Question 1

M & O Company is preparing an Excel spreadsheet for a 5-year finance lease. The implicit interest rate in the lease is 6%. The beginning of the lease is January 1. Lease payments are made each December 31. A portion of the spreadsheet appears as follows: 
- What formula should M & O use in cell E8 to calculate the carrying value of the lease payable after the second lease payment?

Accepted Answer

A)  =E7-D8 
B)  =E7+D8 
C)  =E8+D8 
D)  =PV(C2,C3,0,C1,type)

Question 2

Cook the Books is the lessee in a lease agreement. From the perspective of the lessee, the lease may be classified as:

Accepted Answer

A)  operating, sales-type, indirect financing. 
B)  operating or finance. 
C)  operating or sales-type. 
D)  operating, finance, or sales-type.

Question 3

Warren Co. recorded a right-of-use asset of $800,000 in a 10-year finance lease. The interest rate charged by the lessor was 8%. The balance in the right-of-use asset after two years will be:

Accepted Answer

A)  $648,000. 
B)  $640,000. 
C)  $804,000. 
D)  $968,000.

Question 4

Red Co. recorded a right-of-use asset of $100,000 in a 10-year finance lease. Payments of $16,275 are made annually at the end of each year. The interest rate charged by the lessor was 10%. The balance in the lease payable after two years will be:

Accepted Answer

A)  $80,000. 
B)  $86,823. 
C)  $116,309. 
D)  $121,000.

Question 5

On January 1, 2018, Princess Corporation leased equipment to King Company. The lease term is eight years. The first payment of $675,000 was made on January 1, 2018. The equipment cost Princess Corporation $3,600,000. The present value of the lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2019 on this lease?

Accepted Answer

A)  $261,000. 
B)  $328,500. 
C)  $325,350. 
D)  $293,850.

Question 6

For companies that prepare their financial statements in accordance with IFRS, a lessee will reassess variable lease payments that depend on an index or a rate:

Accepted Answer

A)  not just when the lessee remeasures the right-of-use asset and lease liability for other reasons, but also whenever there is a change in the cash flows resulting from a change in the reference index or rate. 
B)  only when the lessee remeasures the right-of-use asset and lease liability for other reasons. 
C)  using the discount rate in effect at the beginning of the lease. 
D)  only when the terms of the lease are modified by the lessee and lessor.

Question 7

Bishop Company is the lessee in an operating lease. Bishop will report straight-line lease expense if it uses:

Accepted Answer

A)  IFRS. 
B)  U.S. GAAP. 
C)  Either U.S. GAAP or IFRS. 
D)  Neither U.S. GAAP nor IFRS.

Question 8

Recording a sales-type lease with a selling profit is similar to recording:

Accepted Answer

A)  A purchase on account. 
B)  An exchange of assets. 
C)  A sale of a fixed asset. 
D)  A sale of merchandise on account.

Question 9

Star Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1 before entering into an operating lease. Not including any indirect effects on earnings, when Star Corp. records the operating lease, the immediate impact on these ratios is a(an):

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 10

Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018.
Other information:

There is no expected residual value.
Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2018 and 2019. Assume a December 31 year-end. Round your answers to the nearest whole dollar amounts.

Accepted Answer

The answer of Eastern Edison Company leased equipment from Hi-Tech...

Question 11

A lessee should classify a lease transaction as a finance lease if it is noncancelable and one or more of five classification criteria are met. What are these criteria?

Accepted Answer

The answer of A lessee should classify a lease transaction...

Question 12

For the lessor to account for a lease as a sales-type lease, the lease must meet:

Accepted Answer

A)  Any one of first five classification criteria and both of the last two additional conditions specified by GAAP regarding accounting for leases. 
B)  More than one of the five criteria specified by GAAP regarding accounting for leases. 
C)  All five of the criteria specified by GAAP regarding accounting for leases. 
D)  Any one of the five criteria specified by GAAP regarding accounting for leases.

Question 13

To raise operating funds, Coyne Incorporated sold its office building to an insurance company on January 1, 2018, for $1,600,000 and immediately leased the building back. The operating lease is for the final 12 years of the building's estimated 20-year remaining useful life. The building has a fair value of $1,600,000 and a book value of $1,300,000 (its original cost was $2 million). The rental payments of $200,000 are payable to the insurance company each December 31. The lease has an implicit rate of 9%.
Required:
Round your answers to the nearest whole dollar amounts.
Prepare the appropriate journal entries for Coyne Incorporated on:
1. January 1, 2018, to record the sale-leaseback.
2. December 31, 2018, to record necessary adjustments.

Accepted Answer

The answer of To raise operating funds, Coyne Incorporated sold...

Question 14

Sometimes a lease can be renewed for additional periods or terminated after a specified period. How do the lessee and lessor decide the lease term to be used in accounting for the lease?

Accepted Answer

The answer of Sometimes a lease can be renewed for...

Question 15

Terms of a lease agreement and related facts were:
a. Costs of legal fees and commissions incurred by the lessor for the lease transaction were $16,968.
b. The retail cash selling price of the leased asset was $2,000,000. Its useful life was three years with no residual value.
c. The lease term is three years and the lessor paid $2,000,000 to acquire the asset.
d. Annual lease payments at the beginning of each year were $737,320.
e. Lessor's implicit rate when calculating annual rental payments was 11%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entries for the lessor to record the lease and related payments at its beginning, January 1, 2018.
2. Calculate the effective rate of interest revenue after adjusting the net investment by initial direct costs.
3. Record any journal entry(s) necessary at December 31, 2018, the fiscal year-end.

Accepted Answer

The answer of Terms of a lease agreement and related...

Question 16

In an operating lease:

Accepted Answer

A)  the lessee records an asset and a liability for the present value of lease payments. 
B)  the lessor records a receivable for the present value of lease payments. 
C)  the lessee records an asset and a liability for the total of the lease payments. 
D)  the lessor records interest revenue.

Question 17

At January 1, 2018, Butterfly, Inc. leased mining equipment from Diamond Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $75,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescent at a cost of $540,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $33,684.) Diamond seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease.
Required:
Round your answers to the nearest whole dollar amounts.
1. What will be the effect of the lease on Butterfly's earnings for the first year (ignore taxes)?
2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Butterfly (ignore taxes)?

Accepted Answer

The answer of At January 1, 2018, Butterfly, Inc. leased...

Question 18

In a finance lease, the amortization of the right-of-use asset in the third year is:

Accepted Answer

A)  the same as in the fourth year. 
B)  zero. 
C)  less than in the fourth year. 
D)  more than in the fourth year.

Question 19

Jane Wright Company is preparing an Excel spreadsheet for a 6-year finance lease. The implicit interest rate in the lease is 4%. The beginning of the lease is December 31, 2018. Lease payments are made each December 31 starting at December 31, 2018. A portion of the spreadsheet appears as follows:  Required:
1. Using the format followed in cell D7, provide the appropriate formula for cell B6.
2. Using the format followed in cell D7, provide the appropriate formula for cell C8.
3. Using the format followed in cell D7, provide the appropriate formula for cell E8.

Accepted Answer

The answer of Jane Wright Company is preparing an Excel...

Question 20

What nonlease costs might be included as part of lease payments? How are they accounted for by the lessee in a finance lease when paid by the lessee? Explain.

Accepted Answer

The answer of What nonlease costs might be included as...

Exam 15: Leases