Ch 8

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 $130,000. Foley's incremental borrowing rate is 10%, however it knows that Hanson's implicit interest rate is 8%. The journal entry Foley makes at January 2, 2021 includes a debit to ROU asset for? A. $1,136,998. B. $1,061,013. C. $897,674. D. $1,034,910.

A. $1,136,998.

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 $130,000. Foley's incremental borrowing rate is 10%, however it knows that Hanson's implicit interest rate is 8%. The actual residual value of the asset at the end of the lease term was $120,000. The journal entry Foley makes at January 2, 2026 includes a debit to lease liability for? A. $20,000. B. $30,000. C. $150,000. D. $50,000.

A. $20,000.

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. (d) 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. Yancey, Inc. would record depreciation expense on this asset in 2021 of A. $600,000. B. $0. C. $976,471. D. $495,000.

A. $600,000.

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. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. Metcalf should record the leased asset at A. $848,761. B. $814,435. C. $723,943. D. $694,665.

A. $848,761.

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. (d) 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. From the lessee's viewpoint, what type of lease in this? A. Finance lease B. Operating lease C. Sale-leaseback D. Sales-type lease

A. Finance lease

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.0.

A single lease expense is recognized on the income statement for A. an operating lease. B. a finance lease. C. neither a finance lease or an operating lease. D. both a finance lease and an operating lease.

A. an operating lease.

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.

In computing the present value of the lease payments, the lessee should A. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. B. use its incremental borrowing rate in all cases. C. use the implicit rate in all cases. D. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

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

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. $100,000. D. $120,000.

C. $100,000.

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. 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. $2,454,870. B. $2,640,792. C. $2,190,792. D. $2,376,714.

C. $2,190,792.

In an operating lease, the lessee records A. amortization expense. B. interest expense. C. amortization expense and lease expense. D. lease expense.

D. lease expense.

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. 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 implicit interest rate is 10%. The lease payments were determined to have a present value of A. $ 1,16,604. B. $ 833,972. C. $ 1,400,000. D. $ 200,000.

B. $ 833,972.

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. 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 implicit interest rate is 10%. In 2021, Sauder should record interest expense of A. $83,396. B. $63,397. C. $136,604. D. $116,604.

B. $63,397.

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. (d) 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. What is the annual lease payment? A. $272,703 B. $887,703 C. $872,703 D. $902,703

B. $887,703

A leased asset is always depreciated over the term of the lease by the lessee. True False

False

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

False

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 False

True

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

True

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 False

True