Ch 15 essent. of fin.

Tucson Fruits leased farm equipment from Barr Machinery on July 1, 2011. The lease was recorded as a sales-type lease. The present value of the lease payments discounted at 10% was $40.5 million. Ten annual lease payments of $6 million are due at the beginning of each year beginning July 1, 2011. Barr had purchased the equipment for $33 million. What amount of interest revenue from the lease should Barr report in its 2011 income statement?

$ 1,725,000 =10% x ($40,500,000 - $6,000,000) x 6/12.

Grant Industries leased exercise equipment to Silver Gyms on July 1, 2011. Grant recorded the lease as a sales-type lease at $810,000, the present value of minimum lease payments discounted at 10%. The lease called for ten annual lease payments of $120,000 due at the beginning of each year. The first payment was received on July 1, 2011. Grant had manufactured the equipment at a cost of $750,000. The total increase in earnings (pretax) on Grant's 2011 income statement would be

$ 94,500 = $34,500 [10% x ($810,000 - $120,000) x 6/12], and dealer's profit is $60,000 ($810,000 - $750,000).

Geron Co. recorded a right-of-use asset of $400,000 in a ten-year finance lease. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be: Multiple Choice $324,000. $320,000. $440,000. $484,000.

320,000 = 400,000-((400,000*10%)*2) =400,000-80,000

Universal Leasing Corp. leases farm equipment to its customers under direct-financing leases. Typically the equipment has no residual value at the end of leases and the contracts call for payments at the beginning of each year. Universal's target rate of return is 10%. On a five-year lease of equipment with a fair value of $485,100, The amount of lease payment at the beginning of each year will be closest to?

96,575 the present value factor for an annuity due for 5 periods at 10% is 4.16987.annual payment is -------------------------------------$116,334 ($485,100 / 4.16987),the total receipts are--------------------- $581,675 ($116,334 x 5). The interest revenue is total receipts minus fair value -----------------= $581,675 - $485,100

The beginning of a six-year finance lease is December 31, 2018. The agreement specifies equal annual lease payments on December 31 of each year. For the lessee, the first payment on December 31, 2018, includes Interest Expense / Reduction of the Lease Liability a. No Yes b. Yes No c. Yes Yes d. No No

A. No Yes As the lease commences on December 31, 2018 and as the first lease payment is on the same day, there is no interest component in the lease payment. The full amount will go to reduce the lease liability.

In an operating lease in which the asset's economic life and lease term are different: a. The lessee amortizes the leased asset over the term of the lease at a straight-line amount. b. The lessee amortizes the leased asset at an amount that increases each period. c. The lessor amortizes the leased asset over the term of the lease. d. The lessee amortizes the asset over its economic life.

b. The lessee amortizes the leased asset at an amount that increases each period.

Leasing has become the number one method of external financing by U.S. companies. Reasons include each of the following except: a. Tax Advantages b. Lower upfront cash needed to use the asset c. Extended use of the asset d. Protection against obsolescence

c. Extended use of the asset

Which of the following leases would least likely be classified as an operating lease by the lessee? a. The lease term is 5 years and the economic life of the leased asset is 8 years. b. Ownership of the leased asset reverts to the lessor at the end of the lease term. c. The agreement permits the lessee to buy the leased asset for one dollar at the end of the lease term. d. The fair value of the leased asset is $20 million and the present value of the lease payments is $13 million

c. The agreement permits the lessee to buy the leased asset for one dollar at the end of the lease term

Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease? a. The lease transfers ownership of the leased asset to the lessee at the end of the lease term. b. The lessee has the option of acquiring the asset during or at the end of the lease term at a bargain price. c. The lease term is greater than two-thirds of the economic life of the asset. d. The present value of the lease payments is substantially all of the fair value of the leased asset.

c. The lease term is greater than two-thirds of the economic life of the asset.

Which of the following is not a sufficient criterion for a lessor to classify a lease as a sales-type lease? a. The lease transfers ownership of the leased asset to the lessee at the end of the lease term. b. The lessee has the option of acquiring the asset during or at the end of the lease term at a bargain price. c. The present value of the lease payments is greater than the carrying value of the leased asset. d. The present value of the lease payments is substantially all of the fair value of the leased asset.

c. The present value of the lease payments is greater than the carrying value of the leased asset.