Intermediate 3 - Ch 20
104. In a direct-financing lease, the lessor: a. does not transfer complete control to the lessee because a third party is involved. b. transfers complete control to the lessee. c. depreciates the leased equipment over its estimated economic life. d. includes the leased equipment on its balance sheet as part of property, plant, and equipment.
ANSWER: a
105. Unlike in a direct-financing lease, the lessor in a sales-type lease: a. expenses all initial direct costs at the inception of the lease. b. defers all initial direct costs over the lease term. c. removes the carrying value of the leased asset. d. records rental revenue for each period.
ANSWER: a
107. Which of the following is true of a direct-financing lease? a. The lessor does not recognize sales revenue from the leased asset. b. The lease agreement does not accept residual value guarantees from third parties. c. The cost of the leased equipment is recorded as Cost of Goods Sold at the commencement of the lease. d. The fair value of the leased asset is always greater than the carrying cost of the asset.
ANSWER: a
108. Which of the following is a difference between a direct-financing lease and a sales-type lease? a. Unlike a direct-financing lease, a sales-type lease includes a gross profit or loss. b. Unlike in a direct-financing lease, the depreciation expense on the leased asset in a sales-type lease is recorded in the accounts of the lessor. c. Unlike in a sales-type lease, the lessee in a direct-financing lease recognizes a right-of-use asset and a lease liability at the commencement of the lease. d. Unlike a sales-type lease, a direct-financing lease involves the transfer of ownership to the lessee.
ANSWER: a
109. On January 1, 2019, Solitaire Company leased equipment for 7 years. The lease is correctly classified as an operating lease by the lessor. The lease required an annual payment of $25,000 each for the first 4 years and an annual payment of $15,000 each for the remaining years. The lease agreement required Solitaire Company to pay $5,000 as annual insurance premium. On December 31, 2019, Solitaire Company paid $3,800 for repairs. Which of the following amounts was recorded as the rental revenue by the lessor at the end of Year 5? a. $15,000 b. $25,000 c. $20,000 d. $18,800
ANSWER: a
11. For which of the following conditions will the lessor classify a lease as a sales-type lease? a. The present value of the sum of the lease payments is equal to or more than the fair value of the underlying asset. b. The lease term is less than one year. c. The leased asset may be exchanged for a similar asset during the lease term. d. The lease term is half of the underlying asset's economic life.
ANSWER: a
110. Alen Company, a lessor, signs a lease agreement for equipment for 3 years. The fair value of the equipment and the equipment cost to the lessor at the inception of the lease are $200,00 each. The estimated economic life of the equipment is 8 years. The estimated residual value of the equipment at the end of the lease is $20,000. The annual rental payment for the first year is $30,000, for the second year is $36,000, and for the third year is $42,000. The lessor uses the straight-line depreciation method. What will be the annual depreciation expense recorded by the lessor at the end of the second year? a. $22,500 b. $29,333 c. $18,400 d. $30,667
ANSWER: a
111. On January 1, 2019, Zonal Company leased equipment to Ethan & Sons Co. for 8 years. The cost of the leased equipment was $110,000, and the fair value of the asset was $234,736.80. The lease required an annual payment of $40,000 at the beginning of each year. The interest rate implicit in the lease was 10%. Which of the following amounts, rounded to the nearest dollar, should the lessor debit to Lease Receivable at the inception of the lease? a. $234,737 b. $110,000 c. $213,397 d. $124,737
ANSWER: a
112. Greenway Company signs a six-year lease with Gearup Company that requires a payment of $42,500 at the beginning of each year. The lessor's cost of the leased equipment is $148,531.70. The interest rate implicit in the lease is 12%. The equipment is highly specialized and has no residual value at the end of the agreement.. Which of the following amounts should Greenway Company record as interest income at the end of the first year of the lease? Present value of factors for 12% are as follows: Present value of $1 for n = 1 0.892857 Present value of $1 for n = 5 0.567427 Present value of an ordinary annuity for n = 5 3.604776 Present value of an annuity due for n = 5 4.037349 a. $11,770.67 b. $17,823.80 c. $8,113.16 d. $16,840.67
ANSWER: a
113. Anchorby Company, an equipment manufacturer, leases equipment for 10 years. The cost value of the equipment is $100,000. The lease requires an annual payment of $25,000 at the beginning of each year. The interest rate implicit in the lease is 10%. The lease also includes an option to pay $600 at the end of the tenth year to purchase the asset, which the lessee is certain to exercise. Calculate the gross profit or loss reported at the time of the transfer of the equipment. a. +$69,206.92 b. −$70,903.30 c. +$68,975.55 d. −$56,254.37
ANSWER: a
119. On January 1, 2019, Plentiva Company signed a five-year lease that required equal payments of $55,000 at the end of each year. The cost value of the lease equipment was $100,000. The estimated residual value of the equipment was $25,000, which was guaranteed by the lessee. The implicit interest rate in the lease was 10%. On January 1, 2019, what amount did Plentiva Company debit to Lease Receivable? a. $244,865.60 b. $204,342.58 c. $229,342.60 d. $144,865.60
ANSWER: a
17. A lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet. How should the lease related to these accounts be classified? a. operating lease b. direct financing lease c. sales-type lease d. finance lease
ANSWER: a
2. Which is an advantage of leasing from a lessee's viewpoint? a. The asset can be acquired without having to make a substantial down payment. b. The lease is a way of indirectly making a sale. c. Leasing always results in a lower rate of interest. d. Assets and liabilities associated with the lease are not reported.
ANSWER: a
24. Which of the following is not a required disclosure by a lessor of a sales-type lease? a. the guaranteed residual value accruing to the benefit of the lessor b. total contingent rentals included in revenue for the period c. unearned income d. a general description of the lessor's leasing arrangements
ANSWER: a
28. A lease that transfers ownership of the asset from the lessor to the lessee by the end of the lease term is classified by the lessee as a. a finance lease. b. a capitalization lease. c. an operating lease. d. a transfer lease.
ANSWER: a
3. From the lessee's viewpoint, which of the following is not an advantage of leasing? a. In many cases, an asset may be leased without requiring the lessee to record the lease asset and lease liability. b. A lease agreement may reduce the risk of obsolescence for a lessee. c. In many cases, an asset may be leased without requiring the lessee to make a substantial down payment. d. The lessee may be able to claim larger tax deductions through leasing the asset than if the asset were purchased.
ANSWER: a
30. When a lessee makes periodic cash payments for a short-term lease and chooses not to recognize a right-of-use asset, which of the following accounts is increased? a. Rent Expense b. Amortization Expense c. Lease Liability d. Interest Expense
ANSWER: a
32. Costs of maintaining leased property such as insurance, maintenance, and property taxes are referred to as a. executory costs. b. residual value costs. c. participatory costs. d. incremental costs.
ANSWER: a
45. A finance lease should be recorded in the lessee's accounts at the inception of the lease in an amount equal to a. the present value of the expected future lease payments less the executory costs reimbursed to the lessor. b. the total value of the future rental payments less any estimated contingent payments. c. the total value of future rental payments less any executory payments included in the future payments. d. the total value of the expected future lease payments less executory costs included in the minimum lease payments.
ANSWER: a
56. Jennifer, Inc. entered into a five-year finance lease on December 31, 2019. This lease requires five annual lease payments due on December 31 of each year. The first minimum payment was paid on December 31, 2019. This payment included which of the following? Interest Expense Lease Liability I. No Yes II. Yes No III. Yes Yes IV. No No a. I b. II c. III d. IV
ANSWER: a
60. When is it appropriate for the lessee to use the lessor's implicit rate to calculate the present value of the lease payments? a. whenever the lessee knows what the lessor's rate is b. when the lessor's rate is higher than the lessee's incremental borrowing rate c. when the lessee's incremental borrowing rate is lower than the lessor's rate d. when the lessor's implicit rate is lower than the lessee's incremental borrowing rate
ANSWER: a
76. Which of the following facts would require a lessor to classify a lease as an operating lease? a. Lessor retains all the risks and benefits of ownership. b. A bargain purchase option is provided for by the lease agreement. c. The lease term is 90% of the estimated economic life of the leased property. d. The sum of the lease payments is 90% of the fair value of the leased property to the lessor.
ANSWER: a
91. Any initial direct costs incurred by the lessor for a sales-type lease resulting in a selling profit should be a. expensed in the same period that the lease receivable is recognized. b. recorded as a prepaid asset and allocated to expense over the lease term. c. deferred and recognized as a reduction in the interest rate implicit in the lease. d. directly charged (debited) to Retained Earnings.
ANSWER: a
96. Which of the following facts would preclude a lessor from classifying a lease as a sales-type or direct financing lease? a. The undiscounted sum of the minimum lease payments is 90% of the fair value of the leased property to the lessor. b. The collectability of the lease payments is reasonably assured. c. The lease term is 90% of the estimated economic life of the leased property. d. No important uncertainties exist about non-reimbursable costs yet to be incurred by the lessor.
ANSWER: a
On January 1, 2019, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a finance lease. The payments are made at year-end, and the first payment will be made at December 31, 2019. In addition, Mary guarantees the residual value to be $10,000 at the end of the lease term and expects the equipment to be worth $2,000 at the end of five years. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows: Present value of $1 0.567427 Present value of ordinary annuity of $1 3.604776 52. Refer to Exhibit 20-2. If the Mary Company uses the straight-line method of depreciation for its assets, what is the amount of amortization expense for the leased equipment for the year ending December 31, 2019? a. $15,327 b. $14,419 c. $13,511 d. $12,419
ANSWER: a
102. On January 1, 2019, Luke, Inc. leased equipment, signing a five-year lease that requires five payments of $40,000 due on January 1 of each year with the first payment due January 1, 2019. Luke accounted for the lease as a finance lease. Using a rate of 9%, Luke determined the present value on January 1, 2019, to be $169,589. What is the amount that Luke should report on its December 31, 2020 balance sheet? a. $70,364 b. $101,252 c. $110,364 d. $129,589
ANSWER: b
114. TradeWell Company signs a lease agreement for 6 years. The agreement requires an annual payment of $35,750 at the end of each year. The implicit interest rate in the lease is 12%. The estimated residual value of the asset is $42,500. Mu Bank, an unrelated third party, guarantees the residual value. What amount should TradeWell Company debit to Lease Receivable at the inception of the lease? a. $171,953.70 b. $168,514.62 c. $146,982.81 d. $125,450.99
ANSWER: b
115. On January 1, 2019, Wishful Thinking, a lessor, entered into a direct-financing lease agreement with Lennard Company. The lease agreement required 6 equal annual payments of $50,000 at the end of each year. The leased property had an estimated residual value of $14,000, which was guaranteed by an unrelated third party. Wishful Thinking desired a 10% rate of return. What was the amount, rounded to the nearest dollar, that Wishful Thinking recorded as interest revenue on the lease at the end of the year 2020? a. $22,567 b. $19,823 c. $30,177 d. $27,433
ANSWER: b
120. On January 1, 2019, Magnum Company leased equipment for 8 years. The agreement required annual payments of $65,000 at the end of each year. The cost value and the fair value of the lease equipment were $100,000 and $291,675.90, respectively. The estimated residual value of the lease equipment was $35,000 at the end of the lease, which was not guaranteed by the lessee. The estimated economic life of the leased equipment was 10 years. The lease payments were determined at an amount such that the lessor earned a 15% annual rate of return over the lease period. The leased equipment was returned to the lessor at the end of the lease. Based on the given information, how should the lease be classified? a. It should be classified as an operating lease. b. It should be classified as a sales-type lease. c. It should be classified as a direct-financing lease. d. It should be classified as a finance lease.
ANSWER: b
29. If all of the following are provided for by a lease contract, which one is not included in present value of the lessee's liability? a. payments resulting from failure to renew the lease b. unguaranteed residual value c. bargain purchase price d. guaranteed residual value
ANSWER: b
34. Executory costs a. are included in the lease payments by the lessee if the lessor pays the costs and includes them in the fixed lease payment. b. paid directly to a third party by the lessee are included in determination of the lease classification. c. incurred for negotiation of the lease are included in the measurement of the lease. d. are always paid by the lessee.
ANSWER: b
35. If a lease is classified as a finance lease and contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is a. the lease term. b. the expected economic life of the property. c. the lease term or the expected economic life of the property, whichever is shorter. d. the maximum amortization period for intangible assets.
ANSWER: b
4. Which is not an advantage of leasing from a lessee's viewpoint? a. The asset can be acquired without having to make a substantial down payment. b. Leased assets are never reported on the balance sheet. c. A lease may provide 100% financing. d. The risk of obsolescence may be reduced.
ANSWER: b
40. On January 1, 2019, Watson Company signed a four-year lease requiring annual payments of $45,000, with the first payment due on January 1, 2019. Watson's incremental borrowing rate was 7%. Compound interest information for 7% follows: 3 Periods 4 Periods 5 Periods Present value of an annuity due of 1 @ 7% 2.808018 3.624316 4.387211 Present value of ordinary annuity of 1 @ 7% 2.624316 3.387211 4.100197 Assuming the lease qualifies as a finance lease, what amount should be recorded as right-of-use asset on January 1, 2019? a. $197,424 b. $163,094 c. $152,424 d. $184,509
ANSWER: b
41. On January 1, 2019, Renee Corp., a lessee, signed a five-year lease for new equipment that qualified as a finance lease. The lease requires annual payments of $8,000. The first payment is due on December 31, 2019. Renee guaranteed a residual value of $2,500, and expects the asset's fair value to be $2,500 at the end of the lease. On December 31, 2023, Renee returned the asset to the lessor, and the asset was appraised at a value of $1,500. Renee should record which of the following on December 31, 2023? a. a $1,500 credit to Right-to-Use Asset b. a $500 debit to Loss on Guaranteed c. a $500 debit to Cash d. a $1,500 credit to Cash
ANSWER: b
43. On January 1, 2019, Mark Company leased equipment by signing a five-year lease that required five payments of $85,000 due on December 31 of each year. The equipment remains the property of the lessor at the end of the lease, and Mark does not guarantee any residual value. Using a rate of 11%, Mark recorded the finance lease liability on January 1, 2019, in the amount of $314,152. What is the amount of the lease liability on December 31, 2020? a. $263,709 b. $207,717 c. $279,595 d. $225,350
ANSWER: b
46. On January 1, 2019, Donna Company leased equipment by signing a five-year lease that required five payments of $30,000 due on December 31 of each year. The equipment remains the property of the lessor at the end of the lease, and Donna does not guarantee any residual value. Using a rate of 8%, Donna recorded the lease liability on January 1, 2019, in the amount of $119,781. What is the amount of interest expense Donna should report on its 2020 income statement? a. $6,185 b. $7,949 c. $20,418 d. $22,051
ANSWER: b
48. On January 1, 2019, Madison Company signed a four-year lease that qualifies as a finance lease requiring annual payments of $15,000 with the first payment due on January 1, 2019. The fair value of the equipment leased was $50,000. Madison's incremental borrowing rate was 6%. Compound interest information for 6% follows: 3 Periods 4 Periods 5 Periods Present value of annuity due of $1 2.833393 3.673012 4.465106 Present value of ordinary annuity of $1 2.673012 3.465106 4.212364 Assuming the lease qualifies as a finance lease, what amount should be recorded as right-of-use on January 1, 2019 (rounded to the nearest dollar)? a. $48,185 b. $50,000 c. $51,977 d. $55,095
ANSWER: b
5. From the lessor's standpoint, which of the following statements regarding leasing is false? a. A sales-type lease provides a method of indirectly making a sale. b. With an operating lease the asset is transferred to the lessee and removed from the books of the lessor. c. A lease can be classified as sales-type, direct-financing or operating. d. The risk of default is a disadvantage for the lessor.
ANSWER: b
58. The Roger Company leased a machine at the beginning of 2019. The machine was properly recorded as a right-of-use asset by Roger at $73,735. A lease payment of $16,563 is due at the end of each year. The expected life of the machine is seven years, and the term of the lease is five years. At the beginning of 2024, the machine will be returned to the lessor. Both Roger and the lessor use the straight-line method of depreciation. What amount of amortization expense should Roger record in 2019 for the machine (round calculations up to the nearest dollar)? a. $14,600 b. $14,747 c. $16,563 d. $17,000
ANSWER: b
66. On January 1, 2019, Rhyme Co. leased equipment by signing a six-year lease that required six payments of $30,000 due on January 1 of each year with the first payment due January 1, 2019. The equipment remains the property of the lessor at the end of the lease, and Rhyme does not guarantee any residual value. Using an 8% incremental borrowing rate, Rhyme recorded the right-of-use asset and lease liability on January 1, 2019, in the amount of $149,781. What is the total amount of lease liability (including interest) Rhyme should report as of December 31, 2020? a. $99,364 b. $107,313 c. $119,781 d. $121,415
ANSWER: b
67. Which of the following accounts is not included in the journal entry recorded by a lessee when paying the lease payment of an operating lease? a. Lease Expense b. Interest Expense c. Lease Liability d. Right-of-Use Asset
ANSWER: b
71. On January 1, 2019, Stacie signed a lease agreement with Amy. Amy will use the equipment and make ten annual payments of $15,000 beginning December 31, 2019. The lease is considered to be a sales-type lease. When reading the Stacie income statement, you would expect to find which of the following accounts? a. Rent Revenue b. Interest Income c. Rental Expense d. Interest Expense
ANSWER: b
74. Depreciation expense will be recorded in the accounts of the a. lessee for operating leases. b. lessor for operating leases. c. lessor for direct financing leases. d. lessor for sales-type leases.
ANSWER: b
79. On January 1, 2019, Stephen Corp., a lessor, signed a direct financing lease. Stephen was to receive annual year-end payments of $10,000 for ten years, after which there was a guaranteed residual value of $8,000. The implicit interest rate was 8%. Compound interest factors for 8%, ten periods follows (round to the nearest whole dollar): Present value of ordinary annuity of $1 6.710081 Present value of amount of $1 0.463193 On January 1, 2019, what amount should Stephen record as a debit to Lease Receivable? a. $67,101 b. $70,806 c. $100,000 d. $108,000
ANSWER: b
80. When a lessor receives cash on an operating lease, which of the following accounts is increased? a. Interest Revenue: Leases b. Rent Revenue c. Lease Payable d. Lease Receivable
ANSWER: b
83. Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be a. expensed in the same period that the expenditure is made. b. recorded as a prepaid asset and allocated to expense over the lease term. c. deferred and recognized as a reduction in the interest rate implicit in the lease. d. directly charged (debited) to Retained Earnings.
ANSWER: b
86. One of the distinguishing characteristics of a direct financing lease is that a. the lessor is normally a dealer or manufacturer. b. the residual value can be guaranteed by a third party and be included in the classification test. c. the lease has two sources of earnings: interest revenue and profit or loss from the asset exchange. d. the property related to the lease remains on the lessor's balance sheet during the term of the lease.
ANSWER: b
97. Depreciation expense will be recorded in the accounts of the lessee and lessor for which type of lease? a. Operating b. Sales-type c. Direct-financing d. Finance
ANSWER: b
99. Which of the following statements concerning direct financing leases is true? a. The net investment in the lease should be adjusted each year by material increases (but not decreases) in estimated unguaranteed residual values. b. The lessor reports only interest revenue on the income statement. c. Initial direct costs result in an increase in Unearned Interest Revenue-Leases by an amount equal to these costs in the year the costs are incurred. d. The lessor's gross margin is amortized over the life of the lease.
ANSWER: b
Exhibit 20-3 On January 1, 2019, Quinn Company enters into a five-year sales-type lease with Andy Company. The lease requires Andy to make five annual payments of $34,483.50 at the beginning of the year, with the first payment due January 1, 2019. The lease includes a bargain purchase price of $10,000. Quinn requires a 10% rate of return. The cost to Quinn of the property is $100,000, and it has a fair value of $150,000. Present value factors for a 10% interest rate are as follows: Present value of $1 for n = 1 0.909091 Present value of $1 for n = 5 0.620921 Present value of an ordinary annuity for n = 5 3.790787 Present value of an annuity due for n = 5 4.169865 19. Refer to Exhibit 20-3. What is the amount of sales revenue to be recognized by Quinn on January 1, 2019? a. $143,791 b. $150,000 c. $50,000 d. $100,000
ANSWER: b
Exhibit 20-4 On January 1, 2019, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2019. The leased property has an estimated residual value of $10,000, which is not guaranteed by Lenny or a third party. The asset remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows: Present value of $1 for n = 1 0.892857 Present value of $1 for n = 5 0.567427 Present value of an ordinary annuity for n = 5 3.604776 Present value of an annuity due for n = 5 4.037349 20. Refer to Exhibit 20-4. What is the amount of interest revenue that Average should recognize on the lease for the year ended December 31, 2019 (round the answer to the nearest dollar)? a. $37,017 b. $28,017 c. $36,336 d. $27,336
ANSWER: b
Exhibit 20-4 On January 1, 2019, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2019. The leased property has an estimated residual value of $10,000, which is not guaranteed by Lenny or a third party. The asset remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows: Present value of $1 for n = 1 0.892857 Present value of $1 for n = 5 0.567427 Present value of an ordinary annuity for n = 5 3.604776 Present value of an annuity due for n = 5 4.037349 88. Refer to Exhibit 20-4. What is the increase to Lease Receivable for Average (round the answer to the nearest dollar)? a. $308,475 b. $302,801 c. $276,032 d. $270,358
ANSWER: b
On January 1, 2019, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a finance lease. The payments are made at year-end, and the first payment will be made at December 31, 2019. In addition, Mary guarantees the residual value to be $10,000 at the end of the lease term and expects the equipment to be worth $2,000 at the end of five years. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows: Present value of $1 0.567427 Present value of ordinary annuity of $1 3.604776 51. Refer to Exhibit 20-2. What would be the debit to Right-of-Use Asset on January 1, 2019? a. $72,096 b. $76,635 c. $100,000 d. $110,000
ANSWER: b
22. The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as a. a current asset. b. a long-term asset. c. a current asset for the current portion and a long-term asset for the remaining amount. d. only a note to the financial statements.
ANSWER: c
42. If a lessee classifies a lease as a finance lease and uses the straight-line method of depreciation on similar assets, what is the amount to be amortized over the lease term? a. the original amount capitalized less the present value of the guaranteed residual value (if applicable) b. the original amount capitalized less the unguaranteed residual value c. the original amount capitalized less the guaranteed residual value (if applicable) d. fair value of the leased property
ANSWER: c
44. On January 1, 2019, Reynolda Co. leased equipment by signing a five-year lease that required five payments of $30,000 due on January 1 of each year with the first payment due January 1, 2019. The equipment remains the property of the lessor at the end of the lease and Reynolda does not guarantee any residual value. Using a rate of 10%, Reynolda recorded the finance lease liability on January 1, 2019, in the amount of $125,096. What is the amount of current portion of the lease liability Reynolda should report on the December 31, 2020, balance sheet? a. $7,461 b. $20,490 c. $22,539 d. $30,000
ANSWER: c
47. When a lessee makes periodic cash payments for a finance lease, which of the following accounts is decreased? a. Lease Rental Expense b. Right-of-Use Asset c. Lease Liability d. Interest Expense
ANSWER: c
55. Which of the following items would not be included in the calculation of the lease liability for a finance lease? a. bargain purchase option b. guaranteed residual value c. executory costs paid by the lessee to a third party d. any payments required for failure to renew or extend the lease
ANSWER: c
65. On January 1, 2019, Kathy Corp. leased equipment by signing a five-year lease that required five payments of $60,000 due on December 31 of each year. Kathy has a 9% incremental borrowing rate and recorded the lease liability on January 1, 2019, in the amount of $233,379. As of December 31, 2019, what amount is reported as the current portion of the lease obligation? a. $60,000 b. $46,331 c. $42,506 d. $38,996
ANSWER: c
69. The lessee should report finance lease obligations on the balance sheet as a. a current liability. b. a long-term liability. c. a current liability for the current portion and a long-term liability for the remaining amount. d. a note to the financial statements only.
ANSWER: c
72. A lease must be treated as a direct financing lease by the lessor when a. any of the lease classification criteria are met. b. one of the additional lease classification criteria for lessors is met. c. both of the additional lease classification criteria for lessons is met. d. the lease agreement contains a provision for unguaranteed residual value.
ANSWER: c
73. For a sales-type lease, cost of asset leased is recorded by the lessor as a. the initial value of the lease receivable. b. the guaranteed residual value. c. the cost of goods sold. d. the gross profit on the transaction.
ANSWER: c
75. Which of the following statements is true about initial direct costs? a. Initial direct costs should always be debited against income by the lessor in the period of the inception of the lease. b. Initial direct costs are ownership-type costs such as insurance, maintenance, and taxes. c. Initial direct costs of an operating lease should be recorded by the lessor as a prepaid asset. d. Initial direct costs of a sales-type lease should be expensed at the commencement of the lease only if no selling profit or loss has been incurred.
ANSWER: c
84. A six-year operating lease requires annual rent payments of $15,000 for years 1, 2, and 3, and annual rent payments of $10,000 for years 4, 5, and 6. The agreement also requires the lessor to pay a $2,800 annual insurance premium for the leased property. Which of the following amounts should be recognized as the rental revenue in year 1 by the lessor? a. $10,000 b. $13,500 c. $15,000 d. $16,800
ANSWER: c
98. When a lessor receives cash on a sales-type lease, which of the following accounts is decreased? a. Interest Revenue: Leases b. Lease Rental Revenue c. Lease Receivable d. Unearned Interest: Leases
ANSWER: c
Exhibit 20-1 On January 1, 2019, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2019. Pearson's incremental borrowing rate was 9% and the lessor's implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. 37. Refer to Exhibit 20-1. What would be the balance of the lease liability on January 1, 2020, for financial reporting purposes after the lease payment? a. $0 b. $166,779 c. $227,447 d. $233,379
ANSWER: c
Exhibit 20-1 On January 1, 2019, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2019. Pearson's incremental borrowing rate was 9% and the lessor's implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. 39. Refer to Exhibit 20-1. What would be the balance of the lease liability for financial reporting purposes on December 31, 2020, after the lease payment? a. $194,383 b. $167,979 c. $190,192 d. $233,379
ANSWER: c
Exhibit 20-2 On January 1, 2019, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a finance lease. The payments are made at year-end, and the first payment will be made at December 31, 2019. In addition, Mary guarantees the residual value to be $10,000 at the end of the lease term and expects the equipment to be worth $2,000 at the end of five years. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows: Present value of $1 0.567427 Present value of ordinary annuity of $1 3.604776 50. Refer to Exhibit 20-2. What is the amount of interest expense associated with the leased equipment for the year ending December 31, 2019? a. $2,400 b. $8,651 c. $9,196 d. $20,000
ANSWER: c
On January 1, 2019, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a finance lease. The payments are made at year-end, and the first payment will be made at December 31, 2019. In addition, Mary guarantees the residual value to be $10,000 at the end of the lease term and expects the equipment to be worth $2,000 at the end of five years. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows: Present value of $1 0.567427 Present value of ordinary annuity of $1 3.604776 53. Refer to Exhibit 20-2. What is the interest expense associated with the lease liability for the year ending December 31, 2020? a. $9,196 b. $8,651 c. $7,900 d. $7,290
ANSWER: c
106. In a direct-financing lease, a. the lessor owns the asset and records the depreciation of the leased asset in its accounts. b. the lessee has complete control of the leased asset. c. the lessor records the entire lease payment as interest income. d. the lessor's net investment is measured the same as a sales-type lease.
ANSWER: d
36. On January 1, 2019, Denise Company signed a lease agreement requiring ten annual payments of $14,000, beginning December 31, 2019. The agreement was classified as a finance lease. When reviewing Denise's accounting records, which of the following journal entries would not be expected? a. Right-of-Use Asset 105,527 Lease Liability 105,527 b. Interest Expense 5,804 Lease Liability 8,196 Cash 14,000 c. Amortization Expense: Right-of-Use Asset 10,523 Right-of-Use-Asset: 10,523 d. Rent Expense 14,000 Cash 14,000
ANSWER: d
49. When a lessee makes periodic cash payments for a finance lease, which of the following accounts is increased? a. Lease Rental Expense b. Right-of-Use Asset c. Lease Liability d. Interest Expense
ANSWER: d
54. Which of the following statements regarding the calculation of the lessee's amortization expense for a finance lease is true? a. The bargain purchase option price is never included in the measurement of the right-of-use asset to be amortized. b. The guaranteed residual value is not included in the measurement of the right-of-use asset to be amortized. c. The unguaranteed residual value is included in the measurement of the right-of-use asset to be amortized. d. The guaranteed residual value is included in the measurement of the right-of-use asset to be amortized only to the extent that is likely to be owed.
ANSWER: d
57. On January 1, 2019, Stacie signed a lease agreement with Amy. Amy will use the equipment and make ten annual payments of $25,000 beginning December 31, 2019. The lease is considered to be a finance lease. When reading the Amy income statement, you would expect to find which of the following accounts? a. Rent Revenue b. Interest Revenue c. Rental Expense d. Interest Expense
ANSWER: d
59. On January 3, 2019, the Walters Corporation signed a 10-year non-cancelable lease for manufacturing equipment. The fair value of the equipment at that time was $550,000. At the end of the lease period, the equipment, which has an estimated life of 15 years, will be returned to the lessor. Additional information is below: Lease payments (year-end) $80,000 Walters Corporation's incremental borrowing rate 10% Lessor's implicit interest rate (known to Walters) 12% Present value factor for an ordinary annuity of 10 years at 10% 6.144567 Present value factor for an ordinary annuity of 10 years at 12% 5.650223 Walters should record the right-of-use asset at a. $550,000. b. $491,565. c. $452,018. d. $0.
ANSWER: d
61. Which statement is not true? a. If a lease is a finance lease because of a bargain purchase option, the leased asset should be depreciated over the life of the asset, not the life of the lease. b. The lessee ignores unguaranteed residual value in the measurement of the lease obligation. c. The lessor does not consider an unguaranteed residual value in measuring the lease receivable at the date of lease signing. d. In direct financing leases, the net investment in the lease should be adjusted each year by material changes (increases or decreases) in estimated unguaranteed residual values.
ANSWER: d
70. Which of the following is a required financial statement presentation by a lessee for both capital leases and operating lease? a. Lease Expense b. Amortization Expense and Interest Expense c. The reduction of the Lease Liability as a financing activity d. Right-of-Use Asset and Lease Liability
ANSWER: d
77. A direct financing lease differs from a sales-type lease in that a. the direct financing lease recognizes sales revenue. b. the direct financing lease provisions do not include a bargain purchase option. c. the sales-type lease replaces the leased equipment with a monetary asset. d. the direct financing lease does not recognize cost of goods sold.
ANSWER: d
81. In a sales-type lease a. sales revenue ignores the present value of the guaranteed residual value. b. sales revenue includes the present value of unguaranteed residual value. c. cost of goods sold is reduced by the amount of unguaranteed residual value. d. The lease receivable includes the present value of any guaranteed residual value.
ANSWER: d
82. A lessor enters into a sales-type lease. Which of the following statements is true if the leased asset has an unguaranteed residual value? a. The gross profit recognized is less than it would be if the residual was guaranteed. b. The gross profit recognized is more than it would be if the residual was guaranteed. c. The lessor should decrease the cost of goods sold by the amount of the unguaranteed residual value. d. The gross profit is the same as it would be if the residual was guaranteed.
ANSWER: d
Exhibit 20-1 On January 1, 2019, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2019. Pearson's incremental borrowing rate was 9% and the lessor's implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. 38. Refer to Exhibit 20-1. What would be the interest expense for 2019? a. $21,003 b. $22,746 c. $24,224 d. $26,132
ANSWER: d