Question 1

On January 1,2016,Calloway Company leased a machine to Zone Corporation.The lease qualifies as a direct financing lease.Calloway paid $240,000 for the machine and is leasing it to Zone for $34,000 per year,an amount that will return 10% to Calloway.The present value of the minimum lease payments is $240,000.The lease payments are due each January 1,beginning in 2016.What is the appropriate interest entry on December 31,2016?

Accepted Answer

The answer of On January 1,2016,Calloway Company leased a machine...

Question 2

On October 1,2016,Justine Company purchased equipment from Napa Inc.in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000,beginning Oct 1,2017.Similar borrowings have carried an 11% interest rate.The equipment would be recorded at:
A)$2,500,000.
B)$2,225,000.
C)$1,847,950.
D)$2,115,270.

Accepted Answer

The equipment should be recorded at the present value of the note payable. The present value of $500,000 annual payments for 5 years at an 11% interest rate is $1,847,950.

Question 3

Recording a sales-type lease is similar to recording:
A)A purchase on account.
B)An exchange of assets.
C)A sale of a fixed asset.
D)A sale of merchandise on account.

Accepted Answer

The answer of Recording a sales-type lease is similar to...

Question 4

ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease.The cost of the asset is $120,000.The lease contains a bargain purchase option that is effective at the end of the fifth year.The expected economic life of the asset is 10 years.The lease term is five years.The asset is expected to have a residual value of $2,000 at the end of 10 years.Using the straight-line method,what would Best record as annual depreciation?
A)$23,600.
B)$12,200.
C)$12,000.
D)$11,800.

Accepted Answer

The answer of ABC Company leased equipment to Best Corporation...

Question 5

A guaranteed residual value at the inception of a capital lease should be:
A)Excluded from minimum lease payments.
B)Included as part of minimum lease payments at present value.
C)Included as part of minimum lease payments at future value.
D)Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

Accepted Answer

A guaranteed residual value should be included as part of minimum lease payments at present value at the inception of a capital lease. This is because the lessor is essentially guaranteeing a future value for the leased asset, and this value is factored into the calculation of minimum lease payments. Including the guaranteed residual value ensures that the lessee will cover the full cost of the asset over the lease term, including the residual value.

Question 6

On January 1,2016,Packard Corporation leased equipment to Hewlitt Company.The lease term is eight years.The first payment of $450,000 was made on January 1,2016.Remaining payments are made on December 31 each year,beginning with December 31,2016.The equipment cost Packard Corporation $2,400,000.The present value of the minimum lease payments is $2,640,000.The lease is appropriately classified as a sales-type lease.Assuming the interest rate for this lease is 10%,what will be the balance reported as a liability by Hewlitt in the December 31,2017,balance sheet?
A)$1,950,000.
B)$1,509,000.
C)$1,959,000.
D)$1,704,900.

Accepted Answer

The answer of On January 1,2016,Packard Corporation leased equipment to...

Question 7

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee,the:
A)Lessor must compensate the lessee for the excess.
B)Lessee must pay the lessor the amount of the excess.
C)Lessee will reduce the last year's depreciation.
D)Lessor is not obligated to compensate the lessee for the excess.

Accepted Answer

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the lessor is not obligated to compensate the lessee for the excess. The lessee has already paid for the use of the asset and agreed to the guaranteed residual value in the lease agreement. The excess value belongs to the lessor as the owner of the asset.

Question 8

A sales-type lease differs from a direct financing lease in one respect:
A)The lessor receives a manufacturer's or dealer's profit.
B)The lessor receives more interest than on a direct financing lease.
C)The lessor receives less interest than on a direct financing lease.
D)The lessor uses a longer amortization period than on a direct financing lease.

Accepted Answer

In a sales-type lease, the lessor (usually a manufacturer or dealer) receives a manufacturer's or dealer's profit, which is an additional amount on top of the interest earned on the lease. This is not the case in a direct financing lease, where the lessor only earns interest on the lease.

Question 9

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer.The present value of the asset is $600,000.The expected economic life of the asset is 10 years.The lease term is five years.Using the straight-line method,what would West record as annual depreciation?
A)$120,000.
B)$61,000.
C)$60,000.
D)$0.

Accepted Answer

The answer of XYZ Company leased equipment to West Corporation...

Question 10

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably assured is called a:
A)Bargain purchase option.
B)Lessee buy-out option.
C)Lessor sell-out option.
D)Guaranteed purchase option.

Accepted Answer

The term described in the question is a bargain purchase option, which allows the lessee to purchase the leased asset at a price significantly lower than its expected fair value. This option is attractive to lessees as it offers them the opportunity to acquire the asset at a bargain price, making it more likely that they will exercise the option.

Question 11

A noncancelable lease contains a bargain purchase option.The fair value of the asset exceeds the lessor's cost of the asset.Collectibility of the lease payments is assured and there are no material cost uncertainties surrounding the lease.Therefore,the lease will be accounted for by the lessor as a(n):
A)Sales-type lease.
B)Direct financing lease.
C)Operating lease.
D)Guaranteed lease.

Accepted Answer

A noncancelable lease with a bargain purchase option where the fair value of the asset exceeds the lessor's cost of the asset and collectibility of lease payments is assured and there are no material cost uncertainties surrounding the lease is accounted for as a sales-type lease. In a sales-type lease, the lessor recognizes a net investment in the lease at the present value of the lease payments and the profit or loss on the sale is recognized upfront.

Question 12

Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease.The interest rate implicit in the lease is 11%.The first year's interest expense would be:
A)$13,200.
B)$10,238.
C)$33,200.
D)$15,543.

Accepted Answer

To calculate the interest expense for the first year, we need to first calculate the present value of the lease payments:
PV = $20,000 + $30,000/(1+0.11) + $30,000/(1+0.11)^2 + $30,000/(1+0.11)^3 + $30,000/(1+0.11)^4
PV = $20,000 + $26,936.17 + $23,085.02 + $19,732.74 + $16,827.37
PV = $106,581.30

The first year's interest expense is equal to the interest rate multiplied by the remaining balance of the lease payments, which is the PV minus the down payment:
Interest expense = 0.11 x ($106,581.30 - $20,000)
Interest expense = $9,838.95
Rounding this to the nearest dollar, we get $10,238 as the answer.

Question 13

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs.Initial direct costs are recorded as assets and amortized over the term of the lease in:
A)An operating lease.
B)A capital lease.
C)A direct financing lease.
D)A sales-type lease.

Accepted Answer

In an operating lease, initial direct costs are recorded as assets and amortized over the lease term.

Question 14

Which of the following statements regarding guaranteed residual values is true for the lessee?
A)The asset and liability at the inception of the lease should be increased by the amount of the residual value.
B)The asset and liability at the inception of the lease should be decreased by the amount of the residual value.
C)The asset and liability at the inception of the lease should be increased by the present value of the residual value.
D)The asset and liability at the inception of the lease should be decreased by the present value of the residual value.

Accepted Answer

The lessee should increase the asset and liability by the present value of the guaranteed residual value, as it represents an additional payment obligation.

Question 15

What are the three types of expenses that a lessee experiences with a capital lease?
A)Lease expense,executory costs,interest expense.
B)Depreciation expense,lease expense,interest expense.
C)Executory costs,lease expense,depreciation expense.
D)Depreciation expense,interest expense,executory costs.

Accepted Answer

In a capital lease, the lessee experiences depreciation expense on the leased asset, interest expense on the lease liability, and executory costs which are additional costs like maintenance or insurance.

Question 16

When a capital lease is first recorded at the inception of the lease,the lessee typically debits:
A)Leased asset.
B)Rent expense.
C)Lease expense.
D)Lease receivable.

Accepted Answer

When a capital lease is first recorded at the inception of the lease, the lessee debits the leased asset account to reflect the acquisition of the asset. The lease liability is also recorded, typically as a credit to a lease payable or lease liability account. This reflects the obligation to make lease payments over the term of the lease.

Question 17

If the lessee expects to obtain title to leased property due to a bargain purchase option or passage of title at the end of the lease term:
A)The lessee ignores any residual value for the leased property.
B)The lessor ignores any residual value for the leased property.
C)The lessee adds the present value of the residual value to the amount recorded for the lease.
D)The lessor will always charge a higher annual lease rate.

Accepted Answer

The answer of If the lessee expects to obtain title...

Question 18

Additional lessor conditions for classification as a capital lease are consistent with the criteria of:
A)Matching.
B)Cause and effect.
C)Materiality.
D)Revenue recognition.

Accepted Answer

The answer of Additional lessor conditions for classification as a...

Question 19

On January 1,2016,Princess Corporation leased equipment to King Company.The lease term is eight years.The first payment of $675,000 was made on January 1,2016.The equipment cost Princess Corporation $3,600,000.The present value of the minimum lease payments is $3,960,000.The lease is appropriately classified as a sales-type lease.Assuming the interest rate for this lease is 10%,how much interest revenue will Princess record in 2017 on this lease?
A)$261,000.
B)$328,500.
C)$325,350.
D)$293,850.

Accepted Answer

The interest revenue for 2017 is calculated on the outstanding lease receivable balance at the beginning of 2017. The initial lease receivable is $3,960,000. After the first payment of $675,000, the balance is $3,285,000. Interest for 2017 is 10% of $3,285,000, which is $328,500. However, the payment made at the beginning of 2017 reduces the principal, so the interest revenue is calculated on the reduced balance, resulting in $293,850.

Question 20

Francisco leased equipment from Julio on December 31,2016.The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31,2016.The present value of the lease is $1,020,000.Francisco's incremental borrowing rate is 12% for this type of lease.The implicit rate of 10% is known by the lessee.What should be the balance in Francisco lease liability at December 31,2017?
A)$824,400.
B)$807,000.
C)$806,400.
D)$792,000.

Accepted Answer

The answer of Francisco leased equipment from Julio on December...

Quiz 15: Leases

On October 1,2016,Justine Company purchased equipment from Napa Inc.in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000,beginning Oct 1,2017.Similar borrowings have carried an 11% interest rate.The equipment would be recorded at:

Recording a sales-type lease is similar to recording:

A guaranteed residual value at the inception of a capital lease should be:

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee,the:

A sales-type lease differs from a direct financing lease in one respect:

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably assured is called a:

Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease.The interest rate implicit in the lease is 11%.The first year's interest expense would be:

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs.Initial direct costs are recorded as assets and amortized over the term of the lease in:

Which of the following statements regarding guaranteed residual values is true for the lessee?

What are the three types of expenses that a lessee experiences with a capital lease?

When a capital lease is first recorded at the inception of the lease,the lessee typically debits:

If the lessee expects to obtain title to leased property due to a bargain purchase option or passage of title at the end of the lease term:

Additional lessor conditions for classification as a capital lease are consistent with the criteria of: