F6
Steam Co. acquired equipment under a capital lease for 6 years. Minimum lease payments were $60,000 payable annually at the year's end. The interest rate was 5% with an annuity factor for 6 years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?
$15,227
Harris Inc leased equipment under a finance lease for a period of seven years, contracting to pay $100,000 in advance at the start of the lease term on December 31, year 1, and $100,000 annually on December 31 of each of the next six years. The present value at December 31, year 1, of the seven rent payments at a discount rate of 10 percent is $535,000. Harris amortizes its liability under the lease using the effective interest method. What should Harris report as a lease liability In its December 31, year 2, balance sheet?
$378,500
Able sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a finance lease under US GAAP. At the time of sale, the sale-leaseback will be considered:
A failed sale
Which of the following statements regarding the lessor's accounting under an operating lease is most accurate?
A refundable security deposit is booked as a liability until refunded to the lessee
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-finance Lease B-finance
A 20-year property lease, classified as an operating lease, provides for a 10 percent increase in annual payments every five years. In the sixth year compared with the fifth year, the lease will cause the following expenses to increase:
Lease-no Interest-no
The lessee had a 10-year finance lease requiring equal annual payments. The reduction of the lease liability in Year 2 should equal:
The current liability shown for the lease at the end of Year 1
Assuming that no direct costs are involved, what are the components of the lease receivable for a lessor involved in a direct-financing lease?
The minimum lease payments plus residual value
Assuming US GAAP and given no other information on the terms of the lease, the lessee will account for a lease as operating in all of the following situations, EXCEPT:
The present value of the minimum lease payments is equal to 95% of fair value
On January 1 Year 1, JCK Co. signed a contract for an eight-year lease of its equipment with a 10-year life. The present value of the 16 equal semiannual payments in advance equaled 85% of the equipment's fair value. The contract had no provision for JCK, the lessor, to give up legal ownership of the equipment. Should JCK recognize rent or interest revenue in Year 3, and should the revenue recognized in Year 3 be the same or smaller than the revenue recognized in Year 2 under U.S. GAAP?
Year 3 revenues recognized-interest Year 3 amount recognized compared to Year 2-smaller
On December 31, 2005, Day Co. leased a new machine from Parr with the following pertinent information:Lease term 6 yearsAnnual rental payable at beginning of each year $50,000Useful life of machine 8 yearsDay's incremental borrowing rate 15%Implicit interest rate in lease (known by Day) 12%Present value of an annuity of one in advance for six periods at:12% 4.6115% 4.35The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr's accounting records is $375,500. At the beginning of the lease term, Day should record a lease liability of
$230,500
Oak Co. leased equipment for its entire 9-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, 2004 and $50,000 annually on each December 31 for the next 8 years. The present value on December 31, 2004 of the nine lease payments over the lease term, using the rate implicit in the lease, which Oak knows to be 10%, was $316,500. The December 31, 2004 present value of the lease payments using Oak's incremental borrowing rate of 12% was $298,500. Oak made a timely second lease payment. What amount should Oak report as capital lease liability in its December 31, 2005 balance sheet?
$243,150
Neal Corp. entered into a 9-year capital lease on a warehouse on December 31, 2003.Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2004 and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for 9 years at 9% is 5.6.What amount should Neal report as capitalized lease liability at December 31, 2003?
$280,000
Barnel Corp. owns and manages 19 apartment complexes. On signing a lease, each tenant must pay the first and last months' rent and a $500 refundable security deposit. The security deposits are rarely refunded in total because cleaning costs of $150 per apartment are almost always deducted. About 30% of the time, the tenants are also charged for damages to the apartment, which typically cost $100 to repair. If a 1-year lease is signed on a $900 per month apartment, what amount would Barnel report as refundable security deposit?
$500
Anton owns equipment originally purchased four years ago for $325,000. On January 1, Year 5 Anton sells the equipment to Bridges for 208,000. The equipment has a remaining useful life of six years, a carrying value of 195,000, and a fair value of 202,000. Bridges has agreed to lease the equipment back to Anton for year years with annual pyaments of 48,375 and an implicit rate of 5.25%. The lease qualifies as a sale. When the transfertakes place Anton will record a financing liability equal to:
$6,000
On January 1, 2005, Day Corp. entered into a 10-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. Day knows that the lessor expects a 10% return on the lease. Day has a 12% incremental borrowing rate.The equipment is expected to have an estimated useful life of 10 years. In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of the lease.The present value of an ordinary annuity of $1 at12% for 10 years is 5.6502 10% for 10 years is 6.1446The present value of $1 at12% for 10 years is .3220 10% for 10 years is .3855In Day's October 31, 2005 balance sheet, the principal amount of the lease obligation was
$61,446
Besser Contractors leased a new piece of equipment. The lease is for three years and the economic life of the equipment is for years. The lease contains a written purchase option which Besser intends to exercise. Over how many years should Besser depreciate the leased equipment?
4
Under U.S. GAAP, one criterion for a finance lease is that the term of the lease represents the major part of the leased property's estimated economic life at the inception of the lease. What is a reasonable minimum threshold percentage for representing a "major part" of the asset's economic life?
75%
Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?
Depreciation expense-no Interest revenue-yes
At inception of a finance lease, the guaranteed residual value should be:
Included as part of minimum lease payments at present value
A six-year finance lease entered into on December 31, Year 1, specified equal minimum annual lease payments due on December 31 of each year. The first minimum annual lease payments, paid on December 31, Year 1, consists of which of the following?
Interest expense-no Lease liability-yes
On January 1, a company enters into an operating lease for office space and receives control of the property to make leasehold improvements. The company begins alterations to the property on March 1 and the company's staff moves into the property on May 1. The monthly rental payments begin on July 1. The recognition of rental expense for the new offices should begin in which of the following months?
January
Jay's lease payments are made at the end of each period. Jay's liability for a capital lease would be reduced periodically by the
Minimum lease payment less the portion of the minimum lease payment allocable to interest
At the beginning of the year, a lessee signs a five-year lease that contains a written purchase option, which the lessee is reasonably certain to exercise. In preparing the annual cash flow statement after year-end, the lessee's cash flow from operations will be:
Negatively impacted by variable lease payments not included in the lease liability
As an inducement to enter a lease, Graf Co., a lessor, granted Zep, Inc., a lessee, twelve months of free rent under a five-year operating lease. The lease was effective on January 1, Year 1, and provides for monthly rental payments to begin January 1, Year 2. Zep made the first rental payment on December 30, Year 1. In its Year 1 income statement, Graf should report rental revenue in an amount equal to:
One-fifth of the total cash to be received over the life of the lease
A lease is classified as a finance lease because it contains a written purchase option that the lessee is reasonably certain to exercise. Over what period of time should the lessee amortize the leased property?
The economic life of the asset
Bain Co. entered into a 10-year lease agreement for a new piece of equipment worth $500,000. At the end of the lease, Bain will have the option to purchase the equipment. Which of the following would require the lease to be accounted for as a capital lease?
The estimated useful life of the leased asset is 12 years
On January 1, year 1, Frost Co. entered into a 2-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on January 1, year 1 and ends on December 31, year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the minimum lease payments is $13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a capital lease?
The fair value of the computers on January 1, year 1 is $14,000
Which of the following is a criterion for a lease to be classified as a finance lease in the books of a lessee under US GAAP?
The lease contains a written purchase option
Which of the following is a characteristic of a finance lease under US GAAP?
The lease contains a written purchase option that the lessee is reasonably certain to exercise
Which of the following is a criterion for classifying a lease as a finance lease by a lessee?
The lease term is equal to 75 percent or more of the estimated economic life of the leased property
Which of the following situations would require that a lessor not book a lease as an operating lease under US GAAP?
The lease term represents 80% of the economic life of the asset leased
On January 1, Year 1, a shipping company sells a boat and leases it from the buyer in a sale-leaseback transaction. At the end of the 10-year lease, ownership of the boat reverts to the shipping company. The fair value of the boat, at the time of the transaction, was less than its undepreciated cost. Which of the following outcomes most likely will result from the sale-leaseback transaction?
The shipping company will recognize in the current year a loss on the sale of the boat
Watts Inc. enters into an agreement to lease a printer/copier from Jennings Co. The lease is for three years and does not stipulate an ownership transfer or contain a written option to purchase. The printer/copier has a five-year life and the equipment is standard equipment that Jennings can use for many projects and functions. The net present value of the lease payments is approximately half of the overall fair value of the equipment and there is no guaranteed residual value associated with the lease. Watts and Jennings will account for this lease as:
Watts-operating Jennings-operating
