CH 21 - Computational

100. 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 a. Operating lease Capital lease b. Operating lease Operating lease c. Capital lease Capital lease d. Capital lease Operating lease

c

106. In a lease that is recorded as a sales-type lease by the lessor, interest revenue a. should be recognized in full as revenue at the lease's inception. b. should be recognized over the period of the lease using the straight-line method. c. should be recognized over the period of the lease using the effective interest method. d. does not arise.

c

88. Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Geary gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and obligation accounts have the following balances: Leased equipment $400,000 Less accumulated depreciation--capital lease 384,000 $ 16,000 Interest payable $ 1,520 Lease liability 14,480 $16,000 If, at the end of the lease, the fair value of the residual value is $11,800, what gain or loss should Geary record? a. $2,680 gain b. $6,280 loss c. $4,200 loss d. $11,800 gain

c

On December 31, 2018, Kuhn Corporation leased a plane from Bell Company for an seven-year period expiring December 31, 2025. Equal annual payments of $450,000 are due on December 31 of each year, beginning with December 31, 2018. The lease is properly classified as a capital lease on Kuhn's books. The present value at December 31, 2018 of the eight lease payments over the lease term discounted at 10% is $2,640,792. 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, 2018 balance sheet is a. $2,640,792. b. $2,454,870. c. $2,376,714. d. $2,190,792.

d

89. Harter Company leased machinery to Stine Company on July 1, 2018, for a ten-year period expiring June 30, 2028. Equal annual payments under the lease are $250,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest used by Harter and Stine is 9%. The cash selling price of the machinery is $1,750,000 and the cost of the machinery on Harter's accounting records was $1,550,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2018? a. $157,500 b. $135,000 c. $67,500 d. $0

c

On January 1, 2018, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $180,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 10%. 65. With respect to this capitalized lease, for 2018 Ogleby should record a. rent expense of $180,000. b. interest expense of $57,058 and depreciation expense of $150,116. c. interest expense of $57,058 and depreciation expense of $107,225. d. interest expense of $90,000 and depreciation expense of $181,956. 66. With respect to this capitalized lease, for 2019 Ogleby should record a. interest expense of $57,058 and depreciation expense of $107,225. b. interest expense of $75,058 and depreciation expense of $107,225. c. interest expense of $44,764 and depreciation expense of $107,225. d. interest expense of $62,764 and depreciation expense of $107,225.

c,c

On January 2, 2018, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $300,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,800,000, based on implicit interest of 10%. 104. In its 2018 income statement, what amount of interest expense should Hernandez report from this lease transaction? a. $0 b. $135,000 c. $150,000 d. $180,000 105. In its 2018 income statement, what amount of depreciation expense should Hernandez report from this lease transaction? a. $300,000 b. $240,000 c. $180,000 d. $120,000

c,d

On January 1, 2018, 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, 2018 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. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) 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. (f) The yearly rental payment includes $15,000 of executory costs related to taxes on the property. 54. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.) a. $272,703 b. $872,703 c. $887,703 d. $902,703 55. What is the amount of the total annual lease payment? a. $272,703 b. $872,703 c. $887,703 d. $902,703 56. From the lessee's viewpoint, what type of lease exists in this case? a. Sales-type lease b. Sale-leaseback c. Capital lease d. Operating lease 58. Yancey, Inc. would record depreciation expense on this storage building in 2018 of (Rounded to the nearest dollar.) a. $0. b. $495,000. c. $600,000. d. $976,471. 59. If the lease was nonrenewable, there was no bargain purchase option, title to the building does not pass to the lessee at termination of the lease and the lease term was only for eight years, what type of lease would this be for the lessee? a. Sales-type lease b. Direct-financing lease c. Operating lease d. Capital lease

54. c 55. d 56. c 58. c 59. d

101. On December 31, 2018, Burton, Inc. leased machinery with a fair value of $1,575,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $300,000 beginning December 31, 2018. The lease is appropriately accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%. The present value of an annuity due of 1 for 6 years at 10% is 4.7908. The present value of an annuity due of 1 for 6 years at 11% is 4.6959. In its December 31, 2018 balance sheet, Burton should report a lease liability of a. $1,137,240. b. $1,275,000. c. $1,408,770. d. $1,437,240.

a

103. A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal a. the current liability shown for the lease at the end of year 1. b. the current liability shown for the lease at the end of year 2. c. the reduction of the lease liability in year 1. d. one-tenth of the original lease liability.

a

81. Hook Company leased equipment to Emley Company on July 1, 2017, for a one-year period expiring June 30, 2018, for $80,000 a month. On July 1, 2018, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2021, for $100,000 a month. The original cost of the equipment was $6,400,000. The equipment, which has been continually on lease since July 1, 2013, is being depreciated on a straight-line basis over an eight-year period with no salvage value. Assuming that both the lease to Emley and the lease to Terry are appropriately recorded as operating leases for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2018? Hook Emley Terry a.$280,000 $(480,000) $(600,000) b.$280,000 $(480,000) $(1,000,000) c.$1,080,000$(80,000) $(200,000) d.$1,080,000$(880,000) $(600,000)

a

Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2018. The lease is appropriately accounted for as a sales-type lease by Metro and as a capital lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2028. The first of 10 equal annual payments of $828,000 was made on July 1, 2018. Metro had purchased the equipment for $5,250,000 on January 1, 2018, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2018, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000. 91. Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2018? a. $300,000 and $206,880 b. $300,000 and $240,000 c. $3,600,000 and $206,880 d. $3,600,000 and $160,000

a

On January 1, 2018, 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, 2018 with the title passing to Sauder at the end of this period. 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 capital lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. 62. In 2018, Sauder should record interest expense of a. $63,397. b. $116,604. c. $83,396. d. $136,604. 63. In 2019, Sauder should record interest expense of a. $43,397. b. $49,737. c. $69,737. d. $63,397.

a,b

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, --- PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986 68. what is the amount recorded for the leased asset at the lease inception? a. $1,231,066 b. $1,090,912 c. $1,139,874 d. $1,200,000 69. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset's life? a. $0 b. $98,482 c. $70,953 d. $91,192 70. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2? a. $344,152 b. $245,666 c. $252,960 d. $273,199 71. What is the amount of depreciation expense recorded by Pisa, Inc. in the first year of the asset's life? a. $0 because the asset is depreciated by Tower Company. b. $284,968 c. $307,767 d. $300,000

a,c,d,c

85. Mays Company has a machine with a cost of $750,000 which also is its fair value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $75,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be a. $162,874. b. $154,623. c. $146,587. d. $125,000.

b

On December 1, 2018, Goetz Corporation leased office space for 10 years at a monthly rental of $80,000. On that date Goetz paid the landlord the following amounts: Rent deposit $ 80,000 First month's rent 80,000 Last month's rent 80,000 Installation of new walls and offices 640,000 $880,000 The entire amount of $880,000 was charged to rent expense in 2018. What amount should Goetz have charged to expense for the year ended December 31, 2018? a. $80,000 b. $85,333 c. $165,333 d. $640,000

b

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 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, 2018, 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. 75. What type of lease is this from Alt Corporation's viewpoint? a. Operating lease b. Capital lease c. Sales-type lease d. Direct-financing lease 76. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2018? a. Depreciation Expense b. Rent Expense c. Interest Expense d. Depreciation Expense and Interest Expense 77. If the present value of the future lease payments is $1,600,000 at January 1, 2018, what is the amount of the reduction in the lease liability for Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.) a. $414,852 b. $446,852 c. $472,350 d. $456,350

b,b,c

On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. -- PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods4.16986 3.79079.62092 86. What journal entry would Brick Co. make at January 2, 2018 to record the lease? a. Lease Equipment 598,449 Lease Liability 598,449 b. Leased Equipment 758,449 Cash 160,000 Lease Liability 598,449 c. Leased Equipment 689,940 Cash 160,000 Lease Liability 529,940 d. Leased Equipment 707,342 Cash 160,000 Lease Liability 547,342 87. What journal entry would Brick Co. make at January 1, 2019 to record the second lease payment? a. Lease Liability 160,000 Cash 160,000 b. Lease Liability 117,604 Interest Payable 42,396 Cash 160,000 c. Lease Liability 112,124 Interest Payable 47,876 Cash 160,000 d. Lease Liability 116,212 Interest Payable 43,788 Cash 160,000

b,c

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. --- PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092 72. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2018? a. $70,200 b. $56,160 c. $62,400 d. $78,000 73. What is the book value of the leased asset at December 31, 2018? a. $780,000 b. $624,000 c. $468,000 d. $499,200 74. If the selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, what are the equal annual payments? a. $175,820 b. $162,795 c. $181,972 d. $195,356

b,c,a

Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2018 $600,000.00 Dec. 31, 2018 $97,646.71 $60,000.00 $37,646.71 562,353.29 Dec. 31, 2019 97,646.71 56,235.33 41,411.38 520,941.91 Dec. 31, 2020 97,646.71 52,094.19 45,552.52 475,389.39 95. What is the discount rate implicit in the amortization schedule presented above? a. 12% b. 10% c. 8% d. 6% 96. The total lease-related expenses recognized by the lessee during 2019 is a. $96,000. b. $97,647. c. $110,235. d. $92,235. 97. What is the amount of the lessee's liability to the lessor after the December 31, 2020 payment? a. $600,000 b. $562,353 c. $520,942 d. $475,389

b,d,d

90. Pye Company leased equipment to the Polan Company on July 1, 2018, for a ten-year period expiring June 30, 2028. Equal annual payments under the lease are $240,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment is $1,680,000 and the cost of the equipment on Pye's accounting records was $1,488,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Pye, what is the amount of profit on the sale and the interest revenue that Pye would record for the year ended December 31, 2018? a. $192,000 and $151,200 b. $192,000 and $129,600 c. $192,000 and $64,800 d. $0 and $0

c

93. Roman Company leased equipment from Koenig Company on July 1, 2018, for an eight-year period expiring June 30, 2026. Equal annual payments under the lease are $800,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Roman and Koenig is 8%. The cash selling price of the equipment is $4,965,000 and the cost of the equipment on Koenig's accounting records was $4,400,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018? a. $0 and $0 b. $0 and $166,600 c. $565,000 and $166,600 d. $565,000 and $198,600

c

Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at a. $848,761. b. $814,435. c. $723,943. d. $694,665.

c

On December 31, 2018, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2026. Equal annual payments of $500,000 are due on December 31 of each year, beginning with December 31, 2018. The lease is properly classified as a capital lease on Lang 's books. The present value at December 31, 2018 of the eight lease payments over the lease term discounted at 10% is $2,934,213. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2019 balance sheet is a. $2,727,635. b. $2,500,397. c. $2,177,634. d. $3,000,000.

c

On January 1, 2018, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $220,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2018 a. lease expense of $200,000. b. interest expense of $89,468 and depreciation expense of $76,136. c. interest expense of $107,361 and depreciation expense of $89,468. d. interest expense of $91,363 and depreciation expense of $134,202.

c

102. On December 31, 2018, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $2,100,000 (including $100,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2018, and the second payment was made on December 31, 2019. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $8,340,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2019 balance sheet, Harris should report a lease liability of a. $6,340,000. b. $6,240,000. c. $5,706,000. d. $4,974,000.

d

84. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2018 assuming this is a direct-financing lease? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods4.16986 3.79079.62092 a. Cash 160,000 Lease Receivable 740,000 Equipment 900,000 b. Cash 160,000 Lease Receivable 529,940 Loss 210,060 Equipment 900,000 c. Cash 160,000 Lease Receivable 569,270 Equipment 729,270 d. Cash 160,000 Lease Receivable 598,449 Equipment 758,449

d

Emporia Corporation is a lessee with a capital 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 depreciation expense would the lessee record for the first year of the lease? a. $180,000 b. $160,000 c. $120,000 d. $100,000

d

Hull Co. leased equipment to Riggs Company on May 1, 2018. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2019. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2018, of $4,900,000. Hull's depreciation on the equipment in 2018 was $630,000. During 2018, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2018. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. 82. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2018, should be a. $518,000. b. $630,000. c. $1,148,000. d. $1,260,000. 83. The income before income taxes derived by Hull from this lease for the year ended December 31, 2018, should be a. $518,000. b. $630,000. c. $1,148,000. d. $1,260,000.

d,a