Question 1

A capital lease should be recorded in the lessee's accounts at the inception of the lease in an amount equal to

Accepted Answer

A) the present value of the minimum lease payments less the executory costs included in the minimum lease payments 
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 minimum lease payments less executory costs, if any 
A) the present value of the minimum lease payments less the executory costs included in the minimum lease payments 
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 minimum lease payments less executory costs, if any A

Question 2

Exhibit 21-4 On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee Company.The lease agreement calls for five equal annual payments of $60, 000 at the beginning of each year with the first payment due on January 1, 2010.The leased property has an estimated residual value of $10, 000, which Lee does not guarantee.The property remains the property of General at the end of the lease term.General desires a 12% rate of return.Present value factors for a 12% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.892857\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.567427\
 \text { Present value of an ordinary annuity for $ n=5 $ } &3.604776\
 \text { Present value of an annuity due for $ n=5 $ } &4.037349\

\end{array}\)

-Refer to Exhibit 21-4.Given the structure of the lease, the payments, and the residual value information, what is General's net investment in the lease during 2011? (Round the answer to the nearest dollar.)

Accepted Answer

A) $188, 596 
B) $182, 241 
C) $150, 465 
D) $144, 110 
A) $188, 596 
B) $182, 241 
C) $150, 465 
D) $144, 110 C

Question 3

Which of the following correctly states a lease capitalization criterion from the point of view of the lessee?

Accepted Answer

A) Collectibility of the lease payments is reasonably certain. 
B) The present value of the minimum lease payments is equal to 75% or more of the fair value of the leased property. 
C) The lease contains a bargain purchase option. 
D) The lease term is equal to at least 85% of the estimated economic life of the leased asset. 
A) Collectibility of the lease payments is reasonably certain. 
B) The present value of the minimum lease payments is equal to 75% or more of the fair value of the leased property. 
C) The lease contains a bargain purchase option. 
D) The lease term is equal to at least 85% of the estimated economic life of the leased asset. C

Question 4

If a lessee classifies a lease as a capital lease and uses the straight-line method of amortization, the amount to be amortized over the lease term is

Accepted Answer

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 
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

Question 5

Which of the following is a required disclosure by a lessor of an operating lease?

Accepted Answer

A) the cost and carrying amount, if different, of property on lease by major category 
B) minimum future rentals on non-cancellable leases in total as of the balance sheet date and for the five succeeding fiscal years 
C) total contingent rentals included in income 
D) all of these 
A) the cost and carrying amount, if different, of property on lease by major category 
B) minimum future rentals on non-cancellable leases in total as of the balance sheet date and for the five succeeding fiscal years 
C) total contingent rentals included in income 
D) all of these

Question 6

Which statement is not true? A leveraged lease always

Accepted Answer

A) involves three parties 
B) is considered to be a sales-type lease 
C) is a lessor classification, not a lessee classification 
D) involves nonrecourse financing 
A) involves three parties 
B) is considered to be a sales-type lease 
C) is a lessor classification, not a lessee classification 
D) involves nonrecourse financing

Question 7

If a non-cancellable lease contains a bargain purchase option, the lessee is expected to be able to pay all future rents, and the lessor is expected to incur unreimbursable costs during the lease term, the lessee and lessor should classify the lease as $\begin{array}{lll}
&\text { Lessee}&\text {  Lessor }\  
\text { I. } & \text { operating } & \text { operating } \
\text { II. } & \text { operating } & \text { capital } \
\text { III. } & \text { capital } & \text { capital } \
\text { IV. } & \text { capital } & \text { operating }
\end{array}$

Accepted Answer

A) I 
B) II 
C) III 
D) IV 
A) I 
B) II 
C) III 
D) IV

Question 8

The Rupert Company leased a machine at the beginning of 2010.The machine, which had cost the lessor $85, 000, was properly capitalized by Rupert at $73, 734.84.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 2015, the machine will be returned to the lessor.Both Rupert and the lessor use the straight-line method of depreciation.What amount of depreciation expense should Rupert record in 2010 for the machine (round calculations up to the nearest dollar)?

Accepted Answer

A) $14, 600 
B) $14, 747 
C) $16, 563 
D) $17, 000 
A) $14, 600 
B) $14, 747 
C) $16, 563 
D) $17, 000

Question 9

On January 1, Lessee Company incorrectly recorded a capital lease as an operating lease.The ratio of debt to stockholders' equity would be

Accepted Answer

A) not affected 
B) overstated 
C) understated 
D) not determinable 
A) not affected 
B) overstated 
C) understated 
D) not determinable

Question 10

Which is not an advantage of leasing from a lessee's viewpoint?

Accepted Answer

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) "Off-balance-sheet financing" may be practiced. 
D) The risk of obsolescence may be reduced. 
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) "Off-balance-sheet financing" may be practiced. 
D) The risk of obsolescence may be reduced.

Question 11

The following are indicators in the terms of a lease that cause it to be treated as a capital lease.The indicators are: (1) Losses clue to cancellation of the lease by the lessee are borne by the lessee.
(2) Gains and losses due to changes in the fair value of the leased asset are captured by the lessee.
 These indicators are criteria that trigger lease capitalization under
$\begin{array}{lll}
&\text {G A A P}&\text { IFRS }\
\text { I. } & \text { Yes } & \text { Yes } \
\text { II. } & \text { Yes } & \text { No } \
\text { III. } & \text { No } & \text { Yes } \
\text { IV. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

A) I 
B) II 
C) III 
D) IV 
A) I 
B) II 
C) III 
D) IV

Question 12

On January 1, 2010, Matilda Company signed a four-year lease requiring annual payments of $15, 000 with the first payment due on January 1, 2010.The fair value of the equipment leased was $50, 000.Matilda's incremental borrowing rate was 6%.Actuarial information for 6% follows: $\begin{array}{llr}
&\text {3 Periods}&\text {4 Periods}&\text {5 Periods}\
  \text { Present value of an annuity due of \$ } &2.83339&3.67301&4.46511\
 \text {   Present value of ordinary annuity of 1 \$} &2.67301&3.46511&4.21236\
\end{array}$
 Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)?

Accepted Answer

A) $48, 185 
B) $50, 000 
C) $51, 977 
D) $55, 095 
A) $48, 185 
B) $50, 000 
C) $51, 977 
D) $55, 095

Question 13

Exhibit 21-4 On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee Company.The lease agreement calls for five equal annual payments of $60, 000 at the beginning of each year with the first payment due on January 1, 2010.The leased property has an estimated residual value of $10, 000, which Lee does not guarantee.The property remains the property of General at the end of the lease term.General desires a 12% rate of return.Present value factors for a 12% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.892857\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.567427\
 \text { Present value of an ordinary annuity for $ n=5 $ } &3.604776\
 \text { Present value of an annuity due for $ n=5 $ } &4.037349\

\end{array}\)

- Refer to Exhibit 21-4.What is the amount of the credit to Unearned Interest: Leases to be recorded by General Leasing on January 1, 2010? (Round the answer to the nearest dollar.

Accepted Answer

A) $73, 713 
B) $68, 039 
C) $67, 759 
D) $62, 085 
A) $73, 713 
B) $68, 039 
C) $67, 759 
D) $62, 085

Question 14

Which of the following facts would require a lessee to classify a lease as a capital lease?

Accepted Answer

A) The lease term is 85% of the estimated economic life of the leased property. 
B) The present value of the minimum lease payments is 85% of the fair market value of the leased property to the lessor, less any investment tax credit accruing to the lessor. 
C) The lease contains a purchase option. 
D) The lease does not transfer ownership of the leased property. 
A) The lease term is 85% of the estimated economic life of the leased property. 
B) The present value of the minimum lease payments is 85% of the fair market value of the leased property to the lessor, less any investment tax credit accruing to the lessor. 
C) The lease contains a purchase option. 
D) The lease does not transfer ownership of the leased property.

Question 15

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp
2. Contains a bargain purchase option
3. Lease tem is $ 75 \% $ of economic life
4. Present value of lease payments is $ 90 \% $ of fair value

Accepted Answer

A) any of the above criteria 
B) criterion 1 or 2 
C) criterion 1, 2, or 3 
D) criterion 1, 2, or 4 
A) any of the above criteria 
B) criterion 1 or 2 
C) criterion 1, 2, or 3 
D) criterion 1, 2, or 4

Question 16

On January 3, 2010, the Walton Corporation signed a 10-year non-cancellable 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: $\begin{array}{ll}
\text { Lease payments(year-end) } & \$ 80,000 \
\text { WaltonCorporation's incremental borrowing rate } & 10 \% \
\text { Lessor's implicit interest rate (known to Walton) } & 12 \%\
\text {Present value factor for an ordinary annuity of 10 years }\
\text {at $ 10 \% $}&6.144567\
\text {Present value factor for an ordinaty annuity of 10 years}\
\text {at $ 12 \% $}&5.650223
\end{array}$
 Walton should

Accepted Answer

A) capitalize the equipment at $550, 000 
B) capitalize the equipment at $491, 565 
C) capitalize the equipment at $452, 018 
D) not capitalize the equipment 
A) capitalize the equipment at $550, 000 
B) capitalize the equipment at $491, 565 
C) capitalize the equipment at $452, 018 
D) not capitalize the equipment

Question 17

On January 1, 2010, Leslie Company signed a lease agreement requiring ten annual payments of $14, 000, beginning December 31, 2010.The agreement was classified as a capital lease.When reviewing Leslie's accounting records, which of the following would not be expected?

Accepted Answer

A) 
$\begin{array} { l r } 
\text { Leased Equipment } & 105,210 \
\text { Capital Lease Obligation } & 105,210
\end{array}$ 
B) 
$\begin{array} { l c } 
\text { Interest Expense } & 7,365 \
\text { Obligation Under Capital Leases } & 6,635 \
\quad \text { Cash } & 14,000
\end{array}$ 
C) 
Depreciation Expense: Leased Equipment  $\quad $10,521 
Accumulated Depreciation:
Leased Equipment $\quad $ $\quad $ $\quad $10,521 
D) 
$\begin{array} { l c } 
\text { Rent Expense } & 14,000 \
\text { Cash } & 14,000
\end{array}$ 
A) 
$\begin{array} { l r } 
\text { Leased Equipment } & 105,210 \
\text { Capital Lease Obligation } & 105,210
\end{array}$ 
B) 
$\begin{array} { l c } 
\text { Interest Expense } & 7,365 \
\text { Obligation Under Capital Leases } & 6,635 \
\quad \text { Cash } & 14,000
\end{array}$ 
C) 
Depreciation Expense: Leased Equipment  $\quad $10,521 
Accumulated Depreciation:
Leased Equipment $\quad $ $\quad $ $\quad $10,521 
D) 
$\begin{array} { l c } 
\text { Rent Expense } & 14,000 \
\text { Cash } & 14,000
\end{array}$

Question 18

When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?

Accepted Answer

A) Interest Revenue: Leases 
B) Lease Rental Revenue 
C) Lease Receivable 
D) Unearned Interest: Leases 
A) Interest Revenue: Leases 
B) Lease Rental Revenue 
C) Lease Receivable 
D) Unearned Interest: Leases

Question 19

On January 1, 2010, Remy Corp., a lessee, signed a five-year capital lease for new equipment.The lease requires annual payments of $8, 000.The first payment is due on December 31, 2010.Remy guaranteed a residual value of $2, 000.On December 31, 2014, Remy returned the asset to the lessor, and the asset was appraised at a value of $1, 500.Remy should record which of the following on December 31, 2014?

Accepted Answer

A) a $1, 500 credit to leased equipment 
B) a $ 500 debit to a loss account 
C) a $ 500 debit to cash 
D) a $1, 500 credit to cash 
A) a $1, 500 credit to leased equipment 
B) a $ 500 debit to a loss account 
C) a $ 500 debit to cash 
D) a $1, 500 credit to cash

Question 20

From the lessor's standpoint, all of the following statements are true regarding leasing except that

Accepted Answer

A) the lease may serve as a marketing tool and thereby increase sales 
B) if the residual value of the asset is not guaranteed, the lessor has transferred the risks of residual value decreases to the lessee 
C) for sales-type lease agreements, the lessor earns interest in addition to profit from the transfer of the asset 
D) the accounting procedures used by a lessor for a sales-type lease are similar to the accounting procedures used for a normal sale of merchandise under a perpetual inventory system 
A) the lease may serve as a marketing tool and thereby increase sales 
B) if the residual value of the asset is not guaranteed, the lessor has transferred the risks of residual value decreases to the lessee 
C) for sales-type lease agreements, the lessor earns interest in addition to profit from the transfer of the asset 
D) the accounting procedures used by a lessor for a sales-type lease are similar to the accounting procedures used for a normal sale of merchandise under a perpetual inventory system

A capital lease should be recorded in the lessee's accounts at the inception of the lease in an amount equal to

Which of the following correctly states a lease capitalization criterion from the point of view of the lessee?

If a lessee classifies a lease as a capital lease and uses the straight-line method of amortization, the amount to be amortized over the lease term is

Which of the following is a required disclosure by a lessor of an operating lease?

Which statement is not true? A leveraged lease always

On January 1, Lessee Company incorrectly recorded a capital lease as an operating lease.The ratio of debt to stockholders' equity would be

Which is not an advantage of leasing from a lessee's viewpoint?

Which of the following facts would require a lessee to classify a lease as a capital lease?

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp 2. Contains a bargain purchase option 3. Lease tem is $75 \%$ of economic life 4. Present value of lease payments is $90 \%$ of fair value

On January 1, 2010, Leslie Company signed a lease agreement requiring ten annual payments of $14, 000, beginning December 31, 2010.The agreement was classified as a capital lease.When reviewing Leslie's accounting records, which of the following would not be expected?

When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?

From the lessor's standpoint, all of the following statements are true regarding leasing except that

The Environment of Financial Reporting

Financial Reporting: Its Conceptual Framework

Review of a Companys Accounting System

The Balance Sheet and the Statement of Changes in Stockholders Equity

The Income Statement and the Statement of Cash Flows

Additional Aspects of Financial Reporting and Financial Analysis

Cash and Receivables

Inventories: Cost Measurement and Flow Assumptions

Inventories: Special Valuation Issues

Property, Plant, and Equipment: Acquisition and Disposal

Depreciation and Depletion

Intangibles

Current Liabilities and Contingencies

Long-Term Liabilities and Receivables

Investments

Contributed Capital

Earnings Per Share and Retained Earnings

Income Recognition and Measurement of Net Assets

Accounting for Income Taxes

Accounting for Postemployment Benefits

The Statement of Cash Flows

Accounting for Changes and Errors

Time Value of Money Module

Filters

Exam 21: Accounting for Leases

A capital lease should be recorded in the lessee's accounts at the inception of the lease in an amount equal to

Which of the following correctly states a lease capitalization criterion from the point of view of the lessee?

If a lessee classifies a lease as a capital lease and uses the straight-line method of amortization, the amount to be amortized over the lease term is

Which of the following is a required disclosure by a lessor of an operating lease?

Which statement is not true? A leveraged lease always

On January 1, Lessee Company incorrectly recorded a capital lease as an operating lease.The ratio of debt to stockholders' equity would be

Which is not an advantage of leasing from a lessee's viewpoint?

Which of the following facts would require a lessee to classify a lease as a capital lease?

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp 2. Contains a bargain purchase option 3. Lease tem is 75% 75 \% 75% of economic life 4. Present value of lease payments is 90% 90 \% 90% of fair value

On January 1, 2010, Leslie Company signed a lease agreement requiring ten annual payments of $14, 000, beginning December 31, 2010.The agreement was classified as a capital lease.When reviewing Leslie's accounting records, which of the following would not be expected?

When a lessor receives cash on a sales-type lease, which of the following accounts is decreased?

From the lessor's standpoint, all of the following statements are true regarding leasing except that

The Environment of Financial Reporting

Financial Reporting: Its Conceptual Framework

Review of a Companys Accounting System

The Balance Sheet and the Statement of Changes in Stockholders Equity

The Income Statement and the Statement of Cash Flows

Additional Aspects of Financial Reporting and Financial Analysis

Cash and Receivables

Inventories: Cost Measurement and Flow Assumptions

Inventories: Special Valuation Issues

Property, Plant, and Equipment: Acquisition and Disposal

Depreciation and Depletion

Intangibles

Current Liabilities and Contingencies

Long-Term Liabilities and Receivables

Investments

Contributed Capital

Earnings Per Share and Retained Earnings

Income Recognition and Measurement of Net Assets

Accounting for Income Taxes

Accounting for Postemployment Benefits

The Statement of Cash Flows

Accounting for Changes and Errors

Time Value of Money Module

Filters

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1. Transfer of ownersinp 2. Contains a bargain purchase option 3. Lease tem is $75 \%$ of economic life 4. Present value of lease payments is $90 \%$ of fair value