Intermediate II: Chapters 13-15

In a finance lease:

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

Jane's Donut Co. borrowed $200,000 on January 1, 2021, and signed a two-year note bearing interest at 11%. Interest is payable in full at maturity on January 1, 2023. In connection with this note, Jane's should report interest expense at December 31, 2021, in the amount of:

$22,000

What are the 5 rules of an Financing Lease?

1. Does the agreement specify that OWNERSHIP of the asset TRANSFERS to the lessee? 2. Does the agreement contain a purchase option that is reasonably certain to be exercised? IS THERE A BARGAIN 3. Does the lease term constitute the major part of the EXPECTED ECONOMIC LIFE of the asset? 4. Is the PRESENT VALUE of the lease payments GREATER THAN OR EQUAL TO substantially all of the fair value of the asset? 5. Is the asset of such a SPECIALIZED nature that it is expected to have no ALTERNATIVE USE to the lessor at the end of the lease term?

Which of the following is NOT a current liability? a) accounts payable b) a note payable due in two years c) accrued interest payable d) Sales tax payable

B) a note payable due in two years

Which of the following is the best definition of a current liability?

An obligation expected to be satisfied with current assets or by the creation of other current liabilities.

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

Extended use of the asset

From the perspective of the lessee, leases may be classified as either:

Financial or operating

At times, businesses require advance payments from customers that will be applied o the purchase price when good are delivered or services provided. These customer advances represent:

Liabilities until the product or service is provided

For a bond issue that sells for more than the bond face amount, the effective interest rate is: A. The rate printed on the face of the bond. B. The Wall Street Journal prime rate. C. More than the rate stated on the face of the bond. D. Less than the rate stated on the face of the bond.

Less than the rate stated on the face amount

The most common type of liability is:

One to be paid in cash and for which the amount and timing are known.

When a finance lease is first recorded at the beginning of the lease, the lessee typically debits:

Right of use asset

The rate of interest printed on the face of a note payable is called the:

Stated rate.

Interest expense is:

The effective interest rate times the amount of the debt outstanding during the interest period.

A discount on a noninterest-bearing note payable is classified in the balance sheet as:

a contra liability

When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in:

a current liability

Which of the following is not a liability? a) An unused line of credit b) estimated income taxes c) sales tax collected from customers d) advances from customers

a) an unused line of credit

All of the following but one represent collections for third parties. Which one of the following is NOT a collection for a third party: a) sales tax payable b) customer deposits c) employee insurance deductions d) Social security taxes deductions

b) customer deposits

Which of the following is NOT a characteristic of a liability? a) it represents a probable, future sacrifice of economic benefits. b) it must be payable in cash c) It arises from present obligations to other entries d) it results from past transactions or events

b) it must be payable in cash

GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type:

conveys most of the benefits of property ownership

The rate of interest that actually is incurred on a bond payable is called the:

effective rate

Bonds usually sell at their:

present value