Mock Exam 2 - Part 2

Elliot Events entered into a lease with Premier Party Rentals on January 1, 2025. Premier will lease large party tents to Elliot Events for 3 years at a rental rate of $2,000 per month. In addition, Elliot can continue the lease for another two years for $200 per month. What is the term of this lease that would be used in the lease term test?

5 years

Beal, Inc. intends to lease a machine from Paul Corp. Beal's incremental borrowing rate is 14%. The prime rate of interest is 8%. Paul's implicit rate in the lease is 10%, which is known to Beal. Beal computes the present value of the minimum lease payments using

10%

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

Fair Value Method --- Equity Method No effect --- Decrease

When applying the present value test, lease payments determined by the lessee include: - I. fixed payments II. variable payments based on an index III. a bargain purchase option IV. a guaranteed residual value

I, II, III, and IV

Dublin Company holds a 30% stake in Club Company which was purchased in 2025 for $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2025, the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2025? - I. $3,000,000 II. $3,040,000 III. $3,120,000

II or III only

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 --- Lease B Finance lease --- Finance Lease

The total charges to operations over the lease term are

the same for a finance lease as an operating lease

Advantages to lessors in leasing assets include all of the following except

protection against obsolescence

A lessee had a ten-year finance lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal

the current liability reported for the lease at the end of year 1

On January 1, year 1, Frost Co. entered into a two-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 finance lease?

The fair value of the computers on January 1, year 1, is $14,000

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2025 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2025, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. What type of lease is this from Alt Corporation's viewpoint?

finance lease

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2025 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2025, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. From the viewpoint of Yates, what type of lease agreement exists?

sales-type lease