Int 2 Chapter 21A - multiple choice

(L.O. 1) Which of the following lease arrangements would most likely be accounted for as an operating lease by the lessee? A. The lease agreement runs 16 years and the economic life of the lease property is 20 years. B. The present value of the minimum lease payments is $55,600 and the fair value of the leased property is $60,000. C. The lease agreement allows the lessee the right to purchase the leased asset for $1.00 when half of the asset's economic useful life has expired. D. The lessee may renew the two-year lease for an additional two years at the same rental.

D

(L.O. 5) On January 1, 2018, Cihla Airlines sold an airplane to an unaffiliated company for $400,000. The airplane had a book value of $360,000 and a remaining useful life of 8 years. That same day, Cihla leased back the airplane at $5,000 per month for 4 years with no option to renew the lease or repurchase the airplane. Cihla's rent expense for this airplane for the year ended December 31, 2018 should be: A. $0 B. $12,000. C. $15,000. D. $60,000

D

Debbie Company leased equipment to the Trant Company on July 1, 2018, for a noncancelable, ten-year period expiring June 30, 2028 (Debbie and Trant both have a year-end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2018. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease) (L.O. 2) The amount of the lease receivable to be recognized by Debbie Company is: A. $0 because it is an operating lease. B. $316,000.00 C. $341,098.65 D. $356,098.65

D

(L.O. 1) An essential element of a lease conveyance is that the: A. lessor conveys less than his or her total interest in the property. B. lessee provides a sinking fund equal to one year's lease payments. C. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement. D. term of the lease is substantially equal to the economic life of the leased property.

A

(L.O. 1) Which of the following is not one of the commonly discussed advantages of lease for the lessor? A. The lessor has the right of first priority to use the leased asset since the lessor is still the owner of the asset. B. It often provides profitable interest margins. C. It can provide a high residual value to the lessor upon return of the property at the end of the lease term. D. It often provides tax benefits to various parties in the lease.

A

(L.O. 1) Which of the following lease arrangements would most likely be accounted for as a finance lease by the lessee? A. The lessee rents the truck for $1,000 a month for 10 years and after 10 years has an option to continue renting the truck for an additional 10 years at $50 per month, and the estimated life of the truck is 15 years. B. At the end of the lease term, the lessor has another use for the asset that was specially created for the lessee. C. The present value of the minimum lease payments is $32,000 and the fair value of the lease property is $40,000. D. The lease agreement runs 5 years and the economic life of the lease property is 10 years.

A

(L.O. 2) Wilson Company has a machine with a cost of $250,000 which also is its fair market value on the date the machine is leased to Berger Company. The lease is for 6 years and the machine is estimated to have a residual value of zero. If the lessor's implicit interest rate is 6%, the six beginning-of-the-year lease payments would be: A. $47,962.92 B. $50,840.70 C. $55,639.51 D. $60,223.43

A

(L.O. 1) There are different views on the capitalization of leases. Which of the following has been adopted by the FASB? A. Capitalize firm leases where the penalty for nonperformance is substantial. B. Capitalize all long-term leases. C. Do not capitalize any leased assets. D. Capitalize leases that a similar to installment purchases.

B

Debbie Company leased equipment to the Trant Company on July 1, 2018, for a noncancelable, ten-year period expiring June 30, 2028 (Debbie and Trant both have a year-end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2018. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease) (L.O. 2) The interest revenue on the lease receivable recorded by Trant Company at year end, December 31, 2018 is A. $13,774.44 B. $16,024.44 C. $27,548.88 D. $32,048.88

A

(L.O. 3) For the lessee, a finance lease differs from an operating lease because: A. The lessee still records a right-of-use asset and lease liability at commencement and still uses the effective interest method to calculate the lease expense. B. The lessee still records a right-of use asset and lease liability at commencement but records the same amount for lease expense each period over the lease term. C. The lessee does not record a right-of-use asset and lease liability at commencement but still uses the effective interest method to calculate the lease expense. D. The lessee does not record a right-of-use asset and lease liability at commencement and records the same amount for lease expense each period over the lease term.

B

Heybach Company is leasing a truck from Jessica Company that commences on January 1, 2018 and is non-cancelable with a term of four years. The truck cost $100,000 and has an estimated economic life of ten years and residual value at the end of the lease of $40,000 (unguaranteed). The truck reverts to Jessica at the termination of the lease. The implicit rate of Jessica is 5% and is known by Heybach. Jessica determined the rental payments using the 5% rate of return. (L.O. 3) At December 31, 2018, how much amortization of the right-of-use asset should Heybach record? A. $0 B. $15,850.20 C. $17,079.10 D. $18,348.59

B

Heybach Company is leasing a truck from Jessica Company that commences on January 1, 2018 and is non-cancelable with a term of four years. The truck cost $100,000 and has an estimated economic life of ten years and residual value at the end of the lease of $40,000 (unguaranteed). The truck reverts to Jessica at the termination of the lease. The implicit rate of Jessica is 5% and is known by Heybach. Jessica determined the rental payments using the 5% rate of return. (L.O. 3) What amounts should Heybach record on January 1, 2018 for the rightof-use asset and the lease liability? A. $ 49,967.81 B. $ 68,316.40 C. $ 73,394.36 D. $100,000.00

B

On January 1, 2018, Kinney Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Kinney to make annual payments of $20,000 at the beginning of each year for five years with title to pass to Kinney at the end of this period. The machinery has an estimated useful life of 7 years and no guaranteed residual value. Kinney uses the straight-line method of depreciation for all of its fixed assets. Kinney accordingly accounts for this lease transaction as a finance lease. The present value of the lease payments were determined to have a present value of $90,919 at an implicit interest rate of 5%. (L.O. 2) With respect to this finance lease, for the year ended 2018 Kinney should record: A. lease expense of $20,000 B. interest expense of $3,545.95 and depreciation expense of $12,988.43 C. interest expense of $4,545.95 and depreciation expense of $12,988.43 D. interest expense of $5,000.00 and depreciation expense of $18,183.80

B

On January 1, 2018, Kinney Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Kinney to make annual payments of $20,000 at the beginning of each year for five years with title to pass to Kinney at the end of this period. Themachinery has an estimated useful life of 7 years and no guaranteed residual value. Kinney uses the straight-line method of depreciation for all of its fixed assets. Kinney accordingly accounts for this lease transaction as a finance lease. The present value of the lease paymentswere determined to have a present value of $90,919 at an implicit interest rate of 5%. (L.O. 2) Kinney includes the following entry to record the lease on its books: A. a debit to Lease Liability of $90,919 B. a credit to Lease Liability of $90,919 C. a debit to Right-of-Use Asset of $100,000 D. a debit to Deferred Lease Expense of $9,081

B

(L.O. 1) In computing the present value of the payments under the present value test, the lessee must use a discount rate. Normally, use of the lessee's incremental borrowing rate is appropriate unless: A. the lessee's incremental borrowing rate exceeds the prime interest rate on the date of the lease agreement, in which case the prime interest rate should be used. B. the incremental borrowing rate is less than two-thirds of the prime interest rate, in which case the prime interest rate should be used. C. the lessee knows the implicit rate of the lessor. D. the lessee's incremental borrowing rate is double the LIBOR rate.

C

(L.O. 1) Which of the following is not one of the commonly discussed advantages of leasing for the lessee? A. Leasing permits 100% financing at fixed rates. B. Leasing permits changes in equipment more easily thus reducing the risk of obsolescence. C. Leasing improves financial ratios by increasing assets without a corresponding increase in debt. D. Lease agreements may contain less restrictive provisions than other debt agreements.

C

(L.O. 2) If a lease arrangement meets a sales-type lease, but payments by the lessee are determined as not probable, then: A. the lessor records the lease as an operating lease. B. the lessor records the lease as a finance lease but makes a disclosure as to the improbability of payments. C. the lessor does not record a receivable and does not derecognize the leased asset, but instead records any receipt of lease payments as a deposit liability. D. the lessor records the lease as a finance lease at the amount determined to be collected as probable.

C

(L.O. 6) The primary 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 depreciation recorded each year by the lessor. C. the recognition of profit by the lessor. D. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

C

Debbie Company leased equipment to the Trant Company on July 1, 2018, for a noncancelable, ten-year period expiring June 30, 2028 (Debbie and Trant both have a year-end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2018. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease) (L.O. 2) The gross profit on the sale by Trant Company is: A. $0 B. $25,098.65 C. $40,098.65 D. $55,098.65

C

Debbie Company leased equipment to the Trant Company on July 1, 2018, for a noncancelable, ten-year period expiring June 30, 2028 (Debbie and Trant both have a year-end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2018. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease) (L.O. 2) The lease meets the criteria for classification by Debbie Company as a(n) A. finance lease B. operating lease C. sales-type lease D. direct financing lease

C

On January 1, 2018, Kinney Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Kinney to make annual payments of $20,000 at the beginning of each year for five years with title to pass to Kinney at the end of this period. The machinery has an estimated useful life of 7 years and no guaranteed residual value. Kinney uses the straight-line method of depreciation for all of its fixed assets. Kinney accordingly accounts for this lease transaction as a finance lease. The present value of the lease payments were determined to have a present value of $90,919 at an implicit interest rate of 5%. (L.O. 2) With respect to this finance lease, for the year ended 2019 Kinney should record: A. lease expense of $20,000 B. interest expense of $4,545.95 and depreciation expense of $12,988.43 C. interest expense of $2,723.25 and depreciation expense of $12,988.43 D. interest expense of $5,000.00 and depreciation expense of $18,183.80

C