Question 1

Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.

Accepted Answer

A) True 
 B)False

Question 2

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's 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

Accepted Answer

A)  $909,792. 
B)  $1,020,000. 
C)  $1,127,016. 
D)  $1,149,792. 
A)  $909,792. 
B)  $1,020,000. 
C)  $1,127,016. 
D)  $1,149,792.

Question 3

Use the following information for questions 91 and 92.
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?

Accepted Answer

A)  $200,000 and $137,920 
B)  $200,000 and $160,000 
C)  $2,400,000 and $137,920 
D)  $2,400,000 and $160,000 
A)  $200,000 and $137,920 
B)  $200,000 and $160,000 
C)  $2,400,000 and $137,920 
D)  $2,400,000 and $160,000

Question 4

What are the criteria that must be satisfied for a lessor to classify a lease as a direct-financing or sales-type lease?

Accepted Answer

In order for a lessor to classify a leas

Question 5

Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.

Accepted Answer

A) True 
 B)False

Question 6

Use the following information for questions 104 and 105.
On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $200,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,200,000, based on implicit interest of 10%.
-In its 2015 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?

Accepted Answer

A)  $200,000 
B)  $160,000 
C)  $120,000 
D)  $80,000 
A)  $200,000 
B)  $160,000 
C)  $120,000 
D)  $80,000

Question 7

Use the following information for questions 62 and 63.
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

Accepted Answer

A)  $32,547. 
B)  $52,303. 
C)  $47,548. 
D)  $52,302. 
A)  $32,547. 
B)  $52,303. 
C)  $47,548. 
D)  $52,302.

Question 8

Use the following information for questions 82 and 83.
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's accounting records showed a book value for the equipment on May 1, 2012, of $4,200,000. Hull's 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.
-The income before income taxes derived by Hull from this lease for the year ended December 31, 2015, should be

Accepted Answer

A)  $444,000. 
B)  $540,000. 
C)  $984,000. 
D)  $1,080,000. 
A)  $444,000. 
B)  $540,000. 
C)  $984,000. 
D)  $1,080,000.

Question 9

The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.

Accepted Answer

A) True 
 B)False

Question 10

In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair value of a leased asset.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statement is true?

Accepted Answer

A)  Operating leases under GAAP are referred to as finance leases under IFRS. 
B)  IFRS has an additional lessor criterion for capitalization that collectability of the payments required from the lessee is reasonably predictable. 
C)  IFRS is more general in its provisions for determining if a lease arrangement transfers the risks and rewards of ownership. 
D)  Under IFRS, in computing the present value of the minimum lease payments, the lessee is required to use the incremental borrowing rate. 
A)  Operating leases under GAAP are referred to as finance leases under IFRS. 
B)  IFRS has an additional lessor criterion for capitalization that collectability of the payments required from the lessee is reasonably predictable. 
C)  IFRS is more general in its provisions for determining if a lease arrangement transfers the risks and rewards of ownership. 
D)  Under IFRS, in computing the present value of the minimum lease payments, the lessee is required to use the incremental borrowing rate.

Question 12

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?

Accepted Answer

A)  $162,000 
B)  $144,000 
C)  $108,000 
D)  $90,000 
A)  $162,000 
B)  $144,000 
C)  $108,000 
D)  $90,000

Question 13

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 $136,000 at the beginning of each year, including $20,000 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

Accepted Answer

A)  $679,008. 
B)  $651,548. 
C)  $579,154. 
D)  $555,732. 
A)  $679,008. 
B)  $651,548. 
C)  $579,154. 
D)  $555,732.

Question 14

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

Accepted Answer

A)  $3,170,000. 
B)  $3,120,000. 
C)  $2,853,000. 
D)  $2,487,000. 
A)  $3,170,000. 
B)  $3,120,000. 
C)  $2,853,000. 
D)  $2,487,000.

Question 15

Lessors classify and account for all leases that don't qualify as sales-type leases as operating leases.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

Accepted Answer

A)  They have access to low-cost funds allowing them to purchase assets at lower cost. 
B)  They are good at developing innovative contracts that help avoid accounting . 
C)  They provide leasing arrangements for a wider range of products than the parent company's product line. 
D)  They have the paint-of-sale advantage in finding leasing customers. 
A)  They have access to low-cost funds allowing them to purchase assets at lower cost. 
B)  They are good at developing innovative contracts that help avoid accounting . 
C)  They provide leasing arrangements for a wider range of products than the parent company's product line. 
D)  They have the paint-of-sale advantage in finding leasing customers.

Question 17

Which of the following best describes current practice in accounting for leases?

Accepted Answer

A)  Leases are not capitalized. 
B)  Leases similar to installment purchases are capitalized. 
C)  All long-term leases are capitalized. 
D)  All leases are capitalized. 
A)  Leases are not capitalized. 
B)  Leases similar to installment purchases are capitalized. 
C)  All long-term leases are capitalized. 
D)  All leases are capitalized.

Question 18

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

Accepted Answer

A) True 
 B)False

Question 19

The initial direct costs of leasing

Accepted Answer

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)  All of the answers are true with regard to 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)  All of the answers are true with regard to the initial direct costs of leasing.

Question 20

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?

Accepted Answer

The answer of If the lease in a sale-leaseback transaction...

Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.

What are the criteria that must be satisfied for a lessor to classify a lease as a direct-financing or sales-type lease?

Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.

The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.

In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair value of a leased asset.

Which of the following statement is true?

Lessors classify and account for all leases that don't qualify as sales-type leases as operating leases.

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

Which of the following best describes current practice in accounting for leases?

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

The initial direct costs of leasing

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?

Financial Accounting and Accounting Standards

Conceptual Framework for Financial Reporting

The Accounting Information System

Income Statement and Related Information

Balance Sheet and Statement of Cash Flows

Accounting and the Time Value of Money

Cash and Receivables

Valuation of Inventories: a Cost-Basis Approach

Inventories: Additional Valuation Issues

Acquisition and Disposition of Property, Plant, and Equipment

Depreciation, Impairments, and Depletion

Intangible Assets

Current Liabilities and Contingencies

Long-Term Liabilities

Stockholders Equity

Dilutive Securities and Earnings Per Share

Investments

Revenue Recognition

Accounting for Income Taxes

Accounting for Pensions and Postretirement Benefits

Accounting Changes and Error Analysis

Statement of Cash Flows

Full Disclosure in Financial Reporting

Appendix

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Exam 21: Accounting for Leases

Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.

What are the criteria that must be satisfied for a lessor to classify a lease as a direct-financing or sales-type lease?

Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.

The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.

In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair value of a leased asset.

Which of the following statement is true?

Lessors classify and account for all leases that don't qualify as sales-type leases as operating leases.

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

Which of the following best describes current practice in accounting for leases?

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

The initial direct costs of leasing

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?

Financial Accounting and Accounting Standards

Conceptual Framework for Financial Reporting

The Accounting Information System

Income Statement and Related Information

Balance Sheet and Statement of Cash Flows

Accounting and the Time Value of Money

Cash and Receivables

Valuation of Inventories: a Cost-Basis Approach

Inventories: Additional Valuation Issues

Acquisition and Disposition of Property, Plant, and Equipment

Depreciation, Impairments, and Depletion

Intangible Assets

Current Liabilities and Contingencies

Long-Term Liabilities

Stockholders Equity

Dilutive Securities and Earnings Per Share

Investments

Revenue Recognition

Accounting for Income Taxes

Accounting for Pensions and Postretirement Benefits

Accounting Changes and Error Analysis

Statement of Cash Flows

Full Disclosure in Financial Reporting

Appendix

Filters