Question 1

Which statement is not true?

Accepted Answer

A) If a lease is a capital 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) If there is a bargain purchase option, 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. 
A) If a lease is a capital 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) If there is a bargain purchase option, 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.

Question 2

On January 1, 2010, Scarlett signed a lease agreement with Amber.Amber will use the equipment and make ten annual payments of $15, 000 beginning December 31, 2010.The lease is considered to be a capital lease.When reading the Amber income statement, you would expect to find which of the following accounts?

Accepted Answer

A) Rent Revenue 
B) Interest Revenue 
C) Rental Expense 
D) Interest Expense 
A) Rent Revenue 
B) Interest Revenue 
C) Rental Expense 
D) Interest Expense

Question 3

For a lease that contains a bargain purchase option, minimum lease payments include

Accepted Answer

A) any guarantee by the lessee of the residual value 
B) any payments on failure to renew or extend the lease 
C) executory costs 
D) minimum periodic rental payments required by the lease over the lease term 
A) any guarantee by the lessee of the residual value 
B) any payments on failure to renew or extend the lease 
C) executory costs 
D) minimum periodic rental payments required by the lease over the lease term

Question 4

When a lessee makes periodic cash payments for an operating lease, which of the following accounts is increased?

Accepted Answer

A) Lease Rental Expense 
B) Leased Equipment 
C) Obligation Under Capital Leases 
D) Interest Expense 
A) Lease Rental Expense 
B) Leased Equipment 
C) Obligation Under Capital Leases 
D) Interest Expense

Question 5

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 interest revenue that General should recognize on the lease for the year ended December 31, 2010? (Round the answer to the nearest dollar.

Accepted Answer

A) $21, 869 
B) $22, 550 
C) $25, 954 
D) $26, 635 
A) $21, 869 
B) $22, 550 
C) $25, 954 
D) $26, 635

Question 6

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows:
$\begin{array}{llr}
  \text {Present value of $ \$ 1 $  } &0.567427\
 \text { Present value of ordinary annuity of $ \$ 1 $ } &3.604776\
\end{array}$

- Refer to Exhibit 21-2.What is the correct interest expense for the year ending December 31, 2011, for the lease obligation? (Round answers to the nearest dollar.)

Accepted Answer

A) $20, 000 
B) $11, 948 
C) $ 8, 052 
D) $ 7, 290 
A) $20, 000 
B) $11, 948 
C) $ 8, 052 
D) $ 7, 290

Question 7

One of the distinguishing characteristics of a direct financing lease is that

Accepted Answer

A) the lessor is normally a dealer or manufacturer 
B) the net investment in the lease is equal to the cost of the asset or carrying value of the asset 
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 
A) the lessor is normally a dealer or manufacturer 
B) the net investment in the lease is equal to the cost of the asset or carrying value of the asset 
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

Question 8

On January 1, 2010, Wally Company signed a four-year lease requiring annual payments of $45, 000, with the first payment due on January 1, 2010.Wally'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 $ 1 @ 6 \% $ } &2.83339&3.67301&4.46511\
 \text {   Present value of ordinary annuity of 1 @ $ 6 \% $} &2.67301&3.46511&4.21236\
\end{array}$
 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) $200, 931 
B) $165, 285 
C) $155, 931 
D) $144, 555 
A) $200, 931 
B) $165, 285 
C) $155, 931 
D) $144, 555

Question 9

If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is

Accepted Answer

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 
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

Question 10

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows:
$\begin{array}{llr}
  \text {  Present value of \( \$ 1 $ for $ n=1 $} &0.934579\
 \text { Present value of $ \$ 1 $ for $ n=5 $ } &0.712986\
 \text { Present value of an ordinary annuity for $ n=5 $ } &4.100197\
 \text { Present value of an annuity due for $ n=5 $ } &4.387211\

\end{array}\)

- Refer to Exhibit 21-5.If Chicago requires a 7% annual return, what is the correct amount that should be credited to Unearned Interest: Leases on January 1, 2010, by Chicago? (Round the answer to the nearest dollar.)

Accepted Answer

A) $15, 320 
B) $18, 764 
C) $22, 495 
D) $43, 236 
A) $15, 320 
B) $18, 764 
C) $22, 495 
D) $43, 236

Question 11

Which of the following is not a required disclosure by a lessor of a sales-type lease?

Accepted Answer

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 
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

Question 12

Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

Accepted Answer

A) The total capitalized cost of the lease less any expected residual value is allocated over the expected economic life of the assets. 
B) The total capitalized cost of the lease less any expected residual value is allocated over the lease term. 
C) An amount is assigned to Leased Buildings that is amortized over the lease term, and the amount assigned to Leased Land is not amortized. 
D) An amount is assigned to Leased Buildings that is amortized over the expected economic life of the asset, and the amount assigned to Leased Land is not amortized. 
A) The total capitalized cost of the lease less any expected residual value is allocated over the expected economic life of the assets. 
B) The total capitalized cost of the lease less any expected residual value is allocated over the lease term. 
C) An amount is assigned to Leased Buildings that is amortized over the lease term, and the amount assigned to Leased Land is not amortized. 
D) An amount is assigned to Leased Buildings that is amortized over the expected economic life of the asset, and the amount assigned to Leased Land is not amortized.

Question 13

Which is 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 avoided. 
D) The risk of obsolescence may be increased. 
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 avoided. 
D) The risk of obsolescence may be increased.

Question 14

According to current GAAP, leased property could be reported as an asset on the balance sheet of the lessee and the lessor as follows: $\begin{array}{lll}
&\text { Lessee}&\text {  Lessor }\ 
\text { I. } & \text { included } & \text { included } \
\text { II. } & \text { included } & \text { not included }\
\text { III. } & \text {not  included } & \text { not included }
\end{array}$

Accepted Answer

A) I 
B) II 
C) III 
D) all of the above 
A) I 
B) II 
C) III 
D) all of the above

Which statement is not true?

For a lease that contains a bargain purchase option, minimum lease payments include

When a lessee makes periodic cash payments for an operating lease, which of the following accounts is increased?

One of the distinguishing characteristics of a direct financing lease is that

If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is

Which of the following is not a required disclosure by a lessor of a sales-type lease?

Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

Which is an advantage of leasing from a lessee's viewpoint?

According to current GAAP, leased property could be reported as an asset on the balance sheet of the lessee and the lessor as follows: Lessee Lessor I. included included II. included not included III. not included not included

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

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Exam 21: Accounting for Leases

Which statement is not true?

For a lease that contains a bargain purchase option, minimum lease payments include

When a lessee makes periodic cash payments for an operating lease, which of the following accounts is increased?

One of the distinguishing characteristics of a direct financing lease is that

If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is

Which of the following is not a required disclosure by a lessor of a sales-type lease?

Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

Which is an advantage of leasing from a lessee's viewpoint?

According to current GAAP, leased property could be reported as an asset on the balance sheet of the lessee and the lessor as follows: Lessee Lessor I. included included II. included not included III. not included not included

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