Question 1

Which of the following would be excluded from both the minimum lease payments and net lease liability at inception for the lessee?

Accepted Answer

A)  Lessee guarantee of residual. 
B)  Bargain purchase option. 
C)  Third party guarantee of residual. 
D)  Annual lease payments

Question 2

LAS owns a building in North Bay.LAS enters into an agreement with BH as follows: LAS sells the building to BH on 1/1/2014 for $2,900,000 (which was the building's fair value on that date)and immediately leases it back for $500,000 per year for 10 years.The historical cost of the building was $9,000,000 and accumulated amortization amounted to $7,000,000.The net effect of this transaction on the statement of comprehensive income in the year of sale would be:

Accepted Answer

A)  a reduction to net income of $500,000. 
B)  a reduction to net income of $590,000. 
C)  a reduction to net income of $410,000. 
D)  a reduction to net income of $400,000.

Question 3

Under ASPE,if a leased asset's fair value is less than its carrying value at the date of sale under a sale-and-lease-back transaction,the lessor has experienced an impairment loss.

Accepted Answer

A) True 
 B)False

Question 4

On January 1,2014,BE Company collected a $15,000 cash,non-refundable,bonus payment on an operating lease.Assuming a 12 percent interest rate and a five-year lease term,the lease bonus amortization journal entry for 2014,if the interest method is used,is:

Accepted Answer

A)   
B)   
C)   
D)

Question 5

If the straight-line method is used by the lessee to amortize the non-refundable down payment in an operating lease,a constant dollar amount of the prepayment is allocated as expense to each period covered by the lease.

Accepted Answer

A) True 
 B)False

Question 6

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 7

This question relates to the different types of finance leases.To the left are listed eight different items related to such leases.To the right are three columns that identify the types of leases.Place one or two 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 8

What is the cost basis of an asset acquired by a lease,which is in substance an instalment purchase?

Accepted Answer

A)  The present value of the market price of the asset discounted at an appropriate rate as an amount to be received at the end of the lease 
B)  The present value of the future minimum lease payments under the lease (exclusive of executory costs and any profit thereon) discounted at an appropriate rate 
C)  The net realizable value of the asset determined at the date of the lease agreement plus the sum of the future minimum lease payments under the lease 
D)  The sum of the future minimum lease payments under the lease

Question 9

Companies that opt for finance leases usually do so because of the tax advantages finance leases provide.

Accepted Answer

A) True 
 B)False

Question 10

Choose the correct statement regarding including the terms listed in the lessee's (1)minimum lease payments and (2)lease liability for a capitalized lease:

Accepted Answer

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

Question 11

In a sale-and-leaseback agreement,the lessor is also:

Accepted Answer

A)  the buyer. 
B)  a third party guarantor. 
C)  the lessee. 
D)  the seller.

Question 12

ABC INC.entered into a sales-type lease to lease JKL an asset that cost ABC INC.$120,000.The lease agreement requires five annual year-end rentals of $40,000 each.ABC INC.used a 15 percent interest rate to compute the rentals.The dealer's profit (or loss)that ABC INC.recognized was:

Accepted Answer

A)  $14,086 loss. 
B)  $14,086 gain. 
C)  $18,000 gain. 
D)  $80,000 gain.

Question 13

ABC INC.leased equipment to XYZ on January 1,2013.The lease is for a 9-year period expiring January 1,2022.The first equal annual payment of $400,000 was made on January 1,2013.The cash selling price of the equipment is $2,347,500,which is equal to the present value of the lease payments at 10 percent.ABC INC.had purchased the equipment for $2,100,000.The lease is appropriately recorded as a sales-type lease by ABC INC.What amount of interest income should ABC INC.record in 2013 as a result of the lease?

Accepted Answer

A)  $194,750 
B)  $210,000 
C)  $234,750 
D)  $280,000

Question 14

For a finance lease,the amount initially capitalized by the lessee is the sum of the future value of the periodic lease payments,plus the future value of any bargain purchase option.

Accepted Answer

A) True 
 B)False

Question 15

How is the cash flow statement impacted if the lease is deemed to be an operating lease versus a finance lease?

Accepted Answer

The answer of How is the cash flow statement impacted...

Question 16

LMN correctly recorded a 5-year lease on a special machine by making the following entry on the date the lease was signed:  The lease was the following:

Accepted Answer

A)  direct financing lease. 
B)  operating lease. 
C)  sales-type lease. 
D)  could be either a direct financing or sales-type lease. 
E)  cannot determine based on the limited data given.

Question 17

When the lessee guarantees the residual value at the end of the lease term,for accounting purposes,the:

Accepted Answer

A)  annual rentals will always be more than they would have been if the residual value was not guaranteed. 
B)  guaranteed residual value does not affect the annual rentals because it is a cash flow at the end of the lease term. 
C)  annual rentals will be the same as they would have been if the residual value was not guaranteed. 
D)  annual rentals will always be less than they would have been if the residual value was not guaranteed.

Question 18

LOR leased to LEE a computer that cost LOR $20,000.The explicit interest rate is 20%; rentals are paid at each year-end; and the lease term is three years.Residual value at the end of the lease term is $2,000.Assume a direct financing lease.
Requirement 1:
LEE retains the computer at the end of the lease term at a BPO cost of $1,500.
(a)The rental amount computed by LOR is $_______________________.
(b)The amount LEE should capitalize is $________________________.
Requirement 2:
How much interest should be recognized at the end of year 1,in the above situation,by: (a)LOR? $_____________ (b)LEE? $_____________
Requirement 3:
At the end of year 1,in the above situation,how much would the principal be reduced for (a)LOR's lease receivable?
$__________________ and (b)LEE's lease liability?
$_________________.

Accepted Answer

The answer of LOR leased to LEE a computer that...

Question 19

Explain what is meant by off-balance sheet financing?

Accepted Answer

The answer of Explain what is meant by off-balance sheet...

Question 20

Initial direct costs include lessor costs incurred:

Accepted Answer

A)  before obtaining the commitment of a potential lessee to enter into a lease contract 
B)  after obtaining the commitment of a potential lessee to enter into a lease contract 
C)  before and after obtaining the commitment of a potential lessee to enter into a lease contract 
D)  for the purpose of upgrading an existing lease contract

Exam 7: Financial Assets: Cash and Receivables

Which of the following would be excluded from both the minimum lease payments and net lease liability at inception for the lessee?

Under ASPE,if a leased asset's fair value is less than its carrying value at the date of sale under a sale-and-lease-back transaction,the lessor has experienced an impairment loss.

On January 1,2014,BE Company collected a $15,000 cash,non-refundable,bonus payment on an operating lease.Assuming a 12 percent interest rate and a five-year lease term,the lease bonus amortization journal entry for 2014,if the interest method is used,is:

If the straight-line method is used by the lessee to amortize the non-refundable down payment in an operating lease,a constant dollar amount of the prepayment is allocated as expense to each period covered by the lease.

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

What is the cost basis of an asset acquired by a lease,which is in substance an instalment purchase?

Companies that opt for finance leases usually do so because of the tax advantages finance leases provide.

Choose the correct statement regarding including the terms listed in the lessee's (1) minimum lease payments and (2) lease liability for a capitalized lease:

In a sale-and-leaseback agreement,the lessor is also:

ABC INC.entered into a sales-type lease to lease JKL an asset that cost ABC INC.$120,000.The lease agreement requires five annual year-end rentals of $40,000 each.ABC INC.used a 15 percent interest rate to compute the rentals.The dealer's profit (or loss) that ABC INC.recognized was:

For a finance lease,the amount initially capitalized by the lessee is the sum of the future value of the periodic lease payments,plus the future value of any bargain purchase option.

How is the cash flow statement impacted if the lease is deemed to be an operating lease versus a finance lease?

LMN correctly recorded a 5-year lease on a special machine by making the following entry on the date the lease was signed: The lease was the following:

When the lessee guarantees the residual value at the end of the lease term,for accounting purposes,the:

Explain what is meant by off-balance sheet financing?

Initial direct costs include lessor costs incurred: