ACCT 312 EXAM 8

Riley, LLC, (lessee) entered into a 5-year operating lease on January 1, Year 1. Annual lease payments of $40,000 are due on December 31 each year. Initial direct costs related to the lease incurred by Riley are $20,000. The rate implicit in the lease is 8%. The present value of an ordinary annuity at 8% for 5 years is 3.9927. What is the annual lease expense for Riley, LLC?

$44,000

One of the criteria for a lease to be classified as a sales-type lease by the lessor is that the present value of the sum of (1) the lease payments and (2) any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the leased asset. Substantially all of the fair value of the leased asset generally is considered to be

90%

Lease payments consist of payments related to the use of the underlying asset during the lease term. Which of the following is not included in lease payments?

Amounts allocated to nonlease components.

Lessee has entered into a lease of equipment. The lease has a term of 10 months and includes options to purchase the equipment or extend the lease for 12 months. After evaluating all relevant information, Lessee decides that exercise of either option is not reasonably certain. After making the allowed nonrecognition election in these circumstances, Lessee most likely records which entry each month?

Debit: Rent expense $XXX Credit: Cash $XXX

Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. After recognition of the lease, will Able record any depreciation expense on the leased asset and interest revenue related to the lease?

DepreciationExpense: No InterestRevenue: Yes

The amount recorded initially by the lessee as a lease liability should normally

Equal the present value of the lease payments at the beginning of the lease.

The present value of lease payments should be used by the lessee in determining the amount of a lease liability under a lease classified by the lessee as a(n)

Finance Lease: Yes Operating Lease: Yes

Manning Co. (lessee) has the following current lease liabilities at the end of Year 7: Lease A - finance lease, 5 years, lease liability $125,000 Lease B - operating lease, 3 years, lease liability $65,000 How should Manning present the lease liabilities on its balance sheet?

Finance and operating lease liabilities must be presented separately from each other and other liabilities on the balance sheet.

Star Company has entered into a 3-year lease agreement with Bell Corp. (lessor) for the use of 10 new commercial copy machines. The present value (PV) of the sum of the lease payments is $72,000. The total fair value of the machines on the lease commencement date is $120,000. An option to purchase the machines is not part of the lease agreement, and the copy machines will be returned to Bell at the end of the lease period. The machines are not specialized, and Bell will be able to lease or sell the leased machines after they are returned. The estimated useful life is 7 years. The residual value of $6,500 per machine is not guaranteed by Star or by a third party. It is probable that all lease payments will be collected. How should the lease be classified by the lessor?

Operating lease.

A lessor classifies a lease as an operating lease. The lessor therefore

Recognizes rental income on a straight-line basis.

GAAP list five criteria for determining when a lease should be classified as a finance lease by a lessee. Which of the following is a criterion?

The lease agreement provides for the transfer of ownership of the leased property.

Bailey Co. has leased a refrigeration unit from Hallogren Company (lessor). The lease agreement is for 16 months and does not include a purchase option. The fair value of the refrigeration unit is $4,000. Under which of the following may the lessee elect not to recognize the right-of-use asset and lease liability?

U.S. GAAP: No IFRS: Yes

Conn Corp. owns an office building and normally charges tenants $30 per square foot per year for office space. Because the occupancy rate is low, Conn agreed to lease 10,000 square feet to Hanson Co. at $12 per square foot for the first year of a 3-year operating lease. Rent for remaining years will be at the $30 rate. Hanson moved into the building on January 1, Year 1, and paid the first year's rent in advance. What amount of rental revenue should Conn report from Hanson in its income statement for the year ended September 30, Year 1?

$180,000

On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, the company must pay $28,900 per month for 56 months beginning October 1 of the current year. The lease term spans 5 years. The company has a calendar year end. What amount is the company's lease expense for the current calendar year?

$188,813

Glade Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease, and the leases do not contain purchase options. At lease inception, the fair value of the leased computer equipment equals its carrying amount. Glade wishes to earn 8% interest on a 5-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for 5 years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

$51,600

Quinn Corp. (lessee) has entered into lease agreements with Jacob Equipment. Quinn has classified Lease A as a finance lease and Lease B as an operating lease. Both leases have a lease term of 5 years and the same annual payment amounts. For which of the following is the same accounting used by Quinn for Lease A and Lease B?

The reduction of the lease liability is recorded when periodic lease payments are made.

Wilson leased a new machine having a total and remaining expected useful life of 30 years from Tehi. Terms of the noncancelable, 25-year lease were that Wilson would receive title to the property upon payment of a sum equal to the fair value of the machine at the termination of the lease. Wilson is reasonably certain to exercise the purchase option on the machine. For tax purposes, the depreciable life of the machine is 22.5 years. The asset recorded under this lease should properly be amortized over

30 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 lease payments using

10%

On June 1, Oren Co. entered into a 5-year nonrenewable operating lease, commencing on that date, for office space and made the following payments to Rose Properties: Bonus to obtain lease: $30,000 First month's rent: 10,000 Last month's rent: 10,000 The lease term requires monthly rent payments of $10,000. In its income statement for the year ended June 30, what amount should Oren report as lease expense?

$10,500

Wall Co. leased office premises to Fox, Inc., for a 5-year term beginning January 2, Year 4. Under the terms of the operating lease, rent for the first year is $8,000 and rent for years 2 through 5 is $12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the first 6 months of the lease rent-free. In its December 31, Year 4, income statement, what amount should Wall report as rental income?

$10,800

Mack Corp. (lessee) entered into a 4-year operating lease on January 1, Year 1. Annual lease payments of $25,000 are due on December 31 each year, and a down payment of $25,000 is due at the lease commencement date. Initial direct costs related to the lease are $5,000, and the lessee knows that the rate implicit in the lease is 6%. The present value of 1 at 6% for 4 years is 0.792. The present value of an ordinary annuity at 6% for 4 years is 3.465. What is the amount of the right-of-use asset initially recorded by Mack Corp.?

$116,625

Tau Co. manufactures machines to be sold or leased. On January 1, Tau leased machinery to Upsilon, Inc., for a 5-year period. At the end of the lease term, the machinery is to be transferred to Upsilon. Equal $25,000 payments are due at the end of each of the 5 years. The implicit rate of the lease is 7% and the cost to Tau is $90,000. The present value factor for an ordinary annuity for 5 periods at 7% is 4.100. What is the lessor's total pretax gross profit from the lease recognized on January 1?

$12,500

Koby Co. entered into a lease with a vendor for equipment on January 2 for 7 years. The equipment has no guaranteed residual value. The lease required Koby to pay $500,000 annually on January 2, beginning with the current year. The present value of an annuity due for seven years was 5.35 at the inception of the lease. What amount should Koby recognize for the lease asset?

$2,675,000

Oak Co. leased equipment for 9 years, agreeing to pay $50,000 at the start of the lease term on December 31, Year 4, and $50,000 annually on each December 31 for the next 8 years. The present value on December 31, Year 4, of the nine lease payments over the lease term, using the rate implicit in the lease, was $316,500. Oak knows that this rate is 10%. The December 31, Year 4, present value of the lease payments using Oak's incremental borrowing rate of 12% was $298,500. Oak made a timely second lease payment. The lease was classified as an operating lease by Oak. What amount should Oak report as a lease liability in its December 31, Year 5, balance sheet?

$243,150

Frisco Corp. (lessee) entered into a 7-year finance lease with Bovine Equipment (lessor) on January 1, Year 2. Lease payments of $47,500 are due annually beginning on December 31, Year 2. The interest rate implicit in the lease of 8% is known to Frisco. Frisco's incremental borrowing rate is 5%. The fair value of the leased asset on the date of the lease is $315,000. The useful life of the equipment is 8 years. The present value of an ordinary annuity at 5% 7 years: 5.7864 8 years: 6.4632 The present value of an ordinary annuity at 8% 7 years: 5.2064 8 years: 5.7466 What amount should Frisco Corp. record for the right-of-use asset on its balance sheet on the lease commencement date?

$247,304

Benedict Company leased equipment to Mark, Inc., on January 1, Year 2. The lease is for an 8-year period expiring December 31, Year 9. The first of 8 equal annual payments of $600,000 was made on January 1, Year 2. Benedict had purchased the equipment on December 29, Year 1, for $3,200,000. The lease is appropriately accounted for as a sales-type lease by Benedict. Assume that the present value at January 1, Year 2, of all rent payments over the lease term discounted at a 10% interest rate was $3,520,000. What amount of interest income should Benedict record in Year 3 (the second year of the lease period) as a result of the lease?

$261,200

On January 1, Year 4, Jaffe Co. leased a machine to Pender Co. for 10 years, with $10,000 payments due at the beginning of each year effective at the inception of the lease. The machine cost Jaffe $55,000. The lease is appropriately accounted for as a sales-type lease by Jaffe. The present value of the 10 rent payments over the lease term discounted appropriately at 10% was $67,600. The estimated residual value of the machine at the end of 10 years is equal to the disposal costs. How much interest revenue should Jaffe record from the lease for the year ended December 31, Year 4?

$5,760

On January 1 of the current year, Tree Co. enters into a 5-year lease agreement for production equipment. The lease requires Tree to pay $12,500 per year in lease payments. At the end of the 5-year lease term, Tree can purchase the equipment for $30,000. The fair value of the equipment is $75,000. The estimated useful life of the equipment is 10 years. The present value of the lease payments is $50,000. The present value of the purchase option is $20,000. Tree's controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to make its exercise reasonably certain. What amount is the carrying value of the asset related to this lease at December 31 of the current year?

$63,000

On December 1, King Co. leased office space for 5 years at a monthly rental of $60,000. On the same date, King paid the lessor the following amounts: First month's rent: $ 60,000 Last month's rent: 60,000 Security deposit (refundable at lease expiration): 80,000 Installation of new walls and offices: 360,000 King's expense relating to use of the office space for the year should be

$66,000

Robbin, Inc., leased a machine from Ready Leasing Co. The lease requires 10 annual payments of $10,000 beginning immediately. The lease contract specifies the rate implicit in the lease of 12% and a purchase option of $10,000 at the end of the tenth year, even though the machine's estimated value on that date is $20,000. Robbin is reasonably certain to exercise the purchase option. Robbin's incremental borrowing rate is 14%. The present value of an annuity due of 1 at: -12% for 10 years is 6.328 -14% for 10 years is 5.946 The present value of 1 at: -12% for 10 years is .322 -14% for 10 years is .270 What amount should Robbin record as lease liability at the beginning of the lease term?

$66,500

On December 29, Year 1, Action Corp. signed a 7-year lease for an airplane to transport its professional sports team around the country. The airplane's fair value was $841,500. Action made the first annual lease payment of $153,000 on December 31, Year 1. Action's incremental borrowing rate was 12%, and the interest rate implicit in the lease, which was known by Action, was 9%. The following are the rounded present value factors for an annuity due: 9% for 7 years: 5.5 12% for 7 years: 5.1 What amount should Action report as a lease liability in its December 31, Year 1, balance sheet?

$688,500

On January 1, Year 1, Bay Co. acquired a land lease for a 21-year period with no option to renew. The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, Year 2, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building's estimated fair value will be $420,000. What is the building's carrying amount in Bay's December 31, Year 2, balance sheet?

$798,000

On July 1, Year 1, the first day of its fiscal year, Seller Co. leased equipment to Lessee Co. Seller had recently purchased the equipment for $150,000 and accounts for this 5-year agreement as a sales-type lease. Under its terms, Lessee is to make five annual $40,000 payments, with the first due immediately. The present value at the inception of the lease of the five payments discounted at 8% is $172,480. For its fiscal year ending June 30, Year 3, what amount of interest income (rounded) from this lease should be recognized by Seller?

$8,246

On December 30, Rafferty Corp. leased equipment under an operating lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment's useful life is 10 years, and the interest rate implicit in the lease of 10% is known to Rafferty. The operating lease obligation was recorded on December 30 at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this lease in its December 31 balance sheet?

$8,500

On January 1, Year 1, Gee, Inc., leased a delivery truck from Marr Corp. under a 3-year operating lease. Total rent for the term of the lease will be $36,000, payable as follows: $ 500 × 12 months = $ 6,000 $ 750 × 12 months = $ 9,000 $1,750 × 12 months = $21,000 All payments were made when due. In Marr's December 31, Year 2, balance sheet, the accrued rent receivable should be reported as

$9,000

On January 1, Year 4, Wren Co. leased a building to Brill under an operating lease for 10 years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder's fee. The building is depreciated $12,000 per year. For Year 4, Wren incurred insurance and property tax expenses totaling $9,000. Wren's net rental income for Year 4 should be

27,500

On January 1, Glen Co. leased a building to Dix Corp. The lease was properly classified as an operating lease by Glen for a 10-year term at an annual rental of $50,000. The lease was properly classified as an operating lease. At the inception of the lease, Glen received $200,000 covering the first 2 years' rent of $100,000 and a security deposit of $100,000. This deposit will not be returned to Dix upon expiration of the lease but will be applied to payment of rent for the last 2 years of the lease. What portions of the $200,000 should be shown as a current and a long-term liability, respectively, in Glen's December 31 balance sheet?

Current Liability: $50,000 Long-Term Liability: $100,000

On January 1, Year 1, Lessee entered into a 4-year lease with Lessor that does not transfer ownership at the end of the lease term. It also includes a purchase option not reasonably expected to be exercised. The unspecialized leased asset has (1) a 5-year economic life, (2) no residual value, and (3) a present value of the annual lease payments equal to 75% of the leased asset's fair value. Moreover, Lessee incurred no initial direct costs. The lease therefore is classified as a(n)

Finance lease by the lessee.

On January 1, Year 1, Lessee entered into a 4-year lease that does not transfer ownership at the end of the lease term. It also includes a purchase option not reasonably expected to be exercised. The leased asset has (1) a 6-year economic life, (2) no residual value, and (3) a present value of the annual lease payments equal to 75% of the leased asset's fair value. If the leased asset has no alternative use to the lessor at the end of the lease term, how should Lessee classify the lease?

Finance.

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 lease expense for the new offices should begin in which of the following months?

January.

A 12-year finance lease expiring on December 31 specifies equal annual lease payments. Part of this payment represents interest and part represents a reduction in the lease liability. The portion of the lease payment in Year 10 applicable to the reduction of the lease liability should be

More than in Year 8.

On January 1, Year 1, Lessee entered into a 4-year lease that does not transfer ownership or contain a purchase option. The economic life of the leased asset, which has an alternative use, is 6 years. Also, the present value of the lease payments is 75% of the fair value of the leased asset. If no initial direct costs are incurred, what is the lessee's appropriate accounting?

Recognize lease expense for the same amount each period of the lease term.

On January 1, Year 1, Lessee entered into a 4-year lease and did not incur initial direct costs. At the lease commencement date, Lessee

Recognizes the same amount for the right-of-use asset and the lease liability under a finance lease and an operating lease.

King Corp. (lessee) reports finance and operating leases at the end of the year. Cash payments were made during the year on all leases. What is the correct classification on the statement of cash flows of cash payments related to the leases?

Repayment of the principal of a finance lease liability is a cash outflow from financing activities.

Lessee entered into a 10-year equipment lease on January 1, Year 1. Annual lease payments of $40,000 are payable on January 1 each year beginning Year 1. The rate implicit in the lease is 5% and is known to the lessee. The lessee incurred $10,000 of initial direct costs. The lease is classified as an operating lease. The present value of an ordinary annuity at 5% 9 years: 7.1078 10 years: 7.7217 What are the amounts of the right-of-use asset and lease liability to be recorded at the commencement date?

Right-of-Use Asset: $334,312 Liability: $324,312

In a lease that is recorded as a sales-type lease by the lessor, interest revenue

Should be recognized over the period of the lease using the effective-interest method.

On January 1, Year 1, Lessee entered into a 4-year lease of equipment with a 6-year economic life. The lease does not transfer ownership at the end of the lease term or contain a purchase option. Also, the present value of the lease payments is 92% of the fair value of the leased asset. If no residual value is guaranteed, and no initial direct costs are incurred, what is the appropriate subsequent accounting for, or presentation of, the right-of-use asset?

The amortization period is 4 years.

Cott, Inc., prepared an interest amortization table for a 5-year lease payable with a purchase option having an exercise price of $2,000, effective at the end of the lease. At the end of the 5 years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?

The beginning present value of the lease did not include the present value of the payment called for by the purchase option.

Scott Co. entered into a 5-year finance lease requiring it to make 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.

A lease is classified as a finance lease because it contains a purchase option that the lessee is reasonably certain to exercise. Over what period of time should the lessee amortize the right-of-use asset?

The economic life of the asset.

If the lease term is less than 12 months, when may a lessee elect not to recognize the right-of-use asset and lease liability?

The lease does not include a purchase option that the lessee is reasonably certain to exercise.

The fair value of the leased asset differs from its carrying amount. What are the components of the lease receivable for a lessor involved in a sales-type lease?

The lease payments plus guaranteed residual value.

On January 1, Jessie Co. (lessee) entered into a 5-year lease for equipment. Jessie accounted for the acquisition as a finance lease for $120,000, which includes a $5,000 purchase option. At the end of the lease, Jessie expects to exercise the purchase option. Jessie estimates that the equipment's fair value will be $10,000 at the end of its 8-year life. For the year ended December 31, what amount should Jessie recognize as amortization of the asset recorded under the finance lease?

$13,750

A company has an operating lease for its office space. The lease term is 120 months and requires monthly rent of $15,000. As an incentive for the company to enter into the lease, the lessor granted the first 8 months' lease at no cost. What amount of monthly lease expense should be recognized over the life of the lease?

$14,000

Winn Co. manufactures equipment that is sold or leased. On December 31, Year 4, Winn leased equipment to Bart for a 5-year period ending December 31, Year 9, at which date ownership of the leased asset will be transferred to Bart. Equal payments under the lease are $22,000 and are due on December 31 of each year. The first payment was made on December 31, Year 4. The normal sales price of the equipment is $77,000, and cost is $60,000. For the year ended December 31, Year 4, what amount of selling profit should Winn realize from the lease transaction?

$17,000

Summer, Inc., (lessee) entered into an 8-year operating lease on January 1, Year 1. Annual lease payments begin December 31, Year 1. They are $55,000 for Years 1-7 with a final payment in Year 8 of $100,000. The rate implicit in the lease of 8% is known to Summer. The present value of 1 at 8% for 8 years is 0.540. The present value of an ordinary annuity at 8% for 8 years is 5.747. What is the amortization amount of the right-of-use asset in Year 1 for Summer, Inc.?

$33,394

On January 1, Law Co. leased a nearby building under an operating lease. The lease was for 6 years with annual rental payments of $30,000. At the beginning of the lease, Law was required to pay a $40,000 refundable security deposit plus the last year's rent. Moreover, $24,000 of costs were incurred by Law to make the facility suitable for use. Law should recognize lease-related expenses for the year of

$34,000

On January 1, Year 4, Harrow Co., as lessee, signed a 5-year noncancelable equipment lease with annual payments of $100,000 beginning December 31, Year 4. Harrow treated this transaction as a finance lease. The five lease payments have a present value of $379,000 at January 1, Year 4, based on interest of 10%. What amount should Harrow report as interest expense for the year ended December 31, Year 4?

$37,900

On April 1, Year 1, Hall Fitness Center leased its gym to Dunn Fitness Center under a 4-year operating lease. Hall normally charges $6,000 per month to lease its gym, but as an incentive, Hall gave Dunn half off the first year's rent and one quarter off the second year's rent. Dunn's rental payments were as follows: Year 1: 12 × $3,000 = $36,000 Year 2: 12 × $4,500 = $54,000 Year 3: 12 × $6,000 = $72,000 Year 4: 12 × $6,000 = $72,000 Dunn's rent payments were due on the first day of the month, beginning on April 1, Year 1. What amount should Dunn report as rent expense in its monthly income statement for April, Year 3?

$4,875

Star Co. leases a building for its product showroom. The 10-year nonrenewable lease will expire on December 31, Year 6. In January Year 1, Star redecorated its showroom and made leasehold improvements of $48,000. The estimated useful life of the improvements is 8 years. Star uses the straight-line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30, Year 1, balance sheet?

$44,000

Assuming a lease is classified as an operating lease by the lessor, the initial direct costs should be

Deferred and allocated over the lease term on a straight-line basis.

Lease M does not contain a purchase option, but the present value of the lease payments is equal to 91% of the fair value of the leased asset. Lease P does not transfer ownership to the lessee by the end of the lease term, but the lease term is equal to 77% of the estimated economic life of the leased asset. How should the lessee classify these leases?

Lease M: Finance lease Lease P: Finance lease

On January 1, Year 4, Mollat Co. signed a 6-year lease for equipment having a 10-year economic life. The present value of the monthly equal lease payments equaled 80% of the equipment's fair value. The lease agreement provides for neither a transfer of title to Mollat nor a purchase option. In its Year 4 income statement, Mollat should report

Lease expense equal to the Year 4 lease payments.

Quick Company's lease payments are made at the end of each period. Quick's liability for a finance lease will be reduced periodically by the

Lease payment less the portion of the lease payment allocable to interest.

Jackson Co. (lessee) entered into a 10-year operating lease on January 1, Year 1. Annual lease payments are $30,000, and payments begin December 31, Year 1. The lessee knows that the rate implicit in the lease is 8%, and its incremental borrowing rate is 7%. The useful life of the asset is 10 years. How should Jackson Co. account for the lease in the income statement?

Lease payments are allocated over the full lease term on a straight-line basis and reported as lease expense in the income statement.

Spring Corp. entered into a 5-year lease agreement with Fall Corp. Spring, the lessee, paid an additional $5,000 nonrefundable lease bonus to Fall upon signing the operating lease agreement. When would Fall recognize in income the nonrefundable lease bonus paid by Spring?

Over the life of the lease.

Which of the following is a circumstance in which a lessor may classify a lease as a direct financing lease?

Residual value is guaranteed by a third party not the lessee.

Which of the following is a condition for a lessee to elect an accounting policy not to recognize the right-of-use asset and lease liability?

The lease has a term of 12 months or less at the commencement date.

On January 1, Year 5, Company A leased a customized forklift to Company B (lessee) for a lease term of 10 years. The lease includes an option for the lessee to purchase the leased asset at the end of the lease term. The expected residual value of the forklift at the end of Year 10 is minimal and is not guaranteed. The present value (PV) of the sum of the lease payments is $70,000. Company A has classified the lease as a sales-type lease. Which of the following is not a criterion for the lessor to classify the lease as a sales-type lease?

The lessee is not expected to exercise the option to purchase the leased asset.

Which of the following meets a criterion for a lessee to account for a lease as a finance lease?

The lessee is reasonably certain to exercise the option to purchase the leased asset.

On the first day of its fiscal year, Lessor, Inc., leased certain property at an annual rental of $100,000 receivable at the beginning of each year for 10 years. The first payment was received immediately. The leased property is new, had cost $650,000, and has an estimated useful life of 13 years with no salvage value. The rate implicit in the lease is 8%. The present value of an annuity of $1 payable at the beginning of the period at 8% for 10 years is 7.247. Lessor had no other costs associated with this lease. Lessor should have accounted for this lease as a sales-type lease but mistakenly treated the lease as an operating lease. Lessor depreciates all of its properties using the straight-line depreciation method. Ignoring tax effects, what was the effect on net earnings during the first year of treating this lease as an operating lease rather than as a sale?

Understatement of $74,676.