Intermediate Financial Accounting 2

If it is "reasonably certain" that the lessee will exercise a purchase option:

All of these answer choices are correct.

Jacobs Eatery leased restaurant equipment from Gamma Leasing. Gamma 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. Jacobs Eatery elected the short-term lease option. What is the effect of the lease on Jacobs Eatery's earnings during the eight-month term (ignore taxes)?

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

The lessee normally measures the lease liability to be recorded as the:

Present value of the lease payments

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

Subscriptions collected in advance and recorded for GAAP as unearned revenue.

If the lessee and lessor use different interest rates to account for a finance/sales-type lease, then:

The lessee is unaware of the lessor's implicit rate

J Corp. is a lessee that entered into an operating lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

a cash flow from operating activities

In connection with an operating lease, the lessor would not record:

a liability

Of the following differences, which one ordinarily creates a deferred tax asset?

accrued warranty expense

A sales-type lease is reported in the lessor's balance sheet as:

an asset

In 2011, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2011, Magic Table Inc incurs:

an increase in a deferred tax asset

If the lessor records deferred lease revenue at the beginning of a lease term, the lease must:

be an operating lease

On January 1, 2021, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $420,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2021, in the amount of $43,000. 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, 2021?

debit cash - 43,000 credit deferred revenue - 43,000

In an operating lease:

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

In a finance lease:

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

On January 1, 2021, PokemonGo Company leased equipment to Waldo Corporation under a lease agreement that qualifies as an operating lease to Waldo. The present value of the end-of-year lease payments of $138,585 discounted at 5% is $600,000. The expected economic life of the asset is seven years. The lease term is five years. What would Waldo record as amortization of the ROU asset in 2021? Note: This would be the credit to the ROU asset in the December 31, 2021, journal entry.

$108,585

Blue Co. recorded a right-of-use asset of $220,000 in a 10-year operating lease. Payments of $32,786 are made annually at the end of each year. The interest rate charged by the lessor was 8% and was known by Blue. The balance in the right-of-use asset after two years will be:

$188,413

In connection with a lease of more than 12 months, the lessee will always record each of the following except:

interest revenue

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. PaymentCashPaymentEffectiveInterestDecreasein balanceOutstandingBalance 63,282 1 10,000 0 10,000 53,282 2 10,000 6,394 3,606 49,676 3 10,000 5,961 4,039 45,638 4 10,000 5,477 4,523 41,114 5 10,000 4,934 5,066 36,048 6 10,000 4,326 5,674 30,373 7 10,000 3,645 6,355 24,018 8 10,000 2,882 7,118 16,901 9 10,000 ? ? ? 10 10,000 ? ? ? What would be the outstanding balance after payment 10?

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. LeasePaymentCashPaymentEffectiveInterestDecrease inBalanceOutstandingBalance 34,600 18,000 ?? ?? 26,600 28,000 2,660 5,340 21,260 38,000 2,126 5,874 15,386 48,000 1,539 6,461 8,925 58,000 ?? ?? ?? 62,000 182 1,818 0 What is the outstanding balance after payment 5?

1,818

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. PaymentCashPaymentEffectiveInterestDecreasein balanceOutstanding Balance 81,108 1 12,000 0 12,000 69,108 2 12,000 6,911 5,089 64,019 3 12,000 6,402 5,598 58,421 4 12,000 5,842 6,158 52,263 5 12,000 5,226 6,774 45,489 6 12,000 4,549 7,451 38,038 7 12,000 3,804 8,196 29,842 8 12,000 2,984 9,016 20,826 9 12,000 ? ? ? 10 12,000 ? ? ? What is the effective annual interest rate? (Round final answer to the nearest whole percentage.)

10%

For its first year of operations Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%.What should Tringali report as its income tax expense for its first year of operations?

114,000 (265,000*40%=106,000, 20,000*40%=8,000, 106,000+8,000)

Apex is a Lessee in a finance lease and guarantees a $20,000 residual value. It is probable that the asset will be worth $8,000 at the end of the lease. What amount should Apex include in its required lease payments?

12,000

Isaac Inc. began operations in January 2021. For some property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.In 2021, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: 2021$60million 2022 120million 2023 120million 2024 150million 2025 150million $600million Assume that Isaac has a 25% income tax rate and that there were no other differences in income for financial statement and tax purposes. What deferred tax liability would Isaac report in its year-end 2021 balance sheet? Remember deferred tax assets and liabilities pertain to the future, that is 2022 and beyond.

135 million

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 $720,000. 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?

144,000

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): Pretax accounting income:$195 Pretax accounting income included: Overweight fines (not deductible for tax purposes) 5 Depreciation expense 70 Depreciation in the tax return 110 The applicable tax rate is 25%. There are no other temporary or permanent differences. Franklin's net income ($ in millions) is:

145

Isaac Inc. began operations in January 2011. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.In 2011, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2011 balance sheet?

162 million (540*30%)

Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 25%. The total income tax expense for the year was (hint: follow the 3 step process - calculate income tax payable, journalize the changes in DTAs and DTLs, then plug income tax expense):

165 million

Pretax accounting income for the year ended December 31, 2011, was $50 million for Truffles Company. Truffles' taxable income was $60 million. This was a result of differences between straight line depreciation for financial reporting purposes and MACRS for tax purposes. The enacted tax rate is 30% for 2011 and 40% thereafter. What amount should Truffles report as the current portion of income tax expense for 2011?

18 million (60,000*30%)

On January 1, 2021, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $24,000 for 2021, $20,000 for 2022, $17,000 for 2023, and $14,000 for 2024. What is the correct amount of total lease expense for 2022?

18,750

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $21 million.This noncancelable lease had the following terms: Lease payments: $3,204,433 semiannually; first payment at January 1, 2021; remaining payments at June 30 and December 31 each year through June 30, 2025. Lease term: 5 years (10 semiannual payments). No residual value; no purchase option. Economic life of equipment: 5 years. Implicit interest rate and lessee's incremental borrowing rate: 6% semiannually. Fair value of the computers at January 1, 2021: $25 million. What is the outstanding balance of the lease liability in Lone Star's June 30, 2021, balance sheet? (Round your answer to the nearest whole dollar.)

19,898,868

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): Pretax accounting income:$230 Pretax accounting income included: Overweight fines (not deductible for tax purposes) 10 Depreciation expense 73 Depreciation in the tax return using MACRS: 122 The applicable tax rate is 25%. There are no other temporary or permanent differences.Franklin's taxable income ($ in millions) is:

191

On October 1, 2021, Sonoma Company leased equipment from Napa Inc. in lease payable in five equal annual payments of $590,000, beginning Oct 1, 2022. Similar transactions have carried an 9% interest rate. The right-of-use asset would be recorded at: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided OR you may use Excel here and on the exam.)

2,294,894

BBB Leasing purchased a machine for $250,000 and leased it to Jack Tupp Auto Repair on January 1, 2021. Lease description: Quarterly rental payments$16,315 at beginning of each periodLease term5 years (20 quarters)No residual value; no BPO Economic life of machine5 yearsImplicit interest rate12%Fair value of asset$250,000 What is the balance in the lease payable account after the April 1, 2021, lease payment?

224,381

On January 1, 2021, Green Co. recorded a right-of-use asset of $270,360 in an operating lease. The lease calls for ten annual payments of $40,000 at the beginning of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2021, will be:

253,396

On January 1, 2021, Green Co. recorded a right-of-use asset of $304,270 in an operating lease. The lease calls for ten annual payments of $39,000 with the first to be made on January 1, 2021, with each succeeding payment due on December 31. The interest rate charged by the lessor was 6%. The balance in the right-of-use asset at December 31, 2021, will be:

281,186

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. 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, 2026. 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: Dec. 31PaymentsInterestDecrease inBalanceOutstandingBalance2020 $519,115 2020$90,000 $90,000 429,115 2021$90,000 $17,165 72,835 356,280 2022$90,000 14,251 75,749 280,531 2023$90,000 11,221 78,779 201,752 2024$90,000 8,070 81,930 119,822 2025$90,000 4,793 85,207 34,615 2026$36,000 1,385 34,615 0 What is the amount of residual value guaranteed by Reagan to the lessor?

36,000

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $3,000 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. LeasePaymentCashPaymentEffectiveInterestDecrease inBalanceOutstandingBalance 32,720 17,400 ?? ?? 25,320 27,400 2,532 4,868 20,452 37,400 2,045 5,355 15,097 47,400 1,510 5,890 9,207 57,400 ?? ?? ?? 63,000 273 2,727 0 What amount would the lessee record as annual amortization on the asset using the straight-line method, assuming no residual value? (Round your answer to the nearest whole dollar.)

4,090

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income$320,000 Permanent difference (14,700) 305,300 Temporary difference-depreciation (20,300) Taxable income$285,000 Tringali's tax rate is 25%. Assume that no estimated taxes have been paid.What should Tringali report as its deferred income tax liability as of the end of its first year of operations?

5,075

During the current year, Stern Company had pretax accounting income of $41 million. Stern's only temporary difference for the year was $17 million rent received in advance in 20X1 but reported as revenue in 20X2. Stern's taxable income for the year would be:

58 million

During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received in advance for the following year in the amount of $15 million. Stern's taxable income for the year would be:

60 million

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income$280,000 Permanent difference (15,300) 264,700 Temporary difference-depreciation (20,900) Taxable income$243,800 Tringali's tax rate is 25%. Assume that no estimated taxes have been paid.What should Tringali report as its income tax expense for its first year of operations?

66,175

One of the five criteria for a finance lease specifies that the lease term be equal to or greater than _____ percent of the useful life of the leased asset.

75

Francisco leased equipment from Julio on December 31, 2021. The lease is a 10-year lease with annual payments of $152,000 due on December 31 of each year beginning December 31, 2021. The present value of the lease payments is $993,631. The implicit rate of 11% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2022?

782,210

Francisco leased equipment from Julio on December 31, 2021. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2021. The present value of the lease payments is $1,013,854. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2022?

800,239

Durney Co. recorded a right-of-use asset of $1,120,000 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:

896,000

On September 1, 2021, Custom Shirts Inc. 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) $23,000 for year 1, (b) $27,000 for year 2, and (c) $31,000 for year 3. How much total lease expense will Custom Shirts recognize for 2021? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Note: Pay attention to the dates on this one!

9,000

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than _______ percent of the fair market value of the leased asset.

90

P Corp. leased an asset to L Corp. using an operating lease in February of Year 1. P Corp.'s statement of cash flows for the year ending December 31, Year 1 will report:

A cash inflow from operating activities.

A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record:

A decrease in a deferred tax asset.

In reconciling net income to taxable income, interest earned on municipal bonds is:

A permanent difference

Barr Corp. is the lessee in a finance lease. Barr would record:

A right-of-use asset

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessor are expensed at the beginning of the lease in:

A sales-type lease with selling profit

For the lessor, a lessee-guaranteed residual value at the beginning of a finance lease should be:

Included as part of lease payments at present value.

Bird leased equipment that had a retail cash selling price of $1,200,000 and a useful life of five years with no residual value. The lessor paid $1,060,000 to acquire the equipment and used an implicit rate of 8% when calculating annual lease payments of $278,284 beginning January 1, at the beginning of the lease. Incremental costs of negotiating and consummating the completed lease transaction incurred by the lessor were $30,000. What is the increase in the lessor's earnings during the first year as a result of the lease (ignore taxes)? (Round your answer to the nearest whole dollar amount.) Hint: There's three components to this answer - gross profit, initial direct costs, and interest revenue.

Increase in earnings by $183,737.

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):

Sales-type lease.

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

MACRS depreciation early in the life of an asset

On January 1, 2021, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type lease. Calloway paid $310,000 for the machine and is leasing it to Zone for $34,000 per year, an amount that will return 7% to Calloway. The present value of the lease payments is $310,000. The lease payments are due each January 1, beginning in 2021. What is the appropriate interest entry on December 31, 2021? Hint: Note that the payments are made on January 1, but interest accrues over time so think about the appropriate adjusting entry to be made on December 31, 2021.

debit interest receivable - 19,320 credit interest revenue - 19,320

At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A footnote reveals that the entire $400,000 will be earned in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:

deferred tax asset

Matt Co. is the lessor in connection with an operating lease. Matt Co. would record:

depreciation expense

Future taxable amounts result in deferred tax assets

false

Revenues from installment sales of property reported on financial statements in 20X1 and but not in the tax return until later create deferred tax assets.

false

Minnetonka Company leases an asset. Information regarding the lease: Fair value of the asset: $400,000. Useful life of the asset: 6 years with no salvage value. Lease term is 5 years. Annual lease payments are $60,000 Implicit interest rate: 11%. Minnetonka can purchase the asset at the end of the lease period for $50,000. What type of lease is this to the Lessee?

finance

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. 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, 2026. 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: Dec. 31PaymentsInterestDecrease inBalanceOutstandingBalance2020 $519,115 2020$90,000 $90,000 429,115 2021$90,000 $17,165 72,835 356,280 2022$90,000 14,251 75,749 280,531 2023$90,000 11,221 78,779 201,752 2024$90,000 8,070 81,930 119,822 2025$90,000 4,793 85,207 34,615 2026$36,000 1,385 34,615 0 In this situation, Reagan:

is the lease in a finance lease

In an operating lease, the amortization of the right-of-use asset in the third year is:

less than in the fourth year

Which of the following would never require reporting deferred tax assets or deferred tax liabilities?

life insurance proceeds

ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease may be classified as:

operating or sales-type

Abhijit Co. leased equipment from Barua Corp. on July 1, 2021, 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, 2021. 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, 2021? Selling Profit Interest Revenuea.$9,000 $29,200 b.$9,000 $35,200 c.$144,000 $29,200 d.$144,000 $35,200

option C (quiz 2)

The appropriate asset value reported in the balance sheet by the lessee for an operating lease at lease inception is:

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):

sales type lease

Which of the following statements characterizes an operating lease?

the lessor records depreciation and lease revenue

A temporary difference originates in one period and reverses, or turns around, in one or more later periods.

true

Expenditures currently deducted in the tax return but not included with expenses in the income statement until subsequent years create deferred tax liabilities (e.g., MACRS depreciation).

true

MACRS (modified accelerated cost recovery system) depreciation creates deferred tax liabilities early in the life of a depreciable asset.

true

Rent collected in advance is reported in Unearned Revenue in 20X1 and then Revenue in 20X2 when it is earned. It is included in taxable income on the tax return in 20X1. This results in a deferred tax asset.

true