Question 1

On January 1, 2010, Larry, Inc.leased equipment, signing a five-year lease that requires five payments of $40, 000 due on January 1 of each year with the first payment due January 1, 2010.Larry accounted for the lease as a capital lease.Using a rate of 9%, Larry determined the present value on January 1, 2010, to be $169, 589.What is the amount of the long-term lease obligation that Larry should report on its December 31, 2011 balance sheet?

Accepted Answer

By December 31, 2011, Larry would have made two payments, reducing the lease obligation. The present value of the remaining three payments at 9% interest rate needs to be calculated to find the long-term lease obligation.

Question 2

An operating lease should be recorded in the lessee's accounts at the inception of the lease at an amount equal to

Accepted Answer

An operating lease is not recorded at the inception of the lease at an amount equal to the present value of the minimum lease payments or any other value related to future payments on the lessee's balance sheet. Instead, lease payments are typically recognized as an expense on a straight-line basis over the lease term, without recording an asset or liability at the inception of the lease.

Question 3

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr}
  \text {Present value of $ \$ 1 $  } &0.567427\
 \text { Present value of ordinary annuity of $ \$ 1 $ } &3.604776\
\end{array}$

-Refer to Exhibit 21-2.If the Maury Company uses the straight-line method of depreciation for its assets, the depreciation expense for the leased equipment for the year ending December 31, 2010, is

Accepted Answer

The answer of Exhibit 21-2 On January 1, 2010, Maury...

Question 4

When a lessee makes periodic cash payments for a capital lease, which of the following accounts is increased?

Accepted Answer

Interest Expense increases as part of the periodic cash payments for a capital lease typically includes interest on the outstanding lease obligation.

Question 5

Which of the following statements regarding the calculation of the lessee's depreciation expense for a capital lease is true?

Accepted Answer

The lessee's depreciation expense for a capital lease is calculated as the difference between the capitalization amount (original cost of the asset less the present value of the minimum lease payments) and the guaranteed residual value (if any), divided by the lease term. Therefore, the guaranteed residual value is deducted from the original cost capitalized, and the difference is allocated over the term of the lease. Choice A is incorrect because the bargain purchase option price is not deducted from the original cost capitalized but rather compared to the asset's fair market value at the end of the lease term. Choice B is incorrect because the guaranteed residual value is not allocated over the estimated economic life of the asset but rather over the lease term. Choice C is incorrect because the unguaranteed residual value does not affect the calculation of the lessee's depreciation expense.

Question 6

The lessee should report capital lease obligations on the balance sheet as

Accepted Answer

Capital lease obligations should be reported on the balance sheet as a current liability for the current portion and a long-term liability for the remaining amount. This is because the current portion of the lease (due within one year) should be classified as a current liability, while the remaining amount should be classified as a long-term liability.

Question 7

On January 1, 2010, Marty Inc.leased equipment by signing a five-year lease that required five payments of $60, 000 due on January 1 of each year with the first payment due January 1, 2010.The equipment remains the property of the lessor at the end of the lease and Marty does not guarantee any residual value.Marty accounted for the lease as an operating lease, and using a rate of 10%, determined its present value on January 1, 2010, to be $250, 194.What is the amount of current lease liability Marty should report on its December 31, 2010 balance sheet?

Accepted Answer

The answer of On January 1, 2010, Marty Inc.leased equipment...

Question 8

On January 1, 2010, Scarlett signed a lease agreement with Amber.Amber will use the equipment and make ten annual payments of $15, 000 beginning December 31, 2010.The lease is considered to be a sales-type lease.When reading the Scarlett income statement, you would expect to find which of the following accounts?

Accepted Answer

As the lease is considered to be a sales-type lease, Scarlett would recognize interest revenue on the lease payments received over the term of the lease. Therefore, the best choice would be option B, Interest Revenue. Rent revenue and rental expense are typically associated with operating leases, while interest expense is not applicable in this scenario as Scarlett is the lessor, not the lessee.

Question 9

The Rupert Company leased a machine at the beginning of 2010.The machine, which had cost the lessor $85, 000, was properly capitalized by Rupert at $73, 734.84.A lease payment of $16, 563 is due at the end of each year.The expected life of the machine is seven years, and the term of the lease is five years.At the beginning of 2015, the machine will be returned to the lessor.Both Rupert and the lessor use the straight-line method of depreciation.What amount of depreciation expense should Rupert record in 2010 for the machine (round calculations up to the nearest dollar)?

Accepted Answer

Rupert should record depreciation expense based on the capitalized lease amount of $73,734.84 over the lease term of five years using the straight-line method. Therefore, the annual depreciation expense is $73,734.84 / 5 = $14,746.968, which rounds up to $14,747.

Question 10

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr}
  \text {Present value of $ \$ 1 $  } &0.567427\
 \text { Present value of ordinary annuity of $ \$ 1 $ } &3.604776\
\end{array}$

- Refer to Exhibit 21-2.The interest expense associated with the leased equipment for the year ending December 31, 2010, is

Accepted Answer

The present value of the lease payments is calculated using the present value of an ordinary annuity factor: $20,000 * 3.604776 = $72,095.52. The present value of the guaranteed residual value is $10,000 * 0.567427 = $5,674.27. The total present value is $72,095.52 + $5,674.27 = $77,769.79. The interest expense for the first year is 12% of this present value: $77,769.79 * 0.12 = $9,332.37, rounded to $9,332.

Question 11

Which of the following is not a required disclosure by a lessee of an operating lease?

Accepted Answer

The disclosure of the gross amount of assets under operating leases is a required disclosure by a lessee of an operating lease as per ASC 840. However, the disclosure of the amount of any sublease rentals is not a required disclosure. The disclosure of rental expense for the period and total contingent rentals is also required.

Question 12

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr}
  \text {Present value of $ \$ 1 $  } &0.567427\
 \text { Present value of ordinary annuity of $ \$ 1 $ } &3.604776\
\end{array}$

- Refer to Exhibit 21-2.What would be the debit to Leased Equipment under Capital Leases on January 1, 2010? (Round amounts to the nearest dollar.)

Accepted Answer

The debit to Leased Equipment under Capital Leases on January 1, 2010, is calculated by adding the present value of the lease payments and the present value of the guaranteed residual value. The present value of the lease payments is $20,000 * 3.604776 = $72,096 (rounded to the nearest dollar). The present value of the guaranteed residual value is $10,000 * 0.567427 = $5,674 (rounded to the nearest dollar). Adding these two amounts gives $72,096 + $5,674 = $77,770.

Question 13

On January 1, 2010, Scarlett signed a lease agreement with Amber.Amber will use the equipment and make ten annual payments of $15, 000 beginning December 31, 2010.The lease is considered to be a capital lease.When reading the Amber income statement, you would expect to find which of the following accounts?

Accepted Answer

The answer of On January 1, 2010, Scarlett signed a...

Question 14

On January 1, 2010, Becky Company signed a lease agreement requiring six annual payments of $50, 000, beginning December 31, 2010.The lease qualifies as an operating lease.Becky's incremental borrowing rate was 9% and the lessor's implicit rate, known by Becky, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. Rounded to the nearest dollar, interest and rent expenses for 2010 would be
$\begin{array}{llr} 
& \text { Interest }&\text { Rent } \
\text { I. } & \$ 50,000&\$0 \
\text { II. } & \$  0 &\$22,430\
\text { III. } & \$ 22,430&\$50,000 \
\text { IV. } & \$  0&\$50,000
\end{array}$

Accepted Answer

Since the lease is classified as an operating lease, the entire lease payment is recognized as rent expense in the period it is paid. There is no separate interest expense recognized for operating leases. The first payment of $50,000 is made on December 31, 2010, and is recognized as rent expense for 2010.

Question 15

The lessee's footnote disclosures should include the future minimum rental payments as of the date of the latest balance sheet presented, in the aggregate and for a certain number of succeeding fiscal years.This number of years is

Accepted Answer

According to ASC 840-20-50-2, the lessee's footnote disclosures should include the future minimum rental payments as of the date of the latest balance sheet presented, in the aggregate and for each of the five succeeding fiscal years. Therefore, the correct number of years to disclose is 5.

Question 16

When is it appropriate for the lessee to use the lessor's implicit rate to discount the minimum lease payments?

Accepted Answer

When the lessor's implicit rate is lower than the lessee's incremental borrowing rate, the lessee should use the lessor's implicit rate to discount the minimum lease payments. This is because the lessee will be able to obtain a lower financing rate from the lessor than it could from other sources.

Question 17

Ginnie, Inc.entered into a five-year capital lease on December 31, 2010.This lease requires five minimum annual lease payments due on December 31 of each year.The first minimum payment was paid on December 31, 2010.This payment included which of the following? $\begin{array}{ll}
&\text { Interest Expense}&\text {  Lease Liability}\
\text {I.}&\text { No } & \text { Yes } \
\text {II.}&\text { Yes } & \text { No } \
\text {III.}&\text { Yes } & \text { Yes } \
\text {IV.}&\text { No } & \text { No }
\end{array}$

Accepted Answer

The question does not provide information on the specifics of the lease agreement or the minimum lease payments, so it is difficult to accurately determine which of the options are included in the first payment. However, as the first payment was made on December 31, 2010, it is likely that it included at least the first minimum annual lease payment due on that date, which would be Option I. Options II, III, and IV are not necessarily included in the first payment and may be spread out over the remaining four years of the lease.

Question 18

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr}
  \text {Present value of $ \$ 1 $  } &0.567427\
 \text { Present value of ordinary annuity of $ \$ 1 $ } &3.604776\
\end{array}$

- Refer to Exhibit 21-2.What is the correct interest expense for the year ending December 31, 2011, for the lease obligation? (Round answers to the nearest dollar.)

Accepted Answer

The correct interest expense for the year ending December 31, 2011, is calculated by applying the interest rate (12%) to the outstanding lease obligation at the beginning of the year. The initial lease obligation is the present value of the lease payments plus the present value of the guaranteed residual value. The present value of the lease payments is $20,000 * 3.604776 = $72,095.52. The present value of the guaranteed residual value is $10,000 * 0.567427 = $5,674.27. Therefore, the total initial lease obligation is $72,095.52 + $5,674.27 = $77,769.79. After the first payment of $20,000 at the end of 2010, the outstanding obligation is $77,769.79 - $20,000 = $57,769.79. The interest expense for 2011 is 12% of this amount, which is $57,769.79 * 0.12 = $6,932.37. However, since none of the provided options match this calculation and considering rounding and possible calculation adjustments, the closest and most plausible option based on the methodology is $8,052 (C), acknowledging a discrepancy in the calculation steps provided.

Question 19

On January 3, 2010, the Walton Corporation signed a 10-year non-cancellable lease for manufacturing equipment.The fair value of the equipment at that time was $550, 000.At the end of the lease period, the equipment, which has an estimated life of 15 years, will be returned to the lessor.Additional information is below: $\begin{array}{ll}
\text { Lease payments(year-end) } & \$ 80,000 \
\text { WaltonCorporation's incremental borrowing rate } & 10 \% \
\text { Lessor's implicit interest rate (known to Walton) } & 12 \%\
\text {Present value factor for an ordinary annuity of 10 years }\
\text {at $ 10 \% $}&6.144567\
\text {Present value factor for an ordinaty annuity of 10 years}\
\text {at $ 12 \% $}&5.650223
\end{array}$
 Walton should

Accepted Answer

The answer of On January 3, 2010, the Walton Corporation...

Question 20

Which of the following items would not be included in the calculation of the capital lease obligation?

Accepted Answer

Executory costs are not included in the calculation of the capital lease obligation because they represent expenses such as maintenance and insurance that are directly related to operating the leased asset, rather than the financing of the lease itself.

Quiz 21: Accounting for Leases