Intermediate 2 (Ch. 21)

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the A. term of the lease. B. life of the asset or the term of the lease, whichever is longer. C. period ending with the bargain purchase option date. D. asset's remaining economic life.

D. asset's remaining economic life.

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 $723,943.

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%, what is the amount recorded for the leased asset at the lease inception? A. $1,139,874 B. $1,200,000 C. $1,231,066 D. $1,090,912

C. $1,231,066

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. $160,000 B. $120,000 C. $100,000 D. $180,000

C. $100,000

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. $11,800 gain C. $4,200 loss D. $6,280 loss

C. $4,200 loss

On December 31, 2018, Haden Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price $1,080,000 Carrying amount 990,000 Present value of reasonable lease rentals ($9,000 for 12 months @ 12%) 102,000 Estimated remaining useful life 12 years In Haden's December 31, 2018 balance sheet, the deferred profit from the sale of this machine should be A. $102,000. B. $12,000. C. $90,000. D. $0.

D. $0.

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: What is the amount of the lessee's liability to the lessor after the December 31, 2020 payment? A. $562,353 B. $520,942 C. $600,000 D. $475,389

D. $475,389

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. $0 B. $135,000 C. $157,500 D. $67,500

D. $67,500

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. $2,454,870. B. $2,190,792. C. $2,640,792. D. $2,376,714.

B. $2,190,792.

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. $565,000 and $166,600 C. $0 and $166,600 D. $565,000 and $198,600

B. $565,000 and $166,600

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%. In 2018, Sauder should record interest expense of A. $136,604. B. $63,397. C. $116,604. D. $83,396

B. $63,397.

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 $64,800 B. $192,000 and $151,200 C. $0 and $0 D. $192,000 and $129,600

A. $192,000 and $64,800

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. $2,177,634. B. $2,500,397. C. $3,000,000. D. $2,727,635.

A. $2,177,634.

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. $85,333 B. $165,333 C. $640,000 D. $80,000

A. $85,333

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. From the lessee's viewpoint, what type of lease exists in this case? A. Capital lease B. Operating lease C. Sales-type lease D. Sale-leaseback

A. Capital lease

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal? A. Write in a bargain purchase option. B. Use a third party to guarantee the asset's residual value. C. Lessee uses a higher interest rate than that used by lessor. D Set the lease term at something less than 75% of the estimated useful life of the property.

A. Write in a bargain purchase option.

When a company sells property and then leases it back, any gain on the sale should usually be A. deferred and recognized as income over the term of the lease. B. recognized in the current year. C. recognized as a prior period adjustment. D. recognized at the end of the lease.

A. deferred and recognized as income over the term of the lease.

The primary difference between a direct-financing lease and a sales-type lease is the A. recognition of the manufacturer's or dealer's profit at (or loss) the inception of the lease. B. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements. C. amount of the depreciation recorded each year by the lessor. D. manner in which rental receipts are recorded as rental income.

A. recognition of the manufacturer's or dealer's profit at (or loss) the inception of the lease.

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

A. should be recognized over the period of the lease using the effective interest method.

Lessees prefer to account for their leases as operating lease because: A. this decreases the amount of liability reported. B. this increases their debt to total equity ratio. C. this decreases the income tax expense. D. this increases the amount of total assets.

A. this decreases the amount of liability reported.

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: What is the discount rate implicit in the amortization schedule presented above? A. 12% B. 10% C. 8% D. 6%

B. 10%

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? A. Cash 160,000 Lease Receivable 529,940 Loss 210,060 Equipment 900,000 B. Cash 160,000 Lease Receivable 598,449 Equipment 758,449 C. Cash 160,000 Lease Receivable 569,270 Equipment 729,270 D. Cash 160,000 Lease Receivable 740,000 Equipment 900,000

B. Cash 160,000 Lease Receivable 598,449 Equipment 758,449

If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is therefore accounted for as a capital lease, who records the asset on its books and which party records interest expense during the lease period? A. Seller-lessee Purchaser-lessor B. Seller-lessee Seller-lessee C. Purchaser-lessor Seller-lessee D. Purchaser-lessor Purchaser-lessor

B. Seller-lessee Seller-lessee

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? A. There is no impact as the option does not enter into the transaction until the end of the lease term. B. The lessee must increase the present value of the minimum lease payments by the present value of the option price. C. The lessee must decrease the present value of the minimum lease payments by the present value of the option price. D. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

B. The lessee must increase the present value of the minimum lease payments by the present value of the option price.

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts? A. The cost of the asset to the lessor, less the present value of any unguaranteed residual value. B. The present value of the minimum lease payments. C. The present value of the minimum lease payments plus the present value of the unguaranteed residual value. D. The minimum lease payments plus the unguaranteed residual value.

B. The present value of the minimum lease payments.

The Lease Liability account should be disclosed as A. all noncurrent liabilities. B. current portions in current liabilities and the remainder in noncurrent liabilities. C. deferred credits. D. all current liabilities.

B. current portions in current liabilities and the remainder in noncurrent liabilities.

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%. With respect to this capitalized lease, for 2019 Ogleby should record A. interest expense of $75,058 and depreciation expense of $107,225. B. interest expense of $44,764 and depreciation expense of $107,225. C. interest expense of $62,764 and depreciation expense of $107,225. D. interest expense of $57,058 and depreciation expense of $107,225.

B. interest expense of $44,764 and depreciation expense of $107,225.

The amount to be recorded as the cost of an asset under capital lease is equal to the A. present value of the minimum lease payments. B. present value of the minimum lease payments or the fair value of the asset, whichever is lower. C. present value of the minimum lease payments plus the present value of any unguaranteed residual value. D. carrying value of the asset on the lessor's books.

B. present value of the minimum lease payments or the fair value of the asset, whichever is lower.

For a sales-type lease, A. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. B. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. C. assets are depreciated by the lessor. D. the sales price includes the present value of the unguaranteed residual value.

B. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.

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. What is the amount of profit on the sale and the amount of interest revenue that Metro should record for the year ended December 31, 2018? A. $750,000 and $240,000 B. $1,200,000 and $480,000 C. $750,000 and $206,880 D. $0 and $137,920

C. $750,000 and $206,880

Torrey Co. manufactures equipment that is sold or leased. On December 31, 2018, Torrey leased equipment to Dalton for a five-year period ending December 31, 2023, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $1,100,000 (including $100,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2018. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $3,850,000, and cost is $3,000,000. For the year ended December 31, 2018, what amount of income should Torrey realize from the lease transaction? A. $1,150,000 B. $1,650,000 C. $850,000 D. $1,100,000

C. $850,000

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. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.) A. $902,703 B. $272,703 C. $887,703 D. $872,703

C. $887,703

Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported as A. a separate component of stockholders' equity. B. an extraordinary item, net of income tax. C. a deferred gain. D. operating income.

C. a deferred gain.

While only certain leases are currently accounted for as a sale or purchase, there is theoretical justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that A. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal. B. during the life of the lease the lessee can effectively treat the property as if it were owned. C. a lease reflects the purchase or sale of a quantifiable right to the use of property. D. at the end of the lease the property usually can be purchased by the lessee.

C. a lease reflects the purchase or sale of a quantifiable right to the use of property.

The initial direct costs of leasing A. are generally borne by the lessee. B. include incremental costs related to internal activities of leasing, and internal costs related to costs paid to external third parties for originating a lease arrangement. C. are expensed in the period of the sale under a sales-type lease. D. include lessor advertising costs.

C. are expensed in the period of the sale under a sales-type lease.

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. From the lessor's viewpoint, what type of lease is involved? A. Operating lease B. Sale-leaseback C. Direct-financing lease D. Sales-type lease

D. Sales-type lease

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%. With respect to this capitalized lease, for 2018 Ogleby should record A. interest expense of $90,000 and depreciation expense of $181,956. B. rent expense of $180,000. C. interest expense of $57,058 and depreciation expense of $150,116. D. interest expense of $57,058 and depreciation expense of $107,225

D. interest expense of $57,058 and depreciation expense of $107,225

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as A. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement. B. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease. C. the difference between the lease payments receivable and the fair value of the leased property. D. the present value of minimum lease payments.

D. the present value of minimum lease payments.

In computing the present value of the minimum lease payments, the lessee should A. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee. B. use its incremental borrowing rate in all cases. C. use the implicit rate in all cases. D. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.

D. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.