AC 302 Week 7 EXAM Quiz
1 Question The initial direct costs of leasing
Question 2 Question Major reasons why a company may become involved in leasing to other companies is (are)
Question 3. Question : On December 31, 2015, Burton, Inc. leased machinery with a fair value of $1,260,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $240,000 beginning December 31, 2015. The lease is appropriately accounted for by Burton as a capital lease. Burton- incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2015 balance sheet, Burton should report a lease liability of
Question 4. Question : On January 2, 2014, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning January 2 31, 2014. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick- incremental borrowing rate is 10%, however it knows that Gold Star- implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2014 assuming this is a direct-financing lease?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
Question 5. Question : The primary difference between a direct-financing lease and a sales-type lease is the
Question 6. Question : An essential element of a lease is that the
Question 7. Question : A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal
Question 8. Question : On January 1, 2014, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $150,000 at the beginning of each year for five years 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 $625,479 at an effective interest rate of 10%.
In 2015, Sauder should record interest expense of
Question 9. Question : On January 2, 2014, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning January 2, 2014. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick- incremental borrowing rate is 10%, however it knows that Gold Star- implicit interest rate is 8%. What journal entry would Brick Co. make at January 1, 2015 to record the second lease payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
Question 10. Question : Hook Company leased equipment to Emley Company on July 1, 2014, for a one-year period expiring June 30, 2015, for $60,000 a month. On July 1, 2015, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2018, for $75,000 a month. The original cost of the equipment was $4,800,000. The equipment, which has been continually on lease since July 1, 2010, is being depreciated on a straight-line basis over an eight-year period with no salvage value. Assuming that both the lease to Emley and the lease to Terry are appropriately recorded as operating leases for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2015?
Question 11. Question : On December 31, 2014, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $1,050,000 (including $50,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2014, and the second payment was made on December 31, 2015. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $4,170,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2015 balance sheet, Harris should report a lease liability of
Question 12. Question : Hull Co. leased equipment to Riggs Company on May 1, 2015. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2016. Riggs could have bought the equipment from Hull for $4,800,000 instead of leasing it. Hull- accounting records showed a book value for the equipment on May 1, 2012, of $4,200,000. Hull- depreciation on the equipment in 2015 was $540,000. During 2015, Riggs paid $1,080,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $96,000 in 2015. After the lease with Riggs expires, Hull will lease the equipment to another company for two years.
Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2015, should be
Question 13. Question : Emporia Corporation is a lessee with a capital lease. The asset is recorded at $810,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $270,000 at the end of 5 years, and a fair value of $90,000 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?
Question 13. Question : Emporia Corporation is a lessee with a capital lease. The asset is recorded at $810,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $270,000 at the end of 5 years, and a fair value of $90,000 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?
Question 14. Question : Which of the following best describes current practice in accounting for leases?
Question 15. Question : Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
o The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432 are due on January 1 of each year.
o The fair value of the machine on January 1, 2015, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
o Alt depreciates all machinery it owns on a straight-line basis.
o Alt- incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
o Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
Which of the following lease-related revenue and expense items would be recorded by Yates if the lease is accounted for as an operating lease?
Question 16. Question : Which of the following statements is correct?
Question 17. Question : Roman Company leased equipment from Koenig Company on July 1, 2015, for an eight-year period expiring June 30, 2023. Equal annual payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, 2015. The rate of interest contemplated by Roman and Koenig is 8%. The cash selling price of the equipment is $3,723,750 and the cost of the equipment on Koenig- accounting records was $3,300,000. 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, 2015?
Question 18. Question : Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
o The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432 are due on January 1 of each year.
o The fair value of the machine on January 1, 2015, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
o Alt depreciates all machinery it owns on a straight-line basis.
o Alt- incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
o Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2015?
Question 19. Question : Minimum lease payments may include a
Question 20. Question : The amount to be recorded as the cost of an asset under capital lease is equal to the
Question 21. Question : Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2015. 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, 2025. The first of 10 equal annual payments of $552,000 was made on July 1, 2015. Metro had purchased the equipment for $3,500,000 on January 1, 2015, and established a list selling price of $4,800,000 on the equipment. Assume that the present value at July 1, 2015, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,000,000.
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, 2015?
Question 22. Question : Torrey Co. manufactures equipment that is sold or leased. On December 31, 2015, Torrey leased equipment to Dalton for a five-year period ending December 31, 2020, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $550,000 (including $50,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2015. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $1,925,000, and cost is $1,500,000. For the year ended December 31, 2015, what amount of income should Torrey realize from the lease transaction?
Question 23. Question : What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?
Question 24. Question : 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
Question 25. Question : Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2015. 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, 2025. The first of 10 equal annual payments of $552,000 was made on July 1, 2015. Metro had purchased the equipment for $3,500,000 on January 1, 2015, and established a list selling price of $4,800,000 on the equipment. Assume that the present value at July 1, 2015, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,000,000.
Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2015?
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