at a monthly rental of $15,000.On December 31, 2014, XYZ paid the lessor the following amounts: The entire amount of $146,000 was reported as rent expense in 2014 because it is an operating lease.What amount should XYZ have reported as expense for the year ended December 31, 2014?

A)$30,800
B)$15,000
C)$15,800
D)$96,000

Question 46

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

A)Executory costs, finance expense, and lease expense.
B)Depreciation expense, executory costs, and lease expense.
C)Finance expense, depreciation expense, and executory costs.
D)Lease expense, finance expense, and depreciation expense.

Question 47

RST leased equipment from MNO to be used in its warehouse.The lease term is five years.RST spent $5,000 for ordinary repairs during the second year of the lease.RST should:

A)amortize the $5,000 over the life of the lease on a reasonable basis.
B)capitalize the $5,000 permanently in the lease account.
C)write off $5,000 at the end of the lease term.
D)expense the $5,000 immediately.

Question 48

What is the cost basis of an asset acquired by a lease, which is in substance an instalment purchase?

A)The present value of the market price of the asset discounted at an appropriate rate as an amount to be received at the end of the lease
B)The sum of the future minimum lease payments under the lease
C)The present value of the future minimum lease payments under the lease (exclusive of executory costs and any profit thereon)discounted at an appropriate rate
D)The net realizable value of the asset determined at the date of the lease agreement plus the sum of the future minimum lease payments under the lease

Question 49

XYZ leased a tract of land for a 20-year term.The lease agreement did not contain a bargain purchase option, and consequently, the land will revert back to the lessor at the end of the lease term.At the inception of the lease, XYZ initiated construction on a small building on the land.The building was completed at the end of the third year of the lease, at a cost of $60,000.The building was a permanent structure on the land.Its estimated life was 20 years and was expected to have no residual value.XYZ should record annual depreciation (straight-line)on the building of:

A)$3,000
B)$6,000
C)$3,529
D)$2,400

Question 50

An asset with a market value of $100,000 is leased on 1/1/x0.Five annual lease payments are due each January 1 beginning 1/1/x0.The unguaranteed residual value on 12/31/x4, the last day of the lease term, is estimated at $40,000.The lessor's implicit interest rate is 8%.What is the annual lease payment?

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

Question 51

Which of the following is not a possible advantage of long-term leases?

A)Ability to always claim CCA and depreciation.
B)Protection from interest rate changes.
C)100% financing.
D)Flexibility.

Question 52

If the title to a leased asset does not transfer to the lessee at the end of the lease term, but the lessee guarantees the residual, what is the period and residual value used by the lessor to depreciate the leased asset?

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 53

If the title to a leased asset does not transfer to the lessee at the end of the lease term, and no party guarantees the residual, what is the period and residual value used by the lessor t depreciate the leased asset?

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 54

XYZ agreed to lease an industrial machine that cost $108,000 to RST for six years.The lease was a direct financing lease and a 12 percent interest rate was used to calculate the annual lease payments, which were payable at the end of each year.The amount of each annual rental was:

A)$44,402
B)$20,160
C)$18,000
D)$26,268

Question 55

If the title to a leased asset transfers to the lessee at the end of the lease term, what is the period and residual value used by the lessor to depreciate the leased asset?

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 56

In a sale and leaseback situation

A)the lessee immediately recognizes any loss on sale up to the amount of the difference between carrying value and fair value
B)the lessor recognizes all losses on the sale immediately but must defer and amortize all gains
C)if the present value of the lease payments is equal to or less than 90% of the fair value of the property, the lessee recognizes the entire gain or loss on sale immediately
D)all gains and losses are deferred and amortized by the seller

Question 57

For the lessor, under a sales-type lease, the excess of the normal sales price (i.e., current market)of the leased asset over its cost (or carrying amount)should be recognized as revenue by the lessor:

A)in equal amounts during the lease term.
B)in decreasing amounts during the lease term.
C)in full at the inception date of the lease.
D)in increasing amounts during the lease term.

Question 58

ABC INC.entered into a sales-type lease to lease JKL an asset that cost ABC INC. $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.ABC INC.used a 15 percent interest rate to compute the rentals.The dealer's profit (or loss)that ABC INC.recognized was:

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

Question 59

ABC INC.leased a new machine from QRS on July 1, 2014, under a lease with the following pertinent information: ABC INC.has the option to purchase the machine at the end of the lease term, by paying $40,000, which approximates the expected fair value of the machine on the option exercise date.The cost of the machine on QRS's accounting records is $150,000.On July 1, 2014, ABC INC.should record a net capitalized leased asset of:

A)$178,500
B)$190,000
C)$150,000
D)$189,300

Question 60

The term usually used to describe the situation where a lessee has an option to purchase the leased property at a price that is sufficiently lower than its fair market value so that the exercise of the option appears reasonably assured is:

A)bargain renewal option.
B)assured purchase option.
C)bargain purchase option.
D)bargain buy-out option.

Question 61

LAS owns a building in North Bay.LAS enters into an agreement with BH as follows: LAS sells the building to BH on 1/1/2014 for $2,900,000 (which was the building's fair value on that date)and immediately leases it back for $500,000 per year for 10 years.The historical cost of the building was $9,000,000 and accumulated amortization amounted to $7,000,000.Part of the journal entry to record these transactions would include:

A)a credit to building for $900,000.
B)a credit to gain on sale for $900,000.
C)a credit to lease liability for $900,000.
D)a credit to deferred gain for $900,000.

Question 62

LMN made the following journal entry relating to a finance lease: Therefore, LMN must be the:

A)lessee.
B)either the lessee or lessor.
C)lessor.
D)third party guarantor.

Question 63

RST entered into a sales-type lease with EFG to rent special equipment for six years.The equipment cost $40,000 and RST will earn a $4,000 dealer's profit and 12 percent interest revenue.Therefore, RST will receive year-end lease payments of:

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

Question 64

The basic accounting issue for lessors is:

A)revenue recognition during the lease term.
B)expense recognition during the lease term.
C)determination of the cost of the leased asset.
D)computing depreciation on the leased asset.

Question 65

At the inception of a finance lease which calls for payments on an annuity due basis, the lessee typically debits:

A)rent expense.
B)leased asset.
C)lease receivable.
D)lease expense.

Question 66

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms).
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
Assuming that this qualifies as a finance lease, at what amount would DEF Inc.capitalize the leased machinery at the inception of the lease as per IFRS (rounded)?

A)$95,907
B)$99,012
C)$100,000
D)$100,763

Question 67

LMN leases construction equipment on sales-type leases.LMN wants to record a $7,000 dealer's profit on assets leased, each of which cost $60,000.What annual year-end rentals should LMN quote to earn a 12 percent return on 8-year leases?

A)$9,380
B)$6,625
C)$8,375
D)$13,487

Question 68

WXZ entered into a direct financing lease with TUV for the use of an asset which cost WXZ $240,000.The lease agreement contained a bargain purchase option effective immediately after the fifth rental, which provided that TUV could purchase the asset at that time.The estimated life of the asset was 10 years with an estimated residual value of $400.TUV's annual depreciation expense is (use straight- line):

A)$23,960
B)$48,000
C)$22,200
D)$44,400

Question 69

LMO leased an asset for use in its factory.The lease specified that LMO was to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct financing lease because LMO was allowed to lease the asset at cost of $14,000 (i.e., the present value of the lease payments).The lessor received 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 finance lease by LMO, how much annual depreciation (using SL)should LMO record?

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

Question 70

What amount of sales is recognized by the lessor in a sales type lease when the residual value is unguaranteed?

A)Market value of the asset leased.
B)Cost of asset leased less present value of unguaranteed residual value.
C)Cost of asset leased.
D)Market value of asset leased less present value of unguaranteed residual value.

Question 71

The amount of each rental payment on a sales type lease is based on the:

A)cost of the asset plus interest.
B)cost of the asset, profit, and interest.
C)cost of the leased asset.
D)cost of the asset plus profit.

Question 72

On December 31, 2015, JKL leased a new machine from MNO.The following information relates to the lease transaction: * the machine has an estimated useful life of seven years, which coincides with the lease term.
* lease rentals consist of seven equal annual payments of $100,000, the first of which was paid on December 31, 2015.
* MNO's implicit interest rate is 12 percent, which is known by JKL.
* JKL's incremental borrowing rate is 14 percent at December 31, 2015.
* present value of an annuity of $1 in advance for seven periods at 12 percent is 5.11.
* present value of an annuity of $1 in advance for seven periods at 14 percent is 4.89.
At the inception of the lease, JKL should record a capitalized lease liability of (choose the amount closest to your answer):

A)$511,000
B)$489,000
C)$411,000
D)$500,000

Question 73

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms).
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
Assuming that this qualifies as a finance lease, what would be the amount of DEF Inc's annual depreciation as per IFRS (rounded)?

A)$10,000
B)$9,901
C)$10,076
D)$5,000

Question 74

Which of the following are the required operating lease note disclosure requirements for the lessee? 1.Minimum lease payments
2)Contingent Rents
3)Scheduled lease payments for the next year
4)Scheduled lease payments in total for the next remaining years
5)Scheduled lease payments in total for all years.

A)1, 2 & 3.
B)1, 2, 3, 4, & 5.
C)1& 2.
D)1, 2, 3 & 4.
E)1, 2, & 5.

Question 75

A lease agreement includes the following provisions: Inception: 1/1/x0 Annual lease payments of $6,000 are due 12/31/x0, x1, x2
Annual lease payments of $4,000 are due 12/31/x3, x4, x5 There are 6 lease payments in all
Lessor's implicit rate of return: 12% This is a finance lease to the lessor
How much interest revenue is recognized in 20x0 by the lessor (assume a calendar year fiscal year)?

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

Question 76

Under a finance lease that includes a bargain purchase option (BPO), how is depreciation on the asset under lease recognized by:

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 77

The amount of each rental payment on a sales type lease includes:

A)a return of cost, and interest.
B)interest and profit.
C)a return of cost, interest, and profit.
D)a return of cost.

Question 78

On January 1st, 2014, ABC Inc.(the lessor)agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee)for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms).
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
What would be the amount of finance revenue that ABC Inc.would recognize throughout the lease?

A)$20,000
B)$23,000
C)$5,000
D)$15,000

Question 79

When the lessee guarantees the residual value at the end of the lease term, for accounting purposes, the:

A)annual rentals will always be less than they would have been if the residual value was not guaranteed.
B)annual rentals will always be more than they would have been if the residual value was not guaranteed.
C)guaranteed residual value does not affect the annual rentals because it is a cash flow at the end of the lease term.
D)annual rentals will be the same as they would have been if the residual value was not guaranteed.

Question 80

On January 1, 2014, LOR leased a machine (original cost $60,000)to LES for a 5-year period at an implicit interest rate of 15 percent.The lease qualified as a direct financing lease and the annual lease payments ($17,306)are made each December 31.LOR retained the $4,000 estimated unguaranteed residual value , LOR's net receivable and LES's liability would be (round to the nearest dollar):

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4