ACCY 304 Ch 21

11. Under an operating lease, the lessor records each rental receipt as part interest revenue and part rental revenue.

False

12. In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair value of a leased asset.

False

14. Both a guaranteed and an unguaranteed residual value affect the lessee's computation of amounts capitalized as a leased asset.

False

16. If a lease includes a bargain purchase option, the lessee must increase the present value of the lease payments by the purchase option price.

False

18. The gross profit amount in a sales-type lease is greater when a guaranteed residual value exists.

False

3. Minimum rental payments are the same as minimum lease payments

False

4. Executory costs should always be excluded by the lessee in computing the present value of the minimum lease payments.

False

5. A capitalized leased asset is always depreciated over the term of the lease by the lessee.

False

6. A lessee reports interest expense in both a finance lease and an operating lease.

False

8. In an operating lease, the lessee reports both interest expense and amortization expense on the income statement.

False

9. If a lease does not transfer control of the asset over the lease term, the lessor will generally account for the lease as a sales-type lease.

False

62. On January 1, 2021, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years beginning on January 1, 2021 with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a finance lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. In 2021, Sauder should record interest expense of a. $63,397. b. $116,604. c. $83,396. d. $136,604.

a. $63,397.

74. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. If the selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, what are the equal annual payments? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092 a. $175,820 b. $162,795 c. $181,972 d. $195,356

a. $175,820

25. A single lease expense is recognized on the income statement for a. an operating lease. b. a finance lease. c. both a finance lease and an operating lease. d. neither a finance lease or an operating lease.

a. an operating lease.

P35. A lessee with a finance lease containing a bargain purchase option should depreciate the leased asset over the a. asset's remaining economic life. b. term of the lease. c. life of the asset or the term of the lease, whichever is shorter. d. life of the asset or the term of the lease, whichever is longer.

a. asset's remaining economic life.

P27. The amount to be recorded as the cost of an asset under a finance lease is equal to the a. present value of the lease payments. b. present value of the lease payments or the fair value of the asset, whichever is lower. c. present value of the lease payments plus the present value of any unguaranteed residual value. d. carrying value of the asset on the lessor's books.

a. present value of the lease payments.

38. The lease receivable amount includes the present value of a. rental payments plus the present value of guaranteed and unguaranteed residual values. b. rental payments only. c. rental payments plus the present value of the unguaranteed residual value only. d. rental payments plus the present value of the guaranteed residual value only.

a. rental payments plus the present value of guaranteed and unguaranteed residual values.

*50. If none of the five lease tests are satisfied in a sale-leaseback transaction, which of the following statements is incorrect? a. The seller-lessee continues to depreciate the asset. b. The purchaser-lessor records a gain. c. The seller-lessee records the lease as an operating lease. d. The seller-lessee recognizes a gain or loss as appropriate.

b. The purchaser-lessor records a gain.

P44. A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts? a. The minimum lease payments plus the unguaranteed residual value. b. The sales price less the present value of the residual value. c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value. d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value.

b. The sales price less the present value of the residual value.

64. On December 31, 2021, Kuhn Corporation leased a plane from Bell Company for a seven-year period expiring December 31, 2028. Equal annual payments of $450,000 are due on December 31 of each year, beginning with December 31, 2021. The lease is properly classified as a finance lease on Kuhn's books. The present value at December 31, 2021 of the eight lease payments over the lease term discounted at 10% is $2,640,792. Assuming the first payment is made on time, the amount that should be reported by Kuhn Corporation as the lease liability on its December 31, 2021 balance sheet is a. $2,640,792. b. $2,454,870. c. $2,376,714. d. $2,190,792.

d. $2,190,792.

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 54. What is the annual lease payment excluding executory costs? (Rounded to the nearest dollar.) a. $272,703 b. $872,703 c. $887,703 d. $902,703

c. $887,703

34. From the lessee's perspective, in the earlier years of a lease, a. finance leases will enable the lessee to report higher income, compared to operating leases. b. finance leases will cause debt to increase, compared to operating leases. c. operating leases will cause income to increase, compared to finance leases. d. operating leases will cause debt to increase, compared to finance leases.

c. operating leases will cause income to increase, compared to finance leases.

S43. The basic difference between a direct-financing lease and a sales-type lease is the a. manner in which rental receipts are recorded as rental income. b. amount of the depreciation recorded each year by the lessor. c. recognition of the profit on the sale. d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

c. recognition of the profit on the sale.

106. In a lease that is recorded as a sales-type lease by the lessor, interest revenue a. should be recognized in full as revenue at the lease's inception. b. should be recognized over the period of the lease using the straight-line method. c. should be recognized over the period of the lease using the effective interest method. d. does not arise.

c. should be recognized over the period of the lease using the effective interest method.

45. For a sales-type lease, a. the sales price includes the present value of the unguaranteed residual value. b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d. assets are depreciated by the lessor.

c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.

32. In computing the present value of the lease payments, the lessee should a. use its incremental borrowing rate in all cases. b. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. c. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. d. use the implicit rate in all cases.

c. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

46. The right-of-use asset is increased by a. initial direct costs incurred by the lessee only. b. lease incentives received. c. prepaid lease payments only. d. lease prepayments made by the lessee and initial direct costs incurred by the lessee.

d. lease prepayments made by the lessee and initial direct costs incurred by the lessee.

*108. Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a finance lease. At the time of the sale, the gain should be reported as a. a deferred gain. b. comprehensive income net of income tax. c. a separate component of stockholders' equity. d. operating income.

d. operating income.

*51. When a company sells property and then leases it back, any gain on the sale should usually be a. deferred and recognized as income over the term of the lease. b. recognized as a prior period adjustment. c. recognized at the end of the lease. d. recognized in the current year.

d. recognized in the current year.

22. Which of the following is an advantage of captive leasing companies over the other players in the leasing market? a. They have access to low-cost funds allowing them to purchase assets at lower cost. b. They are good at developing innovative contracts that help avoid accounting problems. c. They provide leasing arrangements for a wider range of products than the parent company's product line. d. They have the point-of-sale advantage in finding leasing customers.

d. They have the point-of-sale advantage in finding leasing customers.

40. In a finance lease, the lessee records a. amortization expense only. b. interest expense only. c. lease expense only. d. amortization expense and interest expense.

d. amortization expense and interest expense.

28. The classifications of a lease by the lessee are a. operating and finance leases. b. operating, sales, and finance leases. c. operating and leveraged leases. d. None of these answers are correct.

a. operating and finance leases.

1. Leasing equipment reduces the risk of obsolescence to the lessee and in many cases passes the risk of residual value to the lessor.

True

10. Direct-financing leases involve a third party in addition to the lessee.

True

13. If it is probable that the expected residual value is less than the guaranteed residual value, the difference should be included in the computation of the lease liability.

True

15. When a lease has an unguaranteed residual value, the lessor reduces sales revenue and cost of goods sold by the present value of the unguaranteed residual value.

True

17. The basic difference between a direct-financing lease and a sales-type lease relates to the recognition of the profit on the sale.

True

19. For operating leases, a lessor defers the initial direct costs and amortizes them as expenses over the term of the lease.

True

2. The FASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.

True

20. In a sale-leaseback arrangement the seller-lessee transfers an asset to the buyer-lessor and then leases the asset back from the buyer-lessor.

True

7. A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

True

*98. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2021 $600,000.00 Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29 Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91 Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39 The total lease-related income recognized by the lessee during 2022 is which of the following? a. $ -0- b. $4,000 c. $6,000 d. $60,000

a. $ -0-

101. On December 31, 2021, Burton, Inc. leased machinery with a fair value of $1,575,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $300,000 beginning December 31, 2021. The lease is appropriately accounted for by Burton as a finance lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%. The present value of an annuity due of 1 for 6 years at 10% is 4.7908. The present value of an annuity due of 1 for 6 years at 11% is 4.6959. In its December 31, 2021 balance sheet, Burton should report a lease liability of a. $1,137,240. b. $1,275,000. c. $1,408,770. d. $1,437,240.

a. $1,137,240.

68. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986 a. $1,231,066 b. $1,090,912 c. $1,139,874

a. $1,231,066

81. Hook Company leased equipment to Emley Company on July 1, 2020, for a one-year period expiring June 30, 2021, for $80,000 a month. On July 1, 2021, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2024, for $100,000 a month. The original cost of the equipment was $6,400,000. The equipment, which has been continually on lease since July 1, 2016, is being depreciated on a straight-line basis over an eight-year period with no salvage value. Assuming that both the lease to Emley and the lease to Terry are appropriately recorded as operating leases for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2021? Hook Emley Terry a. $280,000 $(480,000) $(600,000) b. $280,000 $(480,000) $(1,000,000) c. $1,080,000 $(80,000) $(200,000) d. $1,080,000 $(880,000) $(600,000)

a. $280,000 $(480,000) $(600,000)

91. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2021. The lease is appropriately accounted for as a sales-type lease by Metro and as a finance lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2031. The first of 10 equal annual payments of $828,000 was made on July 1, 2021. Metro had purchased the equipment for $5,250,000 on January 1, 2021, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2021, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000. Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2021? a. $300,000 and $206,880 b. $300,000 and $240,000 c. $3,600,000 and $206,880 d. $3,600,000 and $160,000

a. $300,000 and $206,880

83. Hull Co. bought equipment and immediately leased it to Riggs Company on May 1, 2021. At that time the collectibility of the minimum lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2021, of $4,900,000. Hull's depreciation on the equipment in 2021 was $630,000. During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2021. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. The income before income taxes derived by Hull from this lease for the year ended December 31, 2021, should be a. $518,000. b. $630,000. c. $1,148,000. d. $1,260,000.

a. $518,000.

60. Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at a. $848,761. b. $814,435. c. $723,943. d. $694,665.

a. $848,761.

107. Torrey Co. manufactures equipment that is sold or leased. On December 31, 2021, Torrey leased equipment to Dalton for a five-year period ending December 31, 2026, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $1,100,000 (including $100,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2021. Collectibility of the remaining lease payments is probable. The lease receivable before the first payment is $3,850,000, and cost is $3,000,000. For the year ended December 31, 2021, what amount of income should Torrey realize from the lease transaction? a. $850,000 b. $1,100,000 c. $1,150,000 d. $1,650,000

a. $850,000

36. Which of the following describes the lease term test? a. If the lease term is 75% or more of the economic life, it is a finance lease. b. If the lease term is 90% or more of the economic life, it is a finance lease. c. If there is a bargain purchase option during the lease term, it is a finance lease. d. If the asset has an alternative use during the lease term, it is a finance lease.

a. If the lease term is 75% or more of the economic life, it is a finance lease.

87. On January 2, 2021, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2021. Brick Co. agrees to guarantee the $150,000 residual value of the asset at the end of the lease term. The expected value of the residual value is $50,000. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 1, 2022 to record the second lease payment? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092 a. Lease Liability 112,124 Interest Expense 47,876 Cash 160,000 b. Lease Liability 117,604 Interest Expense 42,396 Cash 160,000 c. Lease Liability 160,000 Cash 160,000 d. Lease Liability 116,212 Interest Expense 43,788 Cash 160,000

a. Lease Liability 112,124 Interest Expense 47,876 Cash 160,000

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 57. From the lessor's viewpoint, what type of lease is involved? a. Sales-type lease b. Sale-leaseback c. Direct-financing lease d. Operating lease

a. Sales-type lease

41. When lessors account for residual values related to leased assets, they a. include the residual value in the receivable measurement because it is assumed the residual value will be realized. b. include the unguaranteed residual value in sales revenue. c. recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value. d. reduce the residual value by the executory costs.

a. include the residual value in the receivable measurement because it is assumed the residual value will be realized.

31. In computing amortization of a leased asset where there is no bargain purchase option, the lessee should subtract a. no residual value and depreciate over the term of the lease. b. an unguaranteed residual value and depreciate over the term of the lease. c. a guaranteed residual value and depreciate over the life of the asset. d. an unguaranteed residual value and depreciate over the life of the asset.

a. no residual value and depreciate over the term of the lease.

103. A lessee had a ten-year finance lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal a. the current liability shown for the lease at the end of year 1. b. the current liability shown for the lease at the end of year 2. c. the reduction of the lease liability in year 1. d. one-tenth of the original lease liability.

a. the current liability shown for the lease at the end of year 1.

79. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease? a. $574,864 b. $1,572,563 c. $1,600,000 d. $1,724,592

b. $1,572,563

85. Mays Company has a machine with a cost of $750,000 which also is its fair value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $75,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be a. $162,874. b. $154,623. c. $146,587. d. $125,000.

b. $154,623.

63. On January 1, 2021, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years beginning on January 1, 2021 with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a finance lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. . In 2022, Sauder should record interest expense of a. $43,397. b. $49,737. c. $69,737. d. $63,397.

b. $49,737.

72. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2021? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092 a. $70,200 b. $56,160 c. $62,400 d. $78,000

b. $56,160

*99. On June 30, 2021, Falk Co. sold equipment to an unaffiliated company for $2,000,000. The equipment had a book value of $1,080,000 and a remaining useful life of 10 years. That same day, Falk leased back the equipment at $12,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Falk's lease expense for this equipment for the year ended December 31, 2021, should be a. $288,000. b. $72,000. c. $120,000. d. $96,000.

b. $72,000.

92. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2021. The lease is appropriately accounted for as a sales-type lease by Metro and as a finance lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2031. The first of 10 equal annual payments of $828,000 was made on July 1, 2021. Metro had purchased the equipment for $5,250,000 on January 1, 2021, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2021, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000. What is the amount of profit on the sale and the amount of interest revenue that Metro should record for the year ended December 31, 2021? a. $0 and $137,920 b. $750,000 and $206,880 c. $750,000 and $240,000 d. $1,200,000 and $480,000

b. $750,000 and $206,880

52. On December 1, 2021, Goetz Corporation leased office space for 10 years at a monthly rental of $80,000. On that date Goetz paid the landlord the following amounts: Rent deposit $ 80,000 First month's rent 80,000 Last month's rent 80,000 Installation of new walls and offices 640,000 $880,000 The entire amount of $880,000 was charged to rent expense in 2021. What amount should Goetz have charged to expense for the year ended December 31, 2021? a. $80,000 b. $85,333 c. $165,333 d. $640,000

b. $85,333

95. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2021 $600,000.00 Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29 Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91 Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39 What is the discount rate implicit in the amortization schedule presented above? a. 12% b. 10% c. 8% d. 6%

b. 10%

23. Which of the following best describes current practice in accounting for leases? a. Leases are not capitalized. b. All long-term leases are capitalized. c. Leases similar to installment purchases are capitalized. d. All leases are capitalized.

b. All long-term leases are capitalized.

75. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. What type of lease is this from Alt Corporation's viewpoint? a. Operating lease b. Finance lease c. Sales-type lease d. Direct-financing lease

b. Finance lease

76. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2021? a. Amortization Expense b. Lease Expense c. Interest Expense d. Amortization Expense and Interest Expense

b. Lease Expense

86. On January 2, 2021, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2021. Brick Co. agrees to guarantee the $150,000 residual value of the asset at the end of the lease term. The expected value of the residual value is $50,000. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2021 to record the lease? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092 a. Right-of-Use Asset 598,449 Lease Liability 598,449 b. Right-of-Use Asset 758,449 Cash 160,000 Lease Liability 598,449 c. Right-of-Use Asset 689,940 Cash 160,000 Lease Liability 529,940 d. Right-of-Use Asset 707,342 Cash 160,000 Lease Liability 547,342

b. Right-of-Use Asset 758,449 Cash 160,000 Lease Liability 598,449

S26. What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? a. There is no impact as the option does not enter into the transaction until the end of the lease term. b. The lessee must increase the present value of the minimum lease payments by the present value of the option price. c. The lessee must decrease the present value of the minimum lease payments by the present value of the option price. d.The minimum lease payments would be increased by the option price.

b. The lessee must increase the present value of the minimum lease payments by the present value of the option price.

104. On January 2, 2021, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $300,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a finance lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,800,000, based on implicit interest of 10%. In its 2021 income statement, what amount of interest expense should Hernandez report from this lease transaction? a. $0 b. $135,000 c. $150,000 d. $180,000

c. $150,000

90. Pye Company leased equipment to the Polan Company on July 1, 2021, for a ten-year period expiring June 30, 2031. Equal annual payments under the lease are $240,000 and are due on July 1 of each year. The first payment was made on July 1, 2021. The rate of interest contemplated by Pye and Polan is 9%. The lease receivable before the first payment is $1,680,000 and the cost of the equipment on Pye's accounting records was $1,488,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Pye, what is the amount of profit on the sale and the interest revenue that Pye would record for the year ended December 31, 2021? a. $192,000 and $151,200 b. $192,000 and $129,600 c. $192,000 and $64,800 d. $0 and $0

c. $192,000 and $64,800

61. On December 31, 2021, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2029. Equal annual payments of $500,000 are due on December 31 of each year, beginning with December 31, 2021. The lease is properly classified as a finance lease on Lang 's books. The present value at December 31, 2021 of the eight lease payments over the lease term discounted at 10% is $2,934,213. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total liability for finance leases on its December 31, 2022 balance sheet is a. $2,727,635. b. $2,500,397. c. $2,177,634. d. $3,000,000.

c. $2,177,634.

71. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Pisa, Inc. uses the straight-line method to amortize similar assets. What is the amount of amortization expense recorded by Pisa, Inc. in the first year of the asset's life? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986 a. $0 because the asset is amortized by Tower Company. b. $284,968 c. $307,767 d. $300,000

c. $307,767

88. Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Geary gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and liability accounts have the following balances: Right-of-Use Asset $400,000 Less accumulated depreciation—finance lease 384,000 $ 16,000 Interest payable $ 1,520 Lease liability 14,480 $16,000 If, at the end of the lease, the fair value of the residual value is $11,800, what gain or loss should Dains record? a. $2,680 gain b. $6,280 loss c. $4,200 loss d. $11,800 gain

c. $4,200 loss

73. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $175,820 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2021? a. $780,000 b. $624,000 c. $468,000 d. $499,200

c. $468,000

77. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If the present value of the future lease payments is $1,600,000 at January 1, 2021, what is the amount of the reduction in the lease liability for Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a finance lease? (Rounded to the nearest dollar.) a. $414,852 b. $446,852 c. $472,350 d. $456,350

c. $472,350

109. Farm Co. leased equipment to Union Co. on July 1, 2021, and properly recorded the sales-type lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year of the lease term was received and recorded on July 3, 2021. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its 2017 income statement? a. $0 b. $5,500 c. $5,750 d. $6,750

c. $5,750

93. Roman Company leased equipment from Koenig Company on July 1, 2021, for an eight-year period expiring June 30, 2029. Equal annual payments under the lease are $800,000 and are due on July 1 of each year. The first payment was made on July 1, 2021 The rate of interest contemplated by Roman and Koenig is 8%. The cash lease receivable before the first payment is $4,965,000 and the cost of the equipment on Koenig's accounting records was $4,400,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2021? a. $0 and $0 b. $0 and $166,600 c. $565,000 and $166,600 d. $565,000 and $198,600

c. $565,000 and $166,600

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 58. Yancey, Inc. would record amortization expense on this asset in 2021 of (Rounded to the nearest dollar.) a. $0. b. $495,000. c. $610,139. d. $976,471.

c. $610,139.

89. Harter Company leased machinery to Stine Company on July 1, 2021, for a ten-year period expiring June 30, 2031. Equal annual payments under the lease are $250,000 and are due on July 1 of each year. The first payment was made on July 1, 2021. The rate of interest used by Harter and Stine is 9%. The lease receivable before the first payment is $1,750,000 and the cost of the machinery on Harter's accounting records was $1,550,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2021? a. $157,500 b. $135,000 c. $67,500 d. $0

c. $67,500

69. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a finance lease, what is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset's life? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986 a. $0 b. $98,482 c. $70,953 d. $91,192

c. $70,953

94. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2021 $600,000.00 Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29 Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91 Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39 From the viewpoint of the lessor, what type of lease is involved above? a. Sales-type lease b. Sale-leaseback c. Direct-financing lease d. Operating lease

c. Direct-financing lease

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 56. From the lessee's viewpoint, what type of lease in this? a. Sales-type lease b. Sale-leaseback c. Finance lease d. Operating lease

c. Finance lease

100. Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases? Lease A Lease B a. Operating lease Finance lease b. Operating lease Operating lease c. Finance lease Finance lease d. Finance lease Operating lease

c. Finance lease Finance lease

78. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. From the viewpoint of Yates, what type of lease agreement exists? a. Operating lease b. Finance lease c. Sales-type lease d. Direct-financing lease

c. Sales-type lease

29. Which of the following is a correct statement of one of the classification tests? a. The lease transfers ownership of the property to the lessor. b. The lease contains a purchase option. c. The lease term is equal to or more than 75% of the estimated economic life of the leased property. d. The lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.

24. 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 principal reason that supports this idea is that a. 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. b. at the end of the lease the property usually can be purchased by the lessee. c. a lease reflects the purchase or sale of a quantifiable right to the use of property. d. during the life of the lease the lessee can effectively treat the property as if it were owned.

c. a lease reflects the purchase or sale of a quantifiable right to the use of property.

42. The initial direct costs of leasing a. are generally borne by the lessee. b. include incremental costs. c. are expensed in the period of the sale under a sales-type lease. d. include lessor advertising costs.

c. are expensed in the period of the sale under a sales-type lease.

47. The Lease Liability account should be disclosed as a. a current liability. b. a noncurrent liability. c. current portions in current liabilities and the remainder in noncurrent liabilities. d. deferred credits.

c. current portions in current liabilities and the remainder in noncurrent liabilities.

53. On January 1, 2021, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $220,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2021 a. lease expense of $220,000. b. interest expense of $89,468 and depreciation expense of $76,136. c. interest expense of $107,361 and depreciation expense of $89,468. d. interest expense of $91,363 and depreciation expense of $134,202.

c. interest expense of $107,361 and depreciation expense of $89,468.

66. On January 1, 2021, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $180,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a finance lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 10%. With respect to this lease, for 2019 Ogleby should record a. interest expense of $57,058. b. interest expense of $75,058. c. interest expense of $44,764. d. interest expense of $62,764.

c. interest expense of $44,764.

65. On January 1, 2021, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $180,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a finance lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 10%. With respect to this lease, for 2021 Ogleby should record a. rent expense of $180,000. b. interest expense of $57,058 and amortization expense of $150,116. c. interest expense of $57,058 and amortization expense of $107,225. d. interest expense of $90,000 and amortization expense of $181,956.

c. interest expense of $57,058 and amortization expense of $107,225.

48. Additional lease adjustments that affect the measurement of lease assets and liabilities include each of the following except? a. executory costs. b. initial direct costs. c. internal costs. d. lease prepayments and incentives.

c. internal costs.

39. In an operating lease, the lessee records a. amortization expense. b. interest expense. c. lease expense. d. amortization expense and lease expense.

c. lease expense.

84. On January 2, 2021, Hanson Leasing Company leases equipment to Foley Co. with 5 equal annual payments of $240,000 each, payable beginning January 2, 2021. Foley Co. agrees to guarantee the $150,000 residual value of the asset at the end of the lease term. The expected value of the residual is $0. Foley's incremental borrowing rate is 10%, however it knows that Hanson's implicit interest rate is 8%. The journal entry Hanson makes at January 2, 2021 includes a debit to right-of-use asset for? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092 a. $897,674. b. $1,034,910. c. $1,061,013. d. $1,137,673.

d. $1,137,673.

82. Hull Co. leased equipment to Riggs Company on May 1, 2021. At that time the collectibility of the minimum lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2021, of $4,900,000. Hull's depreciation on the equipment in 2021 was $630,000. During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2021. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2021, should be a. $518,000. b. $630,000. c. $1,148,000. d. $1,260,000.

d. $1,260,000.

67. Emporia Corporation is a lessee with a finance lease. The asset is recorded at $900,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $300,000 at the end of 5 years, and a fair value of $100,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of amortization expense would the lessee record for the first year of the lease? a. $180,000 b. $160,000 c. $120,000 d. $100,000

d. $100,000

105. On January 2, 2021, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $300,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a finance lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line amortization for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,800,000, based on implicit interest of 10%. In its 2021 income statement, what amount of amortization expense should Hernandez report from this lease transaction? a. $300,000 b. $240,000 c. $180,000 d. $120,000

d. $120,000

70. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a finance lease, what is the amount of Lease Liability reduction recorded in first year after the lease inception. PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986 a. $344,152 b. $245,666 c. $252,960 d. $273,199

d. $273,199

97. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2021 $600,000.00 Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29 Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91 Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39 What is the amount of the lessee's liability to the lessor after the December 31, 2023 payment? a. $600,000 b. $562,353 c. $520,942 d. $475,389

d. $475,389

102. On December 31, 2021, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $2,100,000 (including $100,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2021, and the second payment was made on December 31, 2022. The five lease payments are discounted at 10% over the lease term. The present value of lease payments at the inception of the lease and before the first annual payment was $8,756,727. The lease is appropriately accounted for as a finance lease by Harris. In its December 31, 2022 balance sheet, Harris should report a lease liability of a. $6,340,000. b. $6,240,000. c. $5,706,000. d. $5,222,400.

d. $5,222,400.

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 55. What is the total annual lease payment? a. $272,703 b. $872,703 c. $887,703 d. $902,703

d. $902,703

96. Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2021 $600,000.00 Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29 Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91 Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39 The total lease-related expenses recognized by the lessee during 2022 is a. $96,000. b. $97,647. c. $110,235. d. $92,235.

d. $92,235.

33. Which of the following is not one of the lease classification tests? a. Transfer of ownership b. Purchase option c. Lease term d. Collectibility

d. Collectibility

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 59. If the lease was nonrenewable, there was no bargain purchase option, title to the building does not pass to the lessee at termination of the lease and the lease term was only for eight years, what type of lease would this be for the lessee? a. Sales-type lease b. Direct-financing lease c. Operating lease d. Finance lease

d. Finance lease

30. Lease payments include: I. fixed payments. II. variable payments based on an index. III a bargain purchase option. IV. a guaranteed residual value. a. I, II, and III. b. II, III, and IV. c. I, II, and IV. d. I, II, III, and IV.

d. I, II, III, and IV.

21. Which of the following are reasons why a company is involved in leasing to other companies? I. Interest revenue. II. High residual values. III. Tax incentives. IV. Guaranteed bargain purchase options. a. I, II, IV. b. II, III, and IV. c. I, III, and IV. d. I, II, and III.

d. I, II, and III.

37. Which of the following would be included in the Lease Receivable account? I. Guaranteed residual value. II. Unguaranteed residual value. III. Executory costs IV. Rental payments. a. I and III only. b. II, III, and IV. c. I and II only. d. I, II, and IV.

d. I, II, and IV.

80. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. Which of the following lease-related revenue and expense items would be recorded by Yates if the lease is accounted for as an operating lease? a. Lease Revenue only b. Interest Revenue only c. Depreciation Expense only d. Lease Revenue and Amortization Expense

d. Lease Revenue and Amortization Expense

*49. If the lease in a sale-leaseback transaction meets one of the five lease tests and is therefore accounted for as a finance lease, who records the asset on its books and which party records interest expense during the lease period? Party recording the Party recording asset on its books interest expense a. Seller-lessee Purchaser-lessor b. Purchaser-lessor Seller-lessee c. Purchaser-lessor Purchaser-lessor d. Seller-lessee Seller-lessee

d. Seller-lessee Seller-lessee