Question 1

For a sales-type lease, cost of asset leased is valued by the lessor at

Accepted Answer

A)  the recorded cost assigned to the inventory less the present value of the guaranteed residual value of the leased property accruing to the benefit of the lessor 
B)  the recorded cost assigned to the inventory less the undiscounted value of the unguaranteed residual value of the leased property accruing to the benefit of the lessor 
C)  the recorded cost assigned to the inventory less the present value of the unguaranteed residual value of the leased property accruing to the benefit of the lessor 
D)  the recorded cost assigned to the inventory less the undiscounted value of the guaranteed residual value of the leased property accruing to the benefit of the lessor 
A)  the recorded cost assigned to the inventory less the present value of the guaranteed residual value of the leased property accruing to the benefit of the lessor 
B)  the recorded cost assigned to the inventory less the undiscounted value of the unguaranteed residual value of the leased property accruing to the benefit of the lessor 
C)  the recorded cost assigned to the inventory less the present value of the unguaranteed residual value of the leased property accruing to the benefit of the lessor 
D)  the recorded cost assigned to the inventory less the undiscounted value of the guaranteed residual value of the leased property accruing to the benefit of the lessor

Question 2

From the lessee's point of view leasing provides a method of making a sale while still maintaining the advantages of ownership, including security in the asset and tax benefits.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following items would not be included in the calculation of the capital lease obligation?

Accepted Answer

A)  bargain purchase option 
B)  guaranteed residual value 
C)  executory costs 
D)  any payments required for failure to renew or extend the lease 
A)  bargain purchase option 
B)  guaranteed residual value 
C)  executory costs 
D)  any payments required for failure to renew or extend the lease

Question 4

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 5

Exhibit 20-5 The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2014. Baltimore, 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, 2014. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2018. 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:  
-Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, the lease should be classified as a(n)

Accepted Answer

A)  operating lease 
B)  direct financing lease 
C)  sales-type lease 
D)  leveraged lease 
A)  operating lease 
B)  direct financing lease 
C)  sales-type lease 
D)  leveraged lease

Question 6

Exhibit 20-5 The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2014. Baltimore, 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, 2014. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2018. 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:   
-Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, what is the correct amount that should be credited to Unearned Interest: Leases on January 1, 2014, by Baltimore? (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 7

On January 1, 2014, Becky Company signed a lease agreement requiring six annual payments of $45,000, beginning December 31, 2014. The lease qualifies as an operating lease. Becky's incremental borrowing rate was 9% and the lessor's implicit rate, known by Becky, 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. Rounded to the nearest dollar, interest and rent expenses for 2014 would be

Accepted Answer

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

Question 8

On January 1, 2014, 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 capitalized the lease on January 1, 2014, in the amount of $314,152. What is the amount of the lease obligation on December 31, 2015?

Accepted Answer

A)  $263,709 
B)  $207,717 
C)  $279,595 
D)  $225,350 
A)  $263,709 
B)  $207,717 
C)  $279,595 
D)  $225,350

Question 9

Merchant Company found themselves in need of cash. In an effort to shore up their financial situation they sold land to Natalie Company for $3.5 million and immediately leased it back. 
1) The land was recorded on Merchant's book at $1.5 million
2) The term of the noncancelable lease is 20 years. 
3) The lease agreement requires equal rental payments of $439,516 at the end of each year. 
4) The incremental borrowing rate of Merchant's is 12% but the annual rental rate of 11% was set by Natalie, and Merchant is aware of the rate. 
5) Merchant pays all executory costs which amount to $11,500 per year which includes taxes and insurance.
6) There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor, and the collectibility is reasonably assured. 
7) The land's fair value is $3.5 million. 
8) Natalie provided Merchant with the option to purchase the land at the end of the 20 years for $1,000.

Accepted Answer

Required:
1) Prepare the purch

Question 10

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 11

On January 1, 2014, Denise Company signed a lease agreement requiring ten annual payments of $14,000, beginning December 31, 2014. The agreement was classified as a capital lease. When reviewing Denise's accounting records, which of the following would not be expected?

Accepted Answer

A)  Leased Equipment $\quad $$\quad $105,210 
Capital Lease Obligation $\quad $$\quad $105,210 
B)  Interest Expense$\quad $$\quad $ 7,365 
Obligation Under Capital Leases $\quad $$\quad $6,635
Cash$\quad $$\quad $$\quad $ 14,000 
C)  Depreciation Expense: Leased Equipment $\quad $$\quad $$\quad $10,521 
Accumulated Depreciation:
Leased Equipment $\quad $$\quad $$\quad $$\quad $10,521 
D)  Rent Expense $\quad $$\quad $$\quad $14,000 
Cash $\quad $$\quad $$\quad $$\quad $14,000 
A)  Leased Equipment $\quad $$\quad $105,210 
Capital Lease Obligation $\quad $$\quad $105,210 
B)  Interest Expense$\quad $$\quad $ 7,365 
Obligation Under Capital Leases $\quad $$\quad $6,635
Cash$\quad $$\quad $$\quad $ 14,000 
C)  Depreciation Expense: Leased Equipment $\quad $$\quad $$\quad $10,521 
Accumulated Depreciation:
Leased Equipment $\quad $$\quad $$\quad $$\quad $10,521 
D)  Rent Expense $\quad $$\quad $$\quad $14,000 
Cash $\quad $$\quad $$\quad $$\quad $14,000

Question 12

Exhibit 20-4 On January 1, 2014, 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, 2014. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property 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:   
-Refer to Exhibit 20-4. Given the structure of the lease, the payments, and the residual value information, what is General's net investment in the lease during 2015? (Round the answer to the nearest dollar.)

Accepted Answer

A)  $248,475 
B)  $158,475 
C)  $186,492 
D)  $264,137 
A)  $248,475 
B)  $158,475 
C)  $186,492 
D)  $264,137

Question 13

Executory costs

Accepted Answer

A)  are included in the minimum lease payments by the lessee 
B)  should normally be borne by the party that is, in substance, the owner of the asset 
C)  are the costs incurred by the lessor that are directly associated with negotiating and completing the lease transaction 
D)  are always paid by the lessee 
A)  are included in the minimum lease payments by the lessee 
B)  should normally be borne by the party that is, in substance, the owner of the asset 
C)  are the costs incurred by the lessor that are directly associated with negotiating and completing the lease transaction 
D)  are always paid by the lessee

Question 14

Which of the following criteria would require a lessee to classify a lease of land as a capital lease? 1.Transfer of ownership
2.Contains a bargain purchase option
3.Lease term 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 15

On January 1, 2014, 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, 2014. The equipment remains the property of the lessor at the end of the lease and Reynolda does not guarantee any residual value. Using a 10% cost of capital, Reynolda capitalized the lease on January 1, 2014, in the amount of $125,096. What is the amount of current portion of the lease obligation Reynolda should report on the December 31, 2015, balance sheet?

Accepted Answer

A)  $ 7,461 
B)  $20,490 
C)  $22,539 
D)  $30,000 
A)  $ 7,461 
B)  $20,490 
C)  $22,539 
D)  $30,000

Question 16

What four conditions can a lease be cancelable?

Accepted Answer

1) the occurrence of some remote conting

Question 17

Current GAAP requires a lessee to account for certain leases as capital leases.
Required:
What is the rationale for requiring companies to account for leases as capital leases?

Accepted Answer

For a lessee to account for a lease as a

Question 18

Exhibit 20-4 On January 1, 2014, 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, 2014. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property 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:   
-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, 2014? (Round the answer to the nearest dollar.)

Accepted Answer

A)  $37,017 
B)  $28,017 
C)  $36,336 
D)  $27,336 
A)  $37,017 
B)  $28,017 
C)  $36,336 
D)  $27,336

Question 19

(This problem requires use of present value tables.)
Raleigh, Inc. leased some equipment from another company on January 1, 2014, for a three-year period. Payments of $45,000 were due each December 31. The lease qualified as a capital lease. Assets were depreciated over the life of the lease, using the straight-line method. The appropriate interest rate to use was 9%.
Required:
(For all answers, round to the nearest dollar.) 
a.Prepare all December 31, 2014, journal entries required on Raleigh's books.
b.At December 31, 2014, how much of the lease liability should be shown as current? Compute two acceptable answers.
c.If the first $45,000 payment were due January 1, 2014, what journal entries would be required on Raleigh's books on January 1, 2014?
d.Assume again that the $45,000 payments are made on December 31. Assume, in addition, that at the end of three years, the lessee guaranteed a residual value of $10,000. Compute the amount of the lease obligation that should be recorded on January 1, 2014.
e.Refer to Part d. Assume that on December 31, 2016, the leased equipment had a fair value of only $6,500. Prepare all December 31, 2016, journal entries for the lessee.

Accepted Answer

The answer of (This problem requires use of present value...

Question 20

What are the two components of net receivables for leases?

Accepted Answer

1) Gross receivable which is composed of

For a sales-type lease, cost of asset leased is valued by the lessor at

From the lessee's point of view leasing provides a method of making a sale while still maintaining the advantages of ownership, including security in the asset and tax benefits.

Which of the following items would not be included in the calculation of the capital lease obligation?

Which is 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?

On January 1, 2014, Denise Company signed a lease agreement requiring ten annual payments of $14,000, beginning December 31, 2014. The agreement was classified as a capital lease. When reviewing Denise's accounting records, which of the following would not be expected?

Executory costs

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

What four conditions can a lease be cancelable?

Current GAAP requires a lessee to account for certain leases as capital leases. Required: What is the rationale for requiring companies to account for leases as capital leases?

What are the two components of net receivables for leases?

The Demand for and Supply of Financial Accounting Information

Financial Reporting: Its Conceptual Framework

Review of a Companys Accounting System

The Balance Sheet and the Statement of Shareholders Equity

The Income Statement and the Statement of Cash Flows

Cash and Receivables

Inventories: Cost Measurement and Flow Assumptions

Inventories: Special Valuation Issues

Current Liabilities and Contingencies

Property, Plant, and Equipment: Acquisition and Subsequent Investments

Depreciation, Depletion, Impairment, and Disposal

Intangibles

Investments and Long-Term Receivables

Financing Liabilities: Bonds and Notes Payable

Contributed Capital

Retained Earnings and Earnings Per Share

Advanced Issues in Revenue Recognition

Accounting for Income Taxes

Accounting for Postretirement Benefits

The Statement of Cash Flows

Accounting for Changes and Errors

Time Value of Money Module

Filters

Exam 20: Accounting for Leases

For a sales-type lease, cost of asset leased is valued by the lessor at

From the lessee's point of view leasing provides a method of making a sale while still maintaining the advantages of ownership, including security in the asset and tax benefits.

Which of the following items would not be included in the calculation of the capital lease obligation?

Which is 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?

On January 1, 2014, Denise Company signed a lease agreement requiring ten annual payments of $14,000, beginning December 31, 2014. The agreement was classified as a capital lease. When reviewing Denise's accounting records, which of the following would not be expected?

Executory costs

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

What four conditions can a lease be cancelable?

Current GAAP requires a lessee to account for certain leases as capital leases. Required: What is the rationale for requiring companies to account for leases as capital leases?

What are the two components of net receivables for leases?

The Demand for and Supply of Financial Accounting Information

Financial Reporting: Its Conceptual Framework

Review of a Companys Accounting System

The Balance Sheet and the Statement of Shareholders Equity

The Income Statement and the Statement of Cash Flows

Cash and Receivables

Inventories: Cost Measurement and Flow Assumptions

Inventories: Special Valuation Issues

Current Liabilities and Contingencies

Property, Plant, and Equipment: Acquisition and Subsequent Investments

Depreciation, Depletion, Impairment, and Disposal

Intangibles

Investments and Long-Term Receivables

Financing Liabilities: Bonds and Notes Payable

Contributed Capital

Retained Earnings and Earnings Per Share

Advanced Issues in Revenue Recognition

Accounting for Income Taxes

Accounting for Postretirement Benefits

The Statement of Cash Flows

Accounting for Changes and Errors

Time Value of Money Module

Filters