Question 1

LMN leases construction equipment on sales-type leases.LMN wants to record a $7,000 dealer's profit on assets leased, each of which cost $60,000.What annual year-end rentals should LMN quote to earn a 12 percent return on 8-year leases?

Accepted Answer

A) $9,380 
B) $6,625 
C) $8,375 
D) $13,487

Question 2

The depreciation period used by the lessee for a depreciable leased asset must be:

Accepted Answer

A) the remaining life of the asset from the lease inception. 
B) the same period that was used by the lessor. 
C) the term of the lease. 
D) at most the term of the lease but possibly longer if title is transferred at end of lease.

Question 3

Match between columns
                        Premises: bargain renewal option
lease term
incremental borrowing rate

Accepted Answer

The Answer of The lessee has the option of extending is...

Question 4

Both the lessee's interest and depreciation expense should be added back to net income to calculate cash flows from operating activities under the indirect method.

Accepted Answer

A) True 
 B)False

Question 5

Lease Y contains a bargain purchase option and the lease term is equal to 75 percent of th estimated economic life of the leased property.Lease Z contains a bargain purchase optio and the lease term is less than 75 percent of the estimated economic life of the leased property.How would the lessee classify these leases?

Accepted Answer

A) Choice 1 
B) Choice 2 
C) Choice 3 
D) Choice 4

Question 6

WXZ entered into a direct financing lease with TUV for the use of an asset which cost WXZ $240,000.The lease agreement contained a bargain purchase option effective immediately after the fifth rental, which provided that TUV could purchase the asset at that time.The estimated life of the asset was 10 years with an estimated residual value of $400.TUV's annual depreciation expense is (use straight- line):

Accepted Answer

A) $23,960 
B) $48,000 
C) $22,200 
D) $44,400

Question 7

Which interest rate must be used by the lessee to account for a finance lease under ASPE?

Accepted Answer

A) The lessor's implicit rate if known, otherwise the lessee's incremental borrowing rate. 
B) The lower of the lessor's implicit rate AND the lessee's incremental borrowing rate. 
C) The lessee's incremental borrowing rate. 
D) The lessor's implicit rate.

Question 8

Explain what a temporary difference is and how it arises?

Accepted Answer

The answer of Explain what a temporary difference is and...

Question 9

What is the interest rate used for discounting the net lease payments by the lessor?

Accepted Answer

The answer of What is the interest rate used for...

Question 10

Ryan Corp.enters into an agreement with Montgomery Corp.to lease some office space in a very popular part of town.The agreement called for payments of $100,000 per year for five years and an upfront payment of $85,000.Explain the proper accounting treatment for the above situation.

Accepted Answer

The answer of Ryan Corp.enters into an agreement with Montgomery...

Question 11

XYZ Rental leased a special crane to ABC INC.that originally cost $40,000.The lease was for six years and the rentals were $10,000 per year, payable at each year-end.The implicit interest rate was 10 percent.XYZ Rental recognized a gross margin (dealer's profit)of (rounded to nearest dollar):

Accepted Answer

A) $4,000 
B) $24,000 
C) $3,553 
D) $20,000

Question 12

A journal entry is not required for either the lessor or lessee when an operating lease is initiated unless there is an advance payment, such as a lease bonus or prepayment of rent in addition to the periodic rents.

Accepted Answer

A) True 
 B)False

Question 13

A lessor and lessee enter into a lease agreement with the following characteristics: Inception: 1/1/x0 6 annual lease payments of $10,000 are due each Jan.1 beginning 1/1/x0  Assuming the lessee will capitalize this lease, what is the amount of the net lease liability inception, before the first payment is made?

Accepted Answer

A) $50,166 
B) $60,000 
C) $64,000 
D) $47,908

Question 14

While only certain leases are currently accounted for as a sale or purchase, there is theoretical justification for considering all leases to be sales or purchases.The principle reason that supports this idea is that:

Accepted Answer

A) during the life of the lease, the lessee can effectively treat the property as if it were owned by the lessee. 
B) all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal. 
C) at the end of the lease, the property usually can be purchased by the lessee. 
D) a lease reflects the purchase or sale of a quantifiable right to the use of the property.

Question 15

On December 31, 2015, JKL leased a new machine from MNO.The following information relates to the lease transaction: * the machine has an estimated useful life of seven years, which coincides with the lease term.
* lease rentals consist of seven equal annual payments of $100,000, the first of which was paid on December 31, 2015.
* MNO's implicit interest rate is 12 percent, which is known by JKL.
* JKL's incremental borrowing rate is 14 percent at December 31, 2015.
* present value of an annuity of $1 in advance for seven periods at 12 percent is 5.11.
* present value of an annuity of $1 in advance for seven periods at 14 percent is 4.89.
At the inception of the lease, JKL should record a capitalized lease liability of (choose the amount closest to your answer):

Accepted Answer

A) $511,000 
B) $489,000 
C) $411,000 
D) $500,000

Question 16

Under ASPE, the lessor is required to expense any direct costs associated with a lease up front.

Accepted Answer

A) True 
 B)False

Question 17

On January 1, 2014, TA acquired a machine (for leasing purposes)for $52,000 cash.The machine had an estimated eight-year useful life and no residual value.On January 1, 2014, the machine was leased to LTB on an eight-year direct financing lease that required year-end annual rentals of $9,395 starting on December 31, 2014.The lessor's implicit interest rate was (rounded to the nearest percent)%.

Accepted Answer

The answer of On January 1, 2014, TA acquired a...

Question 18

On the first day of its fiscal year, Lessor, Inc., leased certain property at an annual rental o $100,000 receivable at the beginning of each year for ten years.The first payment was received immediately.The leased property, which is new, had cost $650,000 and has an estimated useful life of thirteen years and no salvage value.
Lessor's borrowing rate is 8 percent.The present value of an annuity of $1 payable at the beginning of the period at 8 percent for ten years is 7.247.Lessor had no other costs associated with this lease.Lessor should have accounted for this lease as a sales-type lease, but it mistakenly treated the lease as an operating lease.What was the effect on net earnings during the first year of the lease by having treated this lease as an operating lease rather than as a sales-type lease?

Accepted Answer

A) Understated 
B) The effect depends on the method selected for income tax purposes 
C) No effect 
D) Overstated

Question 19

This question relates to the different types of finance leases.To the left are listed eight different item
related to such leases.To the right are three columns that identify the types of leases.Place one or tw check marks on each line to identify the item with the type of lease to which it primarily relates.

Accepted Answer

The answer of This question relates to the different types...

Question 20

Initial direct costs are:

Accepted Answer

A) non-refundable down payments made by the lessee. 
B) incremental costs incurred by the lessor in negotiating and consummating the lease agreement. 
C) insurance, property taxes, and maintenance costs. 
D) interest and annual lease rental paid.

Exam 18: Leases

LMN leases construction equipment on sales-type leases.LMN wants to record a $7,000 dealer's profit on assets leased, each of which cost $60,000.What annual year-end rentals should LMN quote to earn a 12 percent return on 8-year leases?

The depreciation period used by the lessee for a depreciable leased asset must be:

Define the following terms:

Both the lessee's interest and depreciation expense should be added back to net income to calculate cash flows from operating activities under the indirect method.

Which interest rate must be used by the lessee to account for a finance lease under ASPE?

Explain what a temporary difference is and how it arises?

What is the interest rate used for discounting the net lease payments by the lessor?

Ryan Corp.enters into an agreement with Montgomery Corp.to lease some office space in a very popular part of town.The agreement called for payments of $100,000 per year for five years and an upfront payment of $85,000.Explain the proper accounting treatment for the above situation.

XYZ Rental leased a special crane to ABC INC.that originally cost $40,000.The lease was for six years and the rentals were $10,000 per year, payable at each year-end.The implicit interest rate was 10 percent.XYZ Rental recognized a gross margin (dealer's profit) of (rounded to nearest dollar) :

A journal entry is not required for either the lessor or lessee when an operating lease is initiated unless there is an advance payment, such as a lease bonus or prepayment of rent in addition to the periodic rents.

While only certain leases are currently accounted for as a sale or purchase, there is theoretical justification for considering all leases to be sales or purchases.The principle reason that supports this idea is that:

Under ASPE, the lessor is required to expense any direct costs associated with a lease up front.

Initial direct costs are: