Ch 15 Leases

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Payment Effective Interest Decrease Outstanding Balance $63,2821 $ 10,000 $0 $10,000 53,282 10,000 6,394 3,606 49,676 10,000 5,961 4,039 45,638 10,000 5,477 4,523 41,114 10,000 4,934 5,066 36,048 10,000 4,326 5,674 30,373 10,000 3,645 6,355 24,018 10,000 $ 2,882 $ 7,118 $16,901 10,000 ??? $10,000 ??? What would be the outstanding balance after payment 10? Multiple Choice $0 $10,000 $2,028 $8,929

$0

On January 1, Ramirez Supply leased a car for a four-year period, at which time possession of the car will revert back to the lessor. Annual lease payments are $20,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. Negotiations led to Ramirez guaranteeing the lessor a $72,000 residual value at the end of the lease term although Ramirez estimates that the residual value after four years will be $70,000. What is the amount to be added to the right-of-use asset and lease payable under the residual value guarantee? Note: Round your answer to the nearest whole dollar amount. The present value of $1: n = 4, i = 5% is 0.82270. The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595. The present value of an annuity due of $1: n = 4, i = 5% is 3.72325. Multiple Choice $2,061 $823 $1,216 $1,645

$1,645

Technoid Incorporated sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2024. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: Lease payments: $2,466,754 semiannually; first payment on January 1, 2024; remaining payments on June 30 and December 31 each year through June 30, 2028. Lease term: five years (10 semiannual payments). No residual value; no purchase option. Economic life of equipment: five years. Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. Fair value of the computers on January 1, 2024: $20 million. What is the interest revenue that Technoid would report for this lease in its income statement for the year ended December 31, 2024? Multiple Choice None of these answer choices is correct. $876,662 $0 $1,673,820

$1,673,820

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. Cash Effective Interest Decrease Outstanding Balance $ 34,600 $ 8,000 ?? ?? 26,600 8,000 $ 2,660 $5,340 21,260 8,000 2,126 5,874 15,386 8,000 1,539 6,461 8,925 8,000 ?? ?? ?? $ 2,000 $ 182 $ 1,818 $ 0 What is the outstanding balance after payment 5? Multiple Choice $1,818 $2,000 $3,818 $2,182

$1,818

On October 1, 2024, Sonoma Company leased equipment from Napa Incorporated in lease payable in five equal annual payments of $500,000, beginning October 1, 2025. Similar transactions have carried an 11% interest rate. The right-of-use asset would be recorded at: Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) Multiple Choice $2,500,000. $2,115,270. $0. $1,847,950.

$1,847,950.

Titanic Corporation leased executive limos under terms of a $20,000 first payment upon signing the lease 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: Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) Multiple Choice $33,200. $13,200. $15,543. $10,238.

$10,238.

Jasbir Company leased equipment to Dhaliwal Corporation under a lease agreement that qualifies as a finance 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 Dhaliwal record as annual amortization? Multiple Choice $12,200 $12,000 $23,600 $11,800

$11,800

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West, but not as a result of a bargain purchase option or a title transfer. The present value of the lease payments is $600,000. The expected economic life of the asset is seven years. The lease term is five years. Using the straight-line method, what would West record as annual amortization? Multiple Choice $85,714 $60,000 $120,000 $0

$120,000

Technoid Incorporated sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2024. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: Lease payments: $2,466,754 semiannually; first payment on January 1, 2024; remaining payments on June 30 and December 31 each year through June 30, 2028. Lease term: five years (10 semiannual payments). No residual value; no purchase option. Economic life of equipment: five years. Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. Fair value of the computers on January 1, 2024: $20 million. What is the outstanding balance of the lease liability in Lone Star's balance sheet on June 30, 2024? Note: Round your answer to the nearest whole dollar. Multiple Choice $21,000,000 $15,943,154 $17,533,246 None of these answer choices is correct.

$15,943,154

Jagadison Company leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease and the leases do not contain purchase options. Jagadison desires a return of 8% interest on a five-year lease of equipment with a fair value of $970,425. The present value of an annuity due of $1 at 8% for five years is 4.313. What is the total amount of interest revenue that Jagadison will earn over the life of the lease? Multiple Choice $225,000 $154,575 $388,080 $418,350

$154,575

Karla Salons leased equipment from Smith Company on July 1, 2024, in a finance lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due each year beginning July 1, 2024. Smith Company had constructed the equipment recently for $66,000, and its retail fair value was $81,100. What amount did Smith Company record in its income statement for the reporting year ending December 31, 2024, in connection with the lease? (ignore taxes.) Multiple Choice $22,010 $3,455 $15,100 $18,555

$18,555

Lasch Company recorded a right-of-use asset of $200,000 in a 10-year operating lease. Payments of $32,550 are made annually at the end of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after the first year will be: Multiple Choice $187,450. $188,450. $200,000. $180,000.

$187,450.

Lessee Company enters into a lease on January 1, 2024, that is accounted for as a finance lease. The lease calls for quarterly payments of $15,000, beginning on January 1, 2024, and continuing for 5 years. The last payment is due on October 1, 2028. The lease has an implicit annual interest rate of 8%. The present value of an annuity due at 8% per period for 5 periods is 4.312; the present value of an annuity due at 2% per period for 20 periods is 16.678. What amount will Lessee report as a lease payable (not including accrued interest) in its balance sheet on December 31, 2024? Multiple Choice $203,658 $208,968 $198,720 $200,000

$203,658

BBB Leasing purchased a machine for $250,000 and leased it to Jack Tupp Auto Repair on January 1, 2024. Lease description: Quarterly rental payments $16,315 at beginning of each period Lease term 5 years (20 quarters) No residual value; no BPO Economic life of machine 5 years Implicit interest rate 12% Fair value of asset$250,000 What is the balance in the lease payable account after the April 1, 2024, lease payment? Multiple Choice $232,569 $241,185 $233,685 $224,381

$224,381

On January 2, 2024, Nori Mining Company (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a finance lease for $240,000, which includes a $10,000 purchase option at the end of the lease. Nori is reasonably certain to exercise the purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. For the year ended December 31, 2024, what amount should Nori recognize as amortization expense on the right-of-use asset? Multiple Choice $46,000 $48,000 $27,500 $30,000

$27,500

On December 31, 2023, Reagan Incorporated signed a lease with Silver Leasing Company for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2029. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: December 31 Payments Interest Decrease Outstanding Balance 2023 $ 519,115 2024 $ 90,000 $ 90,000 429,115 2024 $ 90,000 $ 17,165 72,835 356,280 2025 $ 90,000 14,251 75,749 280,531 2026 $ 90,000 11,221 78,779 201,752 2027 $ 90,000 8,070 81,930 119,822 2028 $ 90,000 4,793 85,207 34,615 2029 $ 36,000 1,385 34,615 0 What is the balance of the lease liability on Reagan's balance sheet at December 31, 2025 (after the third lease payment is made)? Multiple Choice $280,531 $266,280 $356,280 $190,530

$280,531

Karla Salons leased equipment from Smith Company on July 1, 2024, in a finance lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due each year beginning July 1, 2024. Smith Company had constructed the equipment recently for $66,000, and its retail fair value was $81,100. What amount of interest revenue from the lease should Smith Company report in its income statement for the year ended December 31, 2024? Multiple Choice $4,055 $12,000 $3,455 $8,110

$3,455

On January 1, 2024, Rastall Company signed a long-term finance lease for an office building. The terms of the lease required Rastall to pay $30,000 annually, beginning December 31, 2024, and continuing each year for 30 years. On January 1, 2024, the present value of the lease payments is $337,734 discounted at the 8% interest rate implicit in the lease. What is the amount of the lease payable that would be reported in Rastall's balance sheet on December 31, 2024? Multiple Choice $870,000 $307,734 $334,753 $337,734

$334,753

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Payment Effective Interest Decrease Outstanding Balance $63,2821 $ 10,000 $0 $10,000 53,282 10,000 6,394 3,606 49,676 10,000 5,961 4,039 45,638 10,000 5,477 4,523 41,114 10,000 4,934 5,066 36,048 10,000 4,326 5,674 30,373 10,000 3,645 6,355 24,018 10,000 $ 2,882 $ 7,118 $16,901 10,000 ??? $10,000 ??? What is the total effective interest paid over the term of the lease? Multiple Choice $63,282 $100,000 $36,718 $53,282

$36,718

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. Cash Effective Interest Decrease Outstanding Balance $ 34,600 $ 8,000 ?? ?? 26,600 8,000 $ 2,660 $5,340 21,260 8,000 2,126 5,874 15,386 8,000 1,539 6,461 8,925 8,000 ?? ?? ?? $ 2,000 $ 182 $ 1,818 $ 0 What amount would the lessee record as annual amortization on the asset using the straight-line method, assuming no residual value? Multiple Choice $6,920 $3,325 $5,320 $4,325

$4,325

Paik Leasing acquires equipment and leases it to customers under long-term sales-type leases. Paik earns interest under these arrangements at a 6% annual rate. Paik purchased a machine and then leased it for $300,000 under an arrangement that specified annual payments to be received for five years, beginning at the commencement of the lease. The lessee had the option to purchase the machine at the end of the lease term for $50,000 when it was expected to have a residual value of $80,000. What is the amount of the annual lease payments? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. The present value of $1: n = 5, i = 6% is 0.74726. The present value of an ordinary annuity of $1: n = 5, i = 6% is 4.21236. The present value of an annuity due of $1: n = 5, i = 6% is 4.46511. Multiple Choice $78,385 $62,349 $67,188 $58,820

$58,820

Warren Company recorded a right-of-use asset of $800,000 in a 10-year finance lease. The interest rate charged by the lessor was 8%. The balance in the right-of-use asset after two years will be: Multiple Choice $640,000. $968,000. $804,000. $648,000.

$640,000.

Karla Salons leased equipment from Smith Company on July 1, 2024, in a finance lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due each year beginning July 1, 2024. Smith Company had constructed the equipment recently for $66,000, and its retail fair value was $81,100. The total decrease in earnings (pretax) reported in Karla's income statement for the year ended December 31, 2024, would be (ignore taxes): Multiple Choice $5,000. $8,400. $9,000. $7,510.

$7,510.

On September 1, 2024, Custom Shirts Incorporated entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments by Custom Shirts are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much total lease expense will Custom Shirts recognize for 2024? Multiple Choice $20,000 $24,000 $6,667 $8,000

$8,000

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Payment Effective Interest Decrease Outstanding Balance $63,2821 $ 10,000 $0 $10,000 53,282 10,000 6,394 3,606 49,676 10,000 5,961 4,039 45,638 10,000 5,477 4,523 41,114 10,000 4,934 5,066 36,048 10,000 4,326 5,674 30,373 10,000 3,645 6,355 24,018 10,000 $ 2,882 $ 7,118 $16,901 10,000 ??? $10,000 ??? What is the outstanding balance after payment 9? Multiple Choice $8,929 $13,463 $5,000 $5,537

$8,929

Red Company recorded a right-of-use asset of $100,000 in a 10-year finance lease. Payments of $16,275 are made annually at the end of each year. The interest rate charged by the lessor and known by Red was 10%. The balance in the lease payable after two years will be: Multiple Choice $116,309. $86,823. $80,000. $121,000.

$86,823.

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. Cash Effective Interest Decrease Outstanding Balance $ 34,600 $ 8,000 ?? ?? 26,600 8,000 $ 2,660 $5,340 21,260 8,000 2,126 5,874 15,386 8,000 1,539 6,461 8,925 8,000 ?? ?? ?? $ 2,000 $ 182 $ 1,818 $ 0 What would be the amount of interest expense recorded with payment 5? Multiple Choice $7,107 $893 $2,000 $1,107

$893

I.D. Clair Company recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments of $14,795 are made annually on January 1 of each year beginning January 1, 2024. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset on December 31, 2024, will be: Note: Round your answer to the nearest whole dollar amount. Multiple Choice $100,000. $85,205. $91,478. $93,726.

$93,726.

I.D. Clair Company recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments of $14,795 are made annually on January 1 of each year beginning January 1, 2024. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset on December 31, 2024, will be: Note: Round your answer to the nearest whole dollar amount. Multiple Choice $91,478. $93,726. $100,000. $85,205.

$93,726.

On January 1, Sepe Vineyard Supply leased a truck for a five-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $11,000 due on December 31 of each year, calculated by the lessor using a 4% discount rate. If Sepe's revenues exceed a specified amount during the lease term, Sepe will pay an additional $3,000 lease payment at the end of the lease. Sepe estimates a 70% probability of meeting the target revenue amount. What amount, if any, should be added to the right-of-use asset and lease liability under the contingent rental agreement? Multiple Choice Present value of $3,000 $3,000 0 Present value of $14,000

0

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. Cash Effective Interest Decrease Outstanding Balance $ 34,600 $ 8,000 ?? ?? 26,600 8,000 $ 2,660 $5,340 21,260 8,000 2,126 5,874 15,386 8,000 1,539 6,461 8,925 8,000 ?? ?? ?? $ 2,000 $ 182 $ 1,818 $ 0 What is the effective annual interest rate? Multiple Choice 11% 9% 10% 20%

10%

On December 31, 2023, Reagan Incorporated signed a lease with Silver Leasing Company for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2029. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: December 31 Payments Interest Decrease Outstanding Balance 2023 $ 519,115 2024 $ 90,000 $ 90,000 429,115 2024 $ 90,000 $ 17,165 72,835 356,280 2025 $ 90,000 14,251 75,749 280,531 2026 $ 90,000 11,221 78,779 201,752 2027 $ 90,000 8,070 81,930 119,822 2028 $ 90,000 4,793 85,207 34,615 2029 $ 36,000 1,385 34,615 0 What is the effective annual interest rate charged to Reagan on this lease? Multiple Choice 8% 6% 4% 17%

4%

On December 31, 2023, Reagan Incorporated signed a lease with Silver Leasing Company for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2029. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: December 31 Payments Interest Decrease Outstanding Balance 2023 $ 519,115 2024 $ 90,000 $ 90,000 429,115 2024 $ 90,000 $ 17,165 72,835 356,280 2025 $ 90,000 14,251 75,749 280,531 2026 $ 90,000 11,221 78,779 201,752 2027 $ 90,000 8,070 81,930 119,822 2028 $ 90,000 4,793 85,207 34,615 2029 $ 36,000 1,385 34,615 0 At what amount would Reagan record the right-of-use asset at the beginning of the agreement? Multiple Choice $576,000 $429,115 $540,000 $519,115

519,115

Pita Pub leased a specialty machine for a five-year non-cancelable term. At the end of the five-year term, Pita Pub has four consecutive one-year renewal options. A replacement machine can be acquired, but due to an expensive installation process and Pita Pub's lease term for its mall location, Pita Pub expects to lease the machine for seven years. What is the lease term? Multiple Choice 6 years 5 years 7 years 9 years

7 years

Bhat Creations leased kitchen equipment under a five-year lease with an option to renew for three years at the end of five years and an option to renew for an additional three years at the end of eight years. The first three-year renewal option can be exercised for one-half the original and usual rate. What is the length of the lease term that Bhat Creations should assume in recording the transactions related to the lease? Multiple Choice 8 years cannot be determined 11 years 5 years

8 years

Which of the following might shorten the term of the lease? Multiple Choice Contingent rentals A purchase option Initial direct costs A renewal option

A purchase option

Barr Corporation is the lessee in a finance lease. Barr would record: Multiple Choice Interest revenue. A right-of-use asset. Depreciation expense. Lease expense.

A right-of-use asset.

If it is "reasonably certain" that the lessee will exercise a purchase option: Multiple Choice Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment. All of these answer choices are correct. The lease is classified as a finance/sales-type lease. It's assumed that the lease term ends on the date that the option is expected to be exercised.

All of these answer choices are correct.

If it is "reasonably certain" that the lessee will exercise a purchase option: Multiple Choice It's assumed that the lease term ends on the date that the option is expected to be exercised. All of these answer choices are correct. Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment. The lease is classified as a finance/sales-type lease.

All of these answer choices are correct.

Gopal Eatery leased restaurant equipment from Krishnan Leasing. Krishnan earns interest under such arrangements at a 6% annual rate. The lease term is eight months with monthly payments of $20,000 due at the end of each month. Gopal Eatery elected the short-term lease option. What is the effect of the lease on Gopal Eatery's earnings during the eight-month term (ignore taxes)? Multiple Choice An initial expense of $160,000 No expense within the 8-month period An expense of $20,000 at the end of each of the 8 months An expense of $20,000 initially and $20,000 at the end of 7 months

An expense of $20,000 at the end of each of the 8 months

For the lessee to account for a lease as a finance lease, the lease must meet: Multiple Choice Any two of the criteria specified by GAAP regarding accounting for leases. All five of the criteria specified by GAAP regarding accounting for leases. Any one of the five criteria specified by GAAP regarding accounting for leases. Any one of the six criteria specified by GAAP regarding accounting for leases.

Any one of the five criteria specified by GAAP regarding accounting for leases.

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 certain sometimes is called a: Multiple Choice Lessor sell-out option. Lessee buy-out option. Bargain purchase option. Guaranteed purchase option.

Bargain purchase option.

Advance payments made by the lessee on an operating lease are considered to be: Multiple Choice Lease expense. Deferred revenue to the lessor. Amortization of the right-of-use asset. A prepayment of interest expense.

Deferred revenue to the lessor.

Damon is the lessee in connection with a finance lease. Damon will not record: Multiple Choice Amortization expense. Depreciation expense. A right-of-use asset. Interest expense.

Depreciation expense.

Matt Company is the lessor in connection with an operating lease. Matt Company would record: Multiple Choice Interest revenue. A right-of-use asset. Amortization expense. Depreciation expense.

Depreciation expense.

On January 1, 2024, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type 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 lease payments is $240,000. The lease payments are due each January 1, beginning in 2024. What is the appropriate interest entry on December 31, 2024? Multiple Choice General Journal D Cash 20,600 C Interest receivable 20,600 General Journal D Interest receivable 24,000 C Interest revenue 24,000 General Journal D Interest receivable 20,600 C Interest revenue 20,600 General Journal D Cash24,000 C Interest revenue 24,000

General Journal D Interest receivable 20,600 C Interest revenue 20,600

On January 1, 2024, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2024, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2024? Multiple Choice General Journal Debit Cash 36,000 Credit Rent revenue36,000 General Journal Debit Cash 36,000 Credit Rent expense36,000 General Journal Debit Cash36,000 credit Deferred revenue 36,000 General Journal Debit Cash36,000 credit Lease receivable 36,000

General Journal Debit Cash36,000 credit Deferred revenue 36,000

By the lessor, a lessee-guaranteed residual value at the beginning of a finance lease should be: Multiple Choice Included as part of lease payments at future value. Excluded from lease payments. Included as part of lease payments at present value. Included as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

Included as part of lease payments at present value.

A short-term lease: Multiple Choice Is defined as having a value of $10,000 or less. Is defined as having a lease term of fifteen months or less. Must be accounted for by the short-cut method if using U.S. GAAP. Is not required to be accounted for by the short-cut method if using IFRS.

Is not required to be accounted for by the short-cut method if using IFRS.

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

Lessor is not obligated to compensate the lessee for the excess.

A lessee will reassess variable lease payments that depend on an index or a rate: Multiple Choice Never. Only when the lessor also reassesses the variable lease payments. Whenever there is a change in the cash flows resulting from a change in the reference index or rate. Only when the lessee remeasures the right-of-use asset and lease liability for other reasons.

Only when the lessee remeasures the right-of-use asset and lease liability for other reasons.

Crystal Corporation makes $2,000 payments every month for leasing office equipment. Crystal recorded a lease payment as follows: Debit Lease payable 1,200 Interest expense 800 Credit Cash2,000 Debit Amortization expense 1,200 Credit Right-of-use asset1,200 Crystal must have a(n): Multiple Choice Finance lease. Sales-type lease without selling profit. Operating lease. Leveraged lease.

Operating lease.

B Corporation is a lessee and has a debt/equity ratio of 2 to 1. The debt/equity ratio is increased when B records: A Finance Lease An Operating Lease a.yes yes b. no no c.yes no d.no yes Multiple Choice Option A Option B Option C Option D

Option A

Abhijit Company leased equipment from Barua Corporation on July 1, 2024, for an 8-year period expiring June 30, 2029. Equal annual payments on July 1 of each year are $120,000. The first payment was made on July 1, 2024. The rate of interest contemplated by Abhijit and Barua is 10%. The cash selling price of the equipment is $704,000, and the cost of the equipment on Barua's accounting records is $560,000. The lease is appropriately recorded as a sales-type lease. What is the amount of selling profit on the sale and interest revenue that Barua will record for the year ended December 31, 2024? Selling Profit Interest Revenue a.$ 9,000 $ 29,200 b.$ 9,000 $ 35,200 c.$ 144,000 $ 29,200 d.$ 144,000 $ 35,200 Multiple Choice Option C Option A Option B Option D

Option C

S Corporation has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. The immediate impact of recording a finance lease on these ratios is a(n): Return on AssetsDebt/Equity a.increase increase b.decrease decrease c.increase decrease d.decrease increase Multiple Choice Option B Option A Option C Option D

Option D

Star Corporation has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1 before entering into an operating lease. Not including any indirect effects on earnings, when Star Corporation records the operating lease, the immediate impact on these ratios is a(an): Return on Assets Debt/Equity a.increase increase b.decrease decrease c.increase decrease d.decrease increase Multiple Choice Option A Option B Option D Option C

Option D

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the right-of-use asset should be recorded is the: Multiple Choice Future value of an annuity due table. Present value of an annuity due table. Present value of an ordinary annuity table Present value of $1 table.

Present value of an annuity due table.

What makes up a lessor's net investment? Multiple Choice Present value of lease payments minus present value of residual value Lease payments plus residual value Lease payments plus non-lease payments Present value of lease payments plus present value of residual value

Present value of lease payments plus present value of residual value

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is: Multiple Choice Zero, unless a prepayment or accrual is involved. Present value of the lease payments. The lessor's book value of the asset at the beginning of the lease. Sum of the lease payments.

Present value of the lease payments.

The lessee normally measures the lease liability to be recorded as the: Multiple Choice Book value of the leased asset. Future value of the lease payments. Present value of the lease payments. Sum of the cash payments over the term of the lease.

Present value of the lease payments.

A noncancelable lease contains an 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 certain. The fair value of the asset exceeds the lessor's cost of the asset. Therefore, the lease will be accounted for by the lessor as a(n): Multiple Choice Sales-type lease. Guaranteed lease. Financing lease. Operating lease.

Sales-type lease.

If the lessor retains title to leased property under the terms of the lease: Multiple Choice The amount to be recovered will be the same as if there were no residual value. The lessor will record a greater amount of depreciation due to the residual value. The amount to be recovered through periodic lease payments is reduced by the present value of any residual amount. The amount to be recovered through periodic lease payments is increased by the present value of the residual amount.

The amount to be recovered through periodic lease payments is reduced by the present value of any residual amount.

For a right-of-use asset under a lease that qualifies as a finance lease because the lease contains a purchase option and the option is reasonably certain to be exercised, the amortization period used by the lessee must be: Multiple Choice The term of the lease. The economic life of the asset at the time the lease agreement took effect. The same period that was used by the lessor. The term of the lease or the economic life of the asset, whichever is shorter.

The economic life of the asset at the time the lease agreement took effect.

Of the five criteria for a finance lease, which one is not applied if the lease begins "at or near the end" of the economic life of the underlying asset? Multiple Choice The passage of title criteria. A purchase option is reasonably certain to be exercised. The present value of lease payments greater or equal to substantially all of fair value test. The economic life test.

The economic life test

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that: Multiple Choice The expenses of the finance lease and operating lease are equal. The expenses of an operating lease are greater than the expenses of a finance lease. The expenses of a finance lease are greater than the expenses of the operating lease. No meaningful comparison can be made.

The expenses of the finance lease and operating lease are equal.

Which of the following statements characterizes an operating lease? Multiple Choice The lessor records depreciation and lease revenue. The lessee reports cash outflows as financing activities. The lessor transfers title at the end of the lease term. The lessee has an option to purchase the leased assets and is reasonably sure to exercise the option.

The lessor records depreciation and lease revenue.

Which of the following statements regarding a lessee-guaranteed residual value is true? Multiple Choice The lessee's right-of-use asset and lease payable at the beginning of the lease should be increased by the present value of the residual value. The lessor's lease receivable should be increased by the amount of the residual value. The lessee's right-of-use asset and lease payable at the beginning of the lease should be decreased by the present value of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value. The lessor's lease receivable should be increased by the amount of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value.

The lessor's lease receivable should be increased by the amount of the residual value.

Sometimes lease payments are scheduled to be increased (or decreased) at some future date during the lease term, depending on whether or not some specified event occurs. Papaya Republic leases space in premium mall locations anticipating higher revenue. If the mall attracts a sufficiently higher number of shoppers, Papaya Republic pays the lessor part of the resulting higher profits, but if not, the Papaya Republic makes only the normal lease payments. Management's policy is to include the variable lease payments as part of the lease payments used to calculate the lessee's lease liability and right-of-use asset if the payments are probable. Which of the following is an accurate statement regarding the company's policy? Multiple Choice The policy is inappropriate because the amounts of future lease payments are uncertain and often avoidable and thus should not be considered as part of the lease payments. This approach is conceptually correct because the arrangement also provides the lessor an incentive to attract shoppers to the mall, which is in the lessee's best interest. This approach is inappropriate because the variable lease payments should be included as part of the lease payments only if and when the lessee remeasures the lease liability. The policy is inappropriate because the variable lease payments should be included as part of the lease payments used to calculate the lessee's lease liability and right-of-use asset only if the payments are "reasonably certain."

The policy is inappropriate because the amounts of future lease payments are uncertain and often avoidable and thus should not be considered as part of the lease payments.

When a finance lease is first recorded at the beginning of the lease, the entry made by the lessee typically includes a debit to: Multiple Choice rent expense. lease receivable. lease expense. right-of-use asset.

right-of-use asset.

Leasing has become the number one method of external financing by U.S. companies. Reasons include each of the following except: Multiple Choice protection against obsolescence. extended use of the asset. tax advantages. lower upfront cash needed to use an asset.

extended use of the asset.

Interest expense is not calculated as the effective interest rate times the amount of the debt outstanding during the interest period for: Multiple Choice notes payable. bonds payable. lease receivable. lease payable.

lease receivable.

Andres Company is the lessee in an operating lease in which the asset's economic life and lease term are different. Andres will amortize the: Multiple Choice leased asset at an amount that increases each period. asset over its economic life. leased asset over the term of the lease at a straight-line amount. leased asset at an amount that decreases each period.

leased asset at an amount that increases each period.

In an operating lease, the amortization of the right-of-use asset in the third year is: Multiple Choice more than in the fourth year. the same as in the fourth year. zero. less than in the fourth year.

less than in the fourth year.

In an eight-year finance lease, the portion of the annual lease payment that represents interest in the lease's third year payment is: Multiple Choice the same as in the fourth year. more than in the second year. less than in the second year. the same as in the first year.

less than in the second year.

On December 31, 2023, Reagan Incorporated signed a lease with Silver Leasing Company for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2029. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: December 31 Payments Interest Decrease Outstanding Balance 2023 $ 519,115 2024 $ 90,000 $ 90,000 429,115 2024 $ 90,000 $ 17,165 72,835 356,280 2025 $ 90,000 14,251 75,749 280,531 2026 $ 90,000 11,221 78,779 201,752 2027 $ 90,000 8,070 81,930 119,822 2028 $ 90,000 4,793 85,207 34,615 2029 $ 36,000 1,385 34,615 0 In this situation, Reagan is the: Multiple Choice lessee in a sales-type lease. lessee in a finance lease. lessor in a finance lease. lessor in a sales-type lease.

lessee in a finance lease.

We classify a lease as a finance lease if the: Multiple Choice present value of lease payments is less than the asset's book value. lessee obtains control of the use of the asset. present value of lease payments is less than the asset's fair value. usual risks and rewards are retained by the lessor.

lessee obtains control of the use of the asset.

We classify a lease as a finance lease if the: Multiple Choice present value of lease payments is less than the asset's book value. lessee obtains control of the use of the asset. usual risks and rewards are retained by the lessor. present value of lease payments is less than the asset's fair value.

lessee obtains control of the use of the asset.

In a finance lease, the: Multiple Choice lessee records an asset and a liability for the present value of lease payments. lessor records an asset and a liability for the present value of lease payments. lessee records an asset and a liability for the total of the lease payments. lessor records an asset and a liability for the total of the lease payments.

lessee records an asset and a liability for the present value of lease payments.

In an operating lease, the: Multiple Choice lessor records interest revenue. lessor records a receivable for the present value of lease payments. lessee records an asset and a liability for the present value of lease payments. lessee records an asset and a liability for the total of the lease payments.

lessee records an asset and a liability for the present value of lease payments.

If the lessee expects to obtain title to leased property due to a purchase option that is reasonably certain to be exercised or the passage of title at the end of the lease term, the: Multiple Choice lessee ignores any residual value for the leased property. lessor will always charge a higher annual lease rate. lessee adds the present value of the residual value to the amount recorded for the lease. lessor ignores any residual value for the leased property.

lessor ignores any residual value for the leased property.

Cook the Books is the lessee in a lease agreement. From the perspective of the lessee, the lease may be classified as: Multiple Choice operating, finance, or sales-type. operating or finance. operating, sales-type, or indirect financing. operating or sales-type.

operating or finance.

In a finance lease, the amortization of the right-of-use asset in the third year is: Multiple Choice more than in the fourth year. the same as in the fourth year. zero. less than in the fourth year.

the same as in the fourth year.