Question 1

Match between columns
                        Premises: Incurred by the lessor to originate a lease that result directly from and are essential to acquiring the lease and would not have been incurred had the lease transaction not occurred.
Portion of estimated residual value not guaranteed by the lessee.
Required to be paid by the lessee to the lessor over the life of the lease.
Rate that would have been incurred if the property had been purchased by debt.
Rate that equates the fair value of the leased property and the present value of the lease payments plus the unguaranteed residual value.
Provision that allows the lessee to purchase the leased property at a price so favorable it is a reasonable certainty that the sale will occur.
The difference between the fair value of the property at the beginning of the lease and its cost or carrying value.
Commitments by the lessor to guarantee performance of the leased property in a manner more extensive than the typical product warranty.
Portion of the residual value of the leased property that is guaranteed by the lessee.
Ownership-type costs, such as insurance, maintenance, and property taxes.

Accepted Answer

The Answer of bargain purchase option and executory costs and is...

Question 2

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

Question 3

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, how much gross profit will Chicago record at the inception of the lease?

Accepted Answer

A) $ 7, 505 
B) $14, 680 
C) $16, 061 
D) $23, 236

Question 4

The lessee's footnote disclosures should include the future minimum rental payments as of the date of the latest balance sheet presented, in the aggregate and for a certain number of succeeding fiscal years.This number of years is

Accepted Answer

A) 5 
B) 10 
C) 15 
D) 20

Question 5

Depreciation expense will be recorded in the accounts of the

Accepted Answer

A) lessee for operating leases 
B) lessor for operating leases 
C) lessor for direct financing leases 
D) lessor for sales-type leases

Question 6

In a sales-leaseback transaction

Accepted Answer

A) the sale and leaseback are treated for accounting purposes as separate transactions 
B) any profit on the sale should, in general, be deferred and amortized by the seller-lessee 
C) any loss up to the amount of the difference between undepreciated cost and fair value should be deferred and amortized by the seller-lessee 
D) any lease of land alone must be classified as an operating lease

Question 7

According to current GAAP, leased property recorded as a capital lease normally should be reported as a long-term or intangible asset on the balance sheet of the lessee and the lessor as follows: $\begin{array}{lll}
&\text { Lessee}&\text {  Lessor }\
\text { I. } & \text { included } & \text { included } \
\text { II. } & \text { included } & \text { not included } \
\text { III. } & \text { not included } & \text { not included }\
\text { IV. } & \text { not included } &  \text { included }
\end{array}$

Accepted Answer

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

Question 8

When a lessee makes periodic cash payments for a capital lease, which of the following accounts is decreased?

Accepted Answer

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

Question 9

When a lessor receives cash on an operating lease, which of the following accounts is increased?

Accepted Answer

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

Question 10

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.If the Maury Company uses the straight-line method of depreciation for its assets, the depreciation expense for the leased equipment for the year ending December 31, 2010, is

Accepted Answer

A) $15, 554 
B) $14, 419 
C) $13, 554 
D) $12, 419

Question 11

For a sales-type lease, cost of goods sold 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

Question 12

A six-year operating lease requires annual rent payments of $15, 000 for years 1, 2, and 3, and annual rent payments of $10, 000 for years 4, 5, and 6.The agreement also requires the lessor to pay a $1, 800 annual insurance premium for the leased property.Which of the following amounts should be recognized as the rental revenue in year 1 by the lessor?

Accepted Answer

A) $10, 000 
B) $13, 500 
C) $15, 000 
D) $16, 800

Question 13

Which of the following items should be included in the calculation of the lessor's gross receivable? $\begin{array}{llll}
&\text { Periodic Lease } & \text { ExecutoryCosts } & \text { Unguaranteed } \
&\text { Rental Payments } & \text { Paid by Lessee } & \text { Residual Value }\
\text { I. } & \text { Yes } & \text { Yes } & \text { Yes } \
\text { II. } & \text { Yes } & \text { Yes } & \text { No } \
\text { III. } & \text { Yes } & \text { No } & \text { No } \
\text { IV } & \text { Vees } & \text { No } & \text { Yes }
\end{array}$

Accepted Answer

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

Question 14

A lessor enters into a sales-type lease.Which of the following statements is true if the leased asset has an unguaranteed residual value?

Accepted Answer

A) The gross profit recognized is less than it would be if the residual was guaranteed. 
B) The gross profit recognized is more than it would be if the residual was guaranteed. 
C) The lessor should decrease the cost of goods sold by the amount of the unguaranteed residual value. 
D) The gross profit is the same as it would be if the residual was guaranteed.

Question 15

Which of the following is not a required disclosure by a lessee of an operating lease?

Accepted Answer

A) rental expense for the period 
B) total contingent rentals 
C) the amount of any sublease rentals 
D) the gross amount of assets under operating leases

Question 16

Ginnie, Inc.entered into a five-year capital lease on December 31, 2010.This lease requires five minimum annual lease payments due on December 31 of each year.The first minimum payment was paid on December 31, 2010.This payment included which of the following? $\begin{array}{ll}
&\text { Interest Expense}&\text {  Lease Liability}\
\text {I.}&\text { No } & \text { Yes } \
\text {II.}&\text { Yes } & \text { No } \
\text {III.}&\text { Yes } & \text { Yes } \
\text {IV.}&\text { No } & \text { No }
\end{array}$

Accepted Answer

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

Question 17

Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be

Accepted Answer

A) expensed in the same period that the expenditure is made 
B) recorded as a prepaid asset and allocated to expense over the lease term 
C) deferred and recognized as a reduction in the interest rate implicit in the lease 
D) directly charged (debited)to Retained Earnings

Question 18

If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified as a(n)

Accepted Answer

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

Question 19

Which of the following statements is true about initial direct costs?

Accepted Answer

A) Initial direct costs should always be debited against income by the lessor in the period of the inception of the lease. 
B) Initial direct costs are ownership-type costs such as insurance, maintenance, and taxes. 
C) Initial direct costs of an operating lease should be recorded by the lessor as a prepaid asset. 
D) Initial direct costs of a sales-type lease should be expensed as incurred, and an equal amount of the unearned income should be recognized as income in the same period.

Question 20

Any initial direct costs incurred by the lessor for a sales-type lease should be

Accepted Answer

A) expensed in the same period that the lease receivable is recognized 
B) recorded as a prepaid asset and allocated to expense over the lease term 
C) deferred and recognized as a reduction in the interest rate implicit in the lease 
D) directly charged (debited)to Retained Earnings

Exam 21: Accounting for Leases

Match each term to its definition by placing the appropriate letter in the space provided

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

The lessee's footnote disclosures should include the future minimum rental payments as of the date of the latest balance sheet presented, in the aggregate and for a certain number of succeeding fiscal years.This number of years is

Depreciation expense will be recorded in the accounts of the

In a sales-leaseback transaction

When a lessee makes periodic cash payments for a capital lease, which of the following accounts is decreased?

When a lessor receives cash on an operating lease, which of the following accounts is increased?

For a sales-type lease, cost of goods sold is valued by the lessor at

A lessor enters into a sales-type lease.Which of the following statements is true if the leased asset has an unguaranteed residual value?

Which of the following is not a required disclosure by a lessee of an operating lease?

Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be

If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified as a(n)

Which of the following statements is true about initial direct costs?

Any initial direct costs incurred by the lessor for a sales-type lease should be