Intermediate accounting volume 2 7th edition beechy test bank

Intermediate Accounting Volume 2 7th Edition Beechy Test Bank Visit to download the full and correct content document: https://testbankdeal.com/dow nload/intermediate-accounting-volume-2-7th-edition-beechy-test-bank/

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) On January 1st, 2014, ABC Inc. (the lessor) agrees to lease a piece of specialized piece of

machinery to DEF Inc. (the lessee) for 5 years. ABC Inc. is a financial intermediary specializing in leasing arrangements such as the one described below. Details are as follows: Fair value of machinery at inception of the lease: $100,000.

Lease term: 5 years (no bargain renewal terms).

Executory costs of $10,000 are reimbursed by the lessee.

5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.

Bargain purchase option at end of lease: $5,000. It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.

Economic life of the asset is 10 years, after which the equipment will be worthless.

Straight-line depreciation applies.

ABC's implicit interest rate with respect to this lease is 10%. This is rate is known by DEF Inc. DEF Inc's incremental borrowing rate is 9%.

What would be the amount of finance revenue recorded by ABC Inc. in the first year of the lease (rounded)?

A) $7,601 B) $9,901 C) $10,000 D) $7,700 Answer: A Explanation:

A) B) C) D)

1

1)

2) On January 1st, 2014, ABC Inc. (the lessor) agrees to lease a piece of specialized piece of

machinery to DEF Inc. (the lessee) for 5 years. ABC Inc. is a financial intermediary specializing in leasing arrangements such as the one described below. Details are as follows: Fair value of machinery at inception of the lease: $100,000.

Lease term: 5 years (no bargain renewal terms).

Executory costs of $10,000 are reimbursed by the lessee.

5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.

Bargain purchase option at end of lease: $5,000. It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.

Economic life of the asset is 10 years, after which the equipment will be worthless.

Straight-line depreciation applies.

ABC's implicit interest rate with respect to this lease is 10%. This is rate is known by DEF Inc. DEF Inc's incremental borrowing rate is 9%.

Assuming that this qualifies as a finance lease, what would be the amount of DEF Inc's annual depreciation as per ASPE (rounded)?

A) $9,901 B) $5,000 C) $10,000 D) $10,076 Answer: D Explanation:

A) B) C) D)

2

2)

3) On January 1, 2014, CDE Company leased an asset from LMN which originally cost the

lessor $75,000. The lease agreement was an operating lease and specified that three $10,500 annual rentals were to be paid at the beginning of each year. LMN should make the following entry on January 1, 2014: A) Please see the following table:

Cash Lease receivable

10,500 10,500

B) Please see the following table:

Rent receivable Rent revenue

10,500 10,500

C) Please see the following table:

Cash Unearned rent revenue

10,500 10,500

D) Please see the following table:

Cash Rent revenue Answer: C Explanation:

10,500 10,500

A) B) C) D)

3

3)

4) On December 31, 2015, JKL leased a new machine from MNO. The following

4)

information relates to the lease transaction: * Market value of the machine at inception of lease: $500,000 * 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: A) $489,000 B) $500,000 C) $411,000 D) $511,000 Answer: B Explanation:

A) B) C) D)

5) JMR Company leases an asset from KAR Company. The rate implicit in the lease is 12%

and JMR's incremental borrowing rate is 11%. JMR is aware of the implicit rate.

Assuming that both rates would provide an MLP amount well below the fair value of the leased asset, the rate that JMR should use for discounting the net lease payment is: A) 11% under ASPE and 12% under IFRS. B) 12% under ASPE and 11% under IFRS. C) 12% under both ASPE and IFRS. D) 11% under both ASPE and IFRS. Answer: A Explanation:

A) B) C) D)

4

5)

6) Lease Y contains a bargain purchase option and the lease term is equal to 75 percent of the 6)

estimated economic life of the leased property. Lease Z contains a bargain purchase option 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?

1 2 3 4

Lease Y Finance lease Finance lease Operating lease Operating lease A) Choice 1

Answer: A Explanation:

Lease Z Finance lease Operating lease Operating lease Finance lease

B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

7) RST entered into a direct financing lease with ZAB, which called for seven annual

7)

rentals of $3,500 (interest rate 12 percent) to be paid at the end of each year. The lease also contained a bargain purchase option allowing ZAB to purchase the asset for $2,500 after making the seventh annual rental payment. The cost of the asset must have been: A) $25,631 B) $17,105 C) $27,000 D) $18,473 Answer: B Explanation:

A) B) C) D)

8) 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:

1 2 3 4

Unguaranteed residual Lessee guarantee of residual Third party guarantee of residual Bargain purchase option A) Choice 1

Answer: B Explanation:

(1) No Yes No Yes

B) Choice 2

(2) Yes Yes Yes No

C) Choice 3

A) B) C) D)

5

D) Choice 4

8)

9) On December 10, 2014, LMN purchased a special machine for leasing purposes; it cost

9)

$10,000. On January 1, 2015, the machine was leased to ABC INC. under the following terms (it is a direct financing lease): a. lease term 4 years; interest rate 10 percent; rentals payable at year-end. b. LMN retains the residual value of $1,000 (i.e., the RV when the machine is returned to LMN at the end of year 4). There is no guarantee on the residual value.

On January 1, 2015, when the lease term starts, the following accounting amounts should be used:

1 2 3 4

LMN's net Lease Lease payment $2,939 2,939 3,155 3,155 A) Choice 1

Answer: B Explanation:

ABC's Lease Receivable $9,317 10,000 9,317 10,000

Liability $9,317 9,317 10,000 10,000

B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

10) On January 1, 2014, MU Corporation leased an asset, under an operating lease, to obtain

the use of a special machine for three years. The lease payments were $9,000 per year payable at each year-end; the lessee must pay all operating expenses. At the inception date, MU Corporation should: A) record the asset at the present value of the annual lease payments.

B) record the rent expense of $27,000.

C) make no entry.

D) record the asset at $27,000.

E) record the asset at its fair market value.

Answer: C Explanation:

A) B) C) D) E)

6

10)

11) A lessee wants to lease an asset on a long-term non-cancellable basis, but wants to avoid

11)

capitalizing the lease. The lessee is considering several strategies: 1) use a lessee guarantee of residual value; 2) make it impossible for the lessee, who has a very low borrowing rate, to determine the lessor's implicit rate, which is much higher than the lessee's borrowing rate; 3) include a bargain purchase option in the lease agreement; 4) include title transfer in the lease agreement.

Which of the above strategies will provide the desired result?

A) 1 and 3 B) only 2 C) 2 and 3 D) none Answer: D Explanation:

E) 1 and 4

A) B) C) D) E)

12) Amanda Company leased an office building for six years for an annual rent of $170,000.

12)

The lessor agreed to forgive the first year of the lease (i.e. payments would not begin until the second year). The entry in the second year would include a debit to: A) deferred liability-$28,333 B) deferred liability-$141,667 C) rent expense-some other amount D) rent expense-$170,000 Answer: A Explanation:

A) B) C) D)

13) The amount of finance revenue to be recognized by JKL Inc. during Year 2 would be: A) $2,104,672 Answer: A Explanation:

B) $1,965,419

C) $1,637,124

A) B) C) D)

7

D) $,2,537,864

13)

14) Choose the correct statement regarding the terms listed in the lessor's (1) minimum lease

14)

payments and (2) net lease receivable for a capitalized lease:

1 2 3 4

Include in: (1) (2) Yes Yes No Yes No Yes No No

Unguaranteed residual Lessee guarantee of residual Third party guarantee of residual Bargain purchase option A) Choice 1

Answer: A Explanation:

B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

15) A bargain purchase option in a finance lease affects the:

15)

A) lessee's capitalized cost of the leased asset.

B) incremental target rate of return.

C) guaranteed residual value.

D) dealer's profit in a sales-type lease.

Answer: A Explanation:

A) B) C) D)

16) The straight-line method is frequently used to amortize non-refundable rental payments

made in advance on leased assets because: A) It is less complex, therefore, less costly.

B) IFRS requires that it be used in all situations.

C) It is more theoretically sound.

D) The interest method may result in unreliable amounts being recognized as expense.

Answer: A Explanation:

A) B) C) D)

8

16)

17) If the lessor and lessee use different interest rates to account for a finance lease, then:

17)

A) total expenses (or revenues) will be equal for each.

B) total expenses (or revenues) will be different for each.

C) the lessee and lessor cannot use different interest rates.

D) the lessor will use different account titles to record the leasing transaction.

Answer: B Explanation:

A) B) C) D)

18) For a finance lease, an amount equal to the present value at the beginning of the lease

18)

term of minimum lease payments during the lease term, excluding that portion of the payments representing executory costs such as insurance, maintenance, and property taxes to be paid by the lessor, together with any profit thereon, should be recorded by the lessee as a(n): A) asset but not a liability.

B) expense.

C) liability but not an asset.

D) asset and a liability.

Answer: D Explanation:

A) B) C) D)

19) In a sale and leaseback situation:

19)

A) the lessor recognizes all losses on the sale immediately but must defer and amortize

all gains.

B) if the present value of the lease payments is equal to or less than 90% of the fair

value of the property, the lessee recognizes the entire gain or loss on sale immediately.

C) all gains and losses are deferred and amortized by the seller.

D) the lessee immediately recognizes any loss on sale up to the amount of the difference between carrying value and fair value.

Answer: D Explanation:

A) B) C) D)

9

20) Equal monthly rental payments for a particular lease should be charged to rental expense

20)

by the lessee for which of the following?

1 2 3 4

Finance lease No No Yes Yes A) Choice 1

Answer: B Explanation:

Operating lease No Yes No Yes B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

21) XYZ Rental leased a special crane to ABC INC. that originally cost $40,000. The lease

21)

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) $4,000 B) $24,000 C) $3,553 D) $20,000 Answer: C Explanation:

A) B) C) D)

22) If a lessee does not exercise a bargain purchase option prior to its lapse date, the: A) bargain purchase option cannot lapse because this option was included in

computing the annual rental amounts.

B) lessee continues to record depreciation on the lease asset because it was assumed from the beginning that the lessee would retain ownership of the asset.

C) lessee recognizes a gain due to the lapse.

D) lessee recognizes a loss due to the lapse.

Answer: D Explanation:

A) B) C) D)

10

22)

23) On the first day of its fiscal year, Lessor, Inc., leased certain property at an annual rental of 23)

$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?

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

A) B) C) D)

24) CDE leases land and secures the landowner's permission to erect a warehouse on the

24)

leased site. The lease has 25 years to run from the time CDE completes the warehouse at a cost of $300,000. The warehouse is expected to last 50 years. In connection with the warehouse, CDE's annual depreciation should be: A) $7,500 B) $6,000 C) $12,000 D) The entire $300,000 should be expensed the first year.

Answer: C Explanation:

A) B) C) D)

25) One incentive for entering into sale-and-leaseback arrangements is: A) lessee may be able to reduce finance expense through the refinancing aspects of the sale-leaseback.

B) tax implications are favourable for the lessor.

C) lessee wants to increase return on investment.

D) lessor has an abundance of cash.

E) improvement in cash flow for the lessor.

Answer: A Explanation:

A) B) C) D) E) 11

25)

26) JMR Company leases an asset from KAR Company. The rate implicit in the lease is 12%

and JMR's incremental borrowing rate is 11%. JMR is aware of the implicit rate.

Assuming that both rates would provide an MLP amount well below the fair value of the leased asset, the rate that KAR should use for discounting the net lease payment is: A) 11% under both ASPE and IFRS. B) 12% under both ASPE and IFRS. C) 12% under ASPE and 11% under IFRS. D) 11% under ASPE and 12% under IFRS. Answer: D Explanation:

A) B) C) D)

12

26)

27) On January 1, 2014, ABC INC. leased a machine to MNO. The lease was for a 10-year

27)

period, which approximated the useful life of the machine. ABC INC. purchased the machine for $120,000 and expects to earn a 10 percent return on its investment, based upon an annual rental of $17,754 payable in advance each January 1st. Assuming that the lease was a direct financing lease, what should be the interest entry on ABC INC.'s books on December 31, 2014?

A) Please see the following table: Unearned interest revenue Interest revenue

10,225 10,225

B) Please see the following table:

Cash Interest revenue

5,754 5,754

C) Please see the following table:

Unearned interest revenue Interest revenue

12,000 12,000

D) Please see the following table:

Cash Interest revenue Equipment Answer: A Explanation:

17,754 12,000 5,754

A) B) C) D)

28) Assume now that JKL Inc. adheres to ASPE. The interest rate used by the company to

impute its interest revenue would now be: A) 8.3698% B) 10.4248% Answer: B Explanation:

C) 12%

A) B) C) D)

13

D) 7.9308%

28)

29) Initial direct costs include lessor costs incurred:

29)

A) after obtaining the commitment of a potential lessee to enter into a lease contract B) before and after obtaining the commitment of a potential lessee to enter into a lease

contract C) before obtaining the commitment of a potential lessee to enter into a lease contract D) for the purpose of upgrading an existing lease contract Answer: A Explanation:

A) B) C) D)

30) Assume the following facts relating to a lease:

Leased asset, new at inception of lease term.

Estimated useful life, 14 years.

Lease term, 8 years; asset returns to lessor.

Interest rate implicit in the lease, 10 percent (known by lessee).

Lessee's marginal borrowing rate, 12 percent.

Amount of each lease payment, $2,000.

Lessor's cost of the leased asset, $15,164.

Market value of leased asset at inception of the lease term, $15,164 Lease payments are due at the end of each period.

From the perspective of the lessee, this lease should be classified as a(n): A) operating lease.

B) finance lease.

C) sales-type lease.

D) direct financing lease.

Answer: A Explanation:

A) B) C) D)

14

30)

31) On January 1st, 2014, ABC Inc. (the lessor) agrees to lease a piece of specialized piece of

31)

machinery to DEF Inc. (the lessee) for 5 years. ABC Inc. is a financial intermediary specializing in leasing arrangements such as the one described below. Details are as follows: Fair value of machinery at inception of the lease: $100,000.

Lease term: 5 years (no bargain renewal terms).

Executory costs of $10,000 are reimbursed by the lessee.

5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.

Bargain purchase option at end of lease: $5,000. It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.

Economic life of the asset is 10 years, after which the equipment will be worthless.

Straight-line depreciation applies.

ABC's implicit interest rate with respect to this lease is 10%. This is rate is known by DEF Inc. DEF Inc's incremental borrowing rate is 9%.

Assuming that this qualifies as a finance lease, at what amount would DEF Inc. capitalize the leased machinery at the inception of the lease as per ASPE (rounded)?

A) $100,764 B) $95,907 C) $99,011 D) $100,000 Answer: A Explanation:

A) B) C) D)

32) 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: A) a reduction to net income of $400,000.

B) a reduction to net income of $500,000.

C) a reduction to net income of $590,000.

D) a reduction to net income of $410,000.

Answer: D Explanation:

A) B) C) D)

15

32)

33) A lessor and lessee enter into a lease agreement with the following characteristics:

33)

Inception: 1/1/x0 6 annual lease payments of $10,000 are due each Jan. 1 beginning 1/1/x0 End of lease term: Book value of equipment under lease at inception: Market value of equipment under lease at inception: Remaining useful life of equipment at inception: Expected residual value at end of lease term: Interest rate used by lessor and lessee:

12/31/x5 $35,000 $50,000 9 years $4,000 10%

Assuming the lessee will capitalize this lease, what is the amount of the net lease liability at inception, before the first payment is made?

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

A) B) C) D)

34) With respect to a lessor's indirect costs, under ASPE:

34)

A) These should be expensed for both direct financing and sales-type leases.

B) These should be expensed under direct financing leases and capitalized under

sales-type leases.

C) These should be capitalized under direct financing leases and expensed under sales-type leases.

D) These should be capitalized for both direct financing and sales-type leases.

Answer: A Explanation:

A) B) C) D)

35) A 5-year lease contract is signed on 1/1/x1 calling for $4,000 to be paid by the lessee on

12/31/x1, and $6,000 on 12/31/x2, x3, and x4. Total lease payments over the lease term are therefore $22,000. The lessee expects to use the leased asset evenly throughout the lease term, which ends 12/31/x4. No payment is due in 20x2. The entry recorded by the lessee for this operating lease, on 12/31/x1 includes which of the following?

A) dr. rent expense $4,400 B) dr. rent expense $4,000 C) cr. rent payable $200 D) dr. prepaid rent $400 Answer: B Explanation:

A) B) C) D)

16

35)

36) ABC Inc. leased a jet from JKL Inc., a company that leases jet aircraft, on January 1st,

36)

Year 1. Terms of the lease are as follows: 6 annual payments of $8,000,000 to be made every January 1st, starting on January 1st, Year 1.

ABC's incremental borrowing rate is 12%. ABC Inc. has not been made aware of JKL's borrowing rate.

Both companies follow IFRS. The jet has a fair value of $38,000,000 at the start of the lease. JKL estimates that the jet will be worthless at the end of the lease term.

There are no executory costs, however JKL, will incur $2 million in direct costs at the start of the lease.

ABC Inc. depreciates all assets on a straight line basis.

Both companies have determined that their respective leases qualify as finance leases.

As a result of the information provided above, ABC would show total expenses of which of these following amounts for Year 2?

A) $9,084,963 B) $9,582,522 C) $10,046,510 D) $9,055,557 Answer: B Explanation:

A) B) C) D)

37) When a lessee measures the present value of future rentals to be capitalized under a

finance lease, identifiable payments expected to be paid by the lessee to cover taxes, insurance, and maintenance should be: A) included in the present value of the future rentals to be capitalized.

B) capitalized, but at a different discount rate and reported in a different account than the present value of the future rental payments.

C) excluded from the present value of the future rentals to be capitalized.

D) capitalized, but at a different discount rate and for a relevant period that usually is different than for the future rental payments.

Answer: C Explanation:

A) B) C) D)

17

37)

38) The inception of a lease is 1/1/x1. A third party guarantees the residual value of the asset

38)

under lease, estimated to be $12,000 at 1/1/x6, the end of the lease term. Annual lease payments are $10,000 due each December 31 beginning 12/31/x1. The last payment is due 12/31/x5. Both the lessor and lessee use 10% as the interest rate. The remaining useful life of the asset was 6 years at inception. What is the net asset balance for the lessor and net liability balance for the lessee, at inception (rounded to the nearest dollar)?

Net asset (lessor) $45,359 $37,908 $45,359 $37,908 $47,119

1 2 3 4 5

A) Choice 1 Answer: C Explanation:

B) Choice 2

Net liability (lessee) $45,359 $47,908 $37,908 $45,359 $38,339 C) Choice 3

D) Choice 4

E) Choice 5

A) B) C) D) E)

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

39)

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.

Answer: D Explanation:

A) B) C) D)

40) An asset with a market value of $100,000 is leased on 1/1/x0. Five annual lease

payments are due each January 1 beginning 1/1/x0. The lessee guarantees the $40,000 residual value as of 12/31/x4, the last day of the lease term. The lessor's implicit interest rate is 8%. What is the annual lease payment?

A) $18,227 B) $23,191 C) $16,877 D) $25,046 Answer: C Explanation:

A) B) C) D)

18

40)

41) A lessee is attempting to circumvent the accounting rules, which require lease

41)

capitalization. Which of the following is most likely to lead to classification of a lease as an operating lease for the lessee?

A) increase the term of the lease. decrease annual executory costs B) attempt to reduce the lessee's borrowing rate C) contract provides for a third-party guarantee of residual value D) contract provides that lessee pays executory costs Answer: C Explanation:

A) B) C) D)

42) While only certain leases are currently accounted for as a sale or purchase, there is

42)

theoretical justification for considering all leases to be sales or purchases. The principle reason that supports this idea is that: 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.

Answer: D Explanation:

A) B) C) D)

43) The term usually used to describe the situation where a lessee has an option to purchase

the leased property at a price that is sufficiently lower than its fair market value so that the exercise of the option appears reasonably assured is: A) bargain renewal option.

B) assured purchase option.

C) bargain purchase option.

D) bargain buy-out option.

Answer: C Explanation:

A) B) C) D)

19

43)

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

44)

purchase?

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 sum of the future minimum lease payments under the lease C) 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 D) 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 Answer: C Explanation:

A) B) C) D)

45) ABC INC. entered into a sales-type lease to lease JKL an asset that cost ABC INC.

45)

$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: A) $14,086 gain.

B) $18,000 gain.

C) $14,086 loss.

D) $80,000 gain.

Answer: A Explanation:

A) B) C) D)

46) What are the three types of period costs that a lessee experiences with finance leases?

A) Executory costs, finance expense, and lease expense.

B) Depreciation expense, executory costs, and lease expense.

C) Finance expense, depreciation expense, and executory costs.

D) Lease expense, finance expense, and depreciation expense.

Answer: C Explanation:

A) B) C) D)

20

46)

47) In a sale and leaseback situation

47)

A) the lessee immediately recognizes any loss on sale up to the amount of the

difference between carrying value and fair value B) the lessor recognizes all losses on the sale immediately but must defer and amortize

all gains C) if the present value of the lease payments is equal to or less than 90% of the fair value of the property, the lessee recognizes the entire gain or loss on sale immediately D) all gains and losses are deferred and amortized by the seller Answer: A Explanation:

A) B) C) D)

48) RST entered into a direct financing lease agreement, which required rentals of $9,600,

48)

each year-end. The lease term was for ten years and a 14 percent rate of return is expected by RST. The cost of the machine for RST was (rounded to the nearest dollar): A) $82,560 B) $96,000 C) $109,440 D) $50,075 Answer: D Explanation:

A) B) C) D)

49) The estimated residual value of a depreciable leased asset at the end of the lease term is: A) an important factor in how the lessor and lessee must account for the lease.

B) added to the bargain purchase option at the expiration of the lease.

C) used by the lessor to compute the annual amount of depreciation expense.

D) always guaranteed by either the lessor or the lessee.

Answer: A Explanation:

A) B) C) D)

21

49)

50) If the title to a leased asset does not transfer to the lessee at the end of the lease term, but

50)

the lessee guarantees the residual, what is the period and residual value used by the lessor to depreciate the leased asset?

1 2 3 4

Period Lease term Lease term Remaining life at inception Remaining life at inception A) Choice 1

Answer: B Explanation:

Residual value 0 Lessee guarantee Lessee guarantee 0

B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

51) XYZ leased a tract of land for a 20-year term. The lease agreement did not contain a

bargain purchase option, and consequently, the land will revert back to the lessor at the end of the lease term. At the inception of the lease, XYZ initiated construction on a small building on the land. The building was completed at the end of the third year of the lease, at a cost of $60,000. The building was a permanent structure on the land. Its estimated life was 20 years and was expected to have no residual value. XYZ should record annual depreciation (straight-line) on the building of: A) $3,000 B) $6,000 C) $3,529 D) $2,400 Answer: C Explanation:

A) B) C) D)

22

51)

52) ABC INC. leased a new machine from QRS on July 1, 2014, under a lease with the

52)

following pertinent information: Lease term 10 years Annual rental payable at the beginning of each lease year $30,000 Useful life of the machine 12 years Implicit interest rate 14 percent Present value of an annuity of $1 in advance for 10 periods 5.95 at 14 percent Present value of $1 for 10 periods at 14 percent 0.27 ABC INC. has the option to purchase the machine at the end of the lease term, by paying $40,000, which approximates the expected fair value of the machine on the option exercise date. The cost of the machine on QRS's accounting records is $150,000. On July 1, 2014, ABC INC. should record a net capitalized leased asset of: A) $178,500 B) $190,000 C) $150,000 D) $189,300 Answer: A Explanation:

A) B) C) D)

53) RST leased equipment from MNO to be used in its warehouse. The lease term is five

years. RST spent $5,000 for ordinary repairs during the second year of the lease. RST should: A) amortize the $5,000 over the life of the lease on a reasonable basis.

B) capitalize the $5,000 permanently in the lease account.

C) write off $5,000 at the end of the lease term.

D) expense the $5,000 immediately.

Answer: D Explanation:

A) B) C) D)

23

53)

54) If the title to a leased asset does not transfer to the lessee at the end of the lease term, and

54)

no party guarantees the residual, what is the period and residual value used by the lessor to depreciate the leased asset?

1 2 3 4

Period Lease term Lease term Remaining life at inception Remaining life at inception A) Choice 1

Answer: A Explanation:

Residual value 0 Residual value at end of term Residual value at end of term 0

B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

55) XYZ agreed to lease an industrial machine that cost $108,000 to RST for six years. The

55)

lease was a direct financing lease and a 12 percent interest rate was used to calculate the annual lease payments, which were payable at the end of each year. The amount of each annual rental was: A) $44,402 B) $20,160 C) $18,000 D) $26,268 Answer: D Explanation:

A) B) C) D)

56) An asset with a market value of $100,000 is leased on 1/1/x0. Five annual lease

payments are due each January 1 beginning 1/1/x0. The unguaranteed residual value on 12/31/x4, the last day of the lease term, is estimated at $40,000. The lessor's implicit interest rate is 8%. What is the annual lease payment?

A) $25,046 B) $16,877 C) $23,191 D) $18,227 Answer: C Explanation:

A) B) C) D)

24

56)

57) If the title to a leased asset transfers to the lessee at the end of the lease term, what is the

57)

period and residual value used by the lessor to depreciate the leased asset?

1 2 3 4

Period Remaining life at inception Original useful life Remaining life at inception Lease term A) Choice 1

Answer: C Explanation:

Residual value Residual value at end of term Residual value at end of life Residual value at end of life Residual value at end of term

B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

58) On December 1, 2014, XYZ leased office space for its own use for 10 years at a monthly

rental of $15,000. On December 31, 2014, XYZ paid the lessor the following amounts: Refundable rent deposit (for possible property damage) First month's rent Rent for last month of year 10 (paid in advance) Installation of new walls and offices Total

$20,000 15,000 15,000 96,000 $146,000

The entire amount of $146,000 was reported as rent expense in 2014 because it is an operating lease. What amount should XYZ have reported as expense for the year ended December 31, 2014?

A) $30,800 B) $15,000 C) $15,800 D) $96,000 Answer: C Explanation:

A) B) C) D)

25

58)

59) For the lessor, under a sales-type lease, the excess of the normal sales price (i.e., current

59)

market) of the leased asset over its cost (or carrying amount) should be recognized as revenue by the lessor: A) in equal amounts during the lease term.

B) in decreasing amounts during the lease term.

C) in full at the inception date of the lease.

D) in increasing amounts during the lease term.

Answer: C Explanation:

A) B) C) D)

60) Which of the following is not a possible advantage of long-term leases?

60)

A) Ability to always claim CCA and depreciation.

B) Protection from interest rate changes.

C) 100% financing.

D) Flexibility.

Answer: A Explanation:

A) B) C) D)

61) LOR leased a computer to LES which cost the lessor $8,000. The terms of the lease

specify four years, an annual interest rate of 15 percent, and four year-end rental payments. The lease qualifies as a finance lease (direct financing). The lessor will get the computer after the fourth year and its residual value at that time is estimated to be $1,000. The amount of each rental payment is (round to the nearest dollar): A) $2,000 B) $2,501 C) $2,602 D) $2,335 Answer: C Explanation:

A) B) C) D)

26

61)

62) LAS owns a building in North Bay. LAS enters into an agreement with BH as follows:

62)

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. Part of the journal entry to record these transactions would include: A) a credit to building for $900,000.

B) a credit to gain on sale for $900,000.

C) a credit to lease liability for $900,000.

D) a credit to deferred gain for $900,000.

Answer: D Explanation:

A) B) C) D)

63) On January 1st, 2014, ABC Inc. (the lessor) agrees to lease a piece of specialized piece of

machinery to DEF Inc. (the lessee) for 5 years. ABC Inc. is a financial intermediary specializing in leasing arrangements such as the one described below. Details are as follows: Fair value of machinery at inception of the lease: $100,000.

Lease term: 5 years (no bargain renewal terms).

Executory costs of $10,000 are reimbursed by the lessee.

5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.

Bargain purchase option at end of lease: $5,000. It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.

Economic life of the asset is 10 years, after which the equipment will be worthless.

Straight-line depreciation applies.

ABC's implicit interest rate with respect to this lease is 10%. This is rate is known by DEF Inc. DEF Inc's incremental borrowing rate is 9%.

Assuming that this qualifies as a finance lease, what would be the amount of DEF Inc's annual depreciation as per IFRS (rounded)?

A) $10,000 B) $9,901 C) $10,076 D) $5,000 Answer: B Explanation:

A) B) C) D)

27

63)

64) At the inception of a finance lease which calls for payments on an annuity due basis, the

lessee typically debits: A) rent expense.

C) lease receivable.

Answer: B Explanation:

64)

B) leased asset.

D) lease expense.

A) B) C) D)

65) On December 31, 2015, JKL leased a new machine from MNO. The following

65)

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

A) B) C) D)

66) LMN made the following journal entry relating to a finance lease:

Cash Lease receivable Interest revenue

XXXX XXXX XXXX

Therefore, LMN must be the: A) lessee.

C) lessor.

Answer: C Explanation:

B) either the lessee or lessor.

D) third party guarantor.

A) B) C) D)

28

66)

67) LMN leases construction equipment on sales-type leases. LMN wants to record a $7,000

67)

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?

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

A) B) C) D)

68) LMO leased an asset for use in its factory. The lease specified that LMO was to make

68)

annual payments of $2,818 payable at the end of each year. The lessor classified the lease as a direct financing lease because LMO was allowed to lease the asset at cost of $14,000 (i.e., the present value of the lease payments). The lessor received a 12 percent rate of return on the lease. The estimated residual value at the end of the lease term is zero. If the lease was classified as a finance lease by LMO, how much annual depreciation (using SL) should LMO record?

A) $1,400 B) $1,750 C) $2,818 D) $1,310 Answer: B Explanation:

A) B) C) D)

69) Which of the following are the required operating lease note disclosure requirements for

the lessee?

1. Minimum lease payments 2. Contingent Rents 3. Scheduled lease payments for the next year 4. Scheduled lease payments in total for the next remaining years 5. Scheduled lease payments in total for all years.

A) 1, 2 & 3.

B) 1, 2, 3, 4, & 5.

C) 1& 2.

D) 1, 2, 3 & 4.

E) 1, 2, & 5.

Answer: B Explanation:

A) B) C) D) E)

29

69)

70) The amount of each rental payment on a sales type lease is based on the: A) cost of the asset plus interest.

B) cost of the asset, profit, and interest.

C) cost of the leased asset.

D) cost of the asset plus profit.

Answer: D Explanation:

70)

A) B) C) D)

71) A lease agreement includes the following provisions:

71)

Inception: 1/1/x0 Annual lease payments of $6,000 are due 12/31/x0, x1, x2 Annual lease payments of $4,000 are due 12/31/x3, x4, x5 There are 6 lease payments in all Lessor's implicit rate of return: 12% This is a finance lease to the lessor How much interest revenue is recognized in 20x0 by the lessor (assume a calendar year fiscal year)?

A) $2,118 B) $3,419 C) $2,550 D) $3,600 Answer: C Explanation:

A) B) C) D)

72) Under a finance lease that includes a bargain purchase option (BPO), how is depreciation

on the asset under lease recognized by:

1 2 3 4

Lessor Not recognized Depreciate over remaining life Not recognized Depreciate over remaining life A) Choice 1

Answer: C Explanation:

Lessee Depreciate over lease term Depreciate over remaining life Depreciate over remaining life Not recognized

B) Choice 2

C) Choice 3

A) B) C) D)

30

D) Choice 4

72)

73) When the lessee guarantees the residual value at the end of the lease term, for accounting

73)

purposes, the: A) annual rentals will always be less than they would have been if the residual value was not guaranteed.

B) annual rentals will always be more than they would have been if the residual value was not guaranteed.

C) guaranteed residual value does not affect the annual rentals because it is a cash flow at the end of the lease term.

D) annual rentals will be the same as they would have been if the residual value was not guaranteed.

Answer: D Explanation:

A) B) C) D)

74) RST entered into a sales-type lease with EFG to rent special equipment for six years. The

equipment cost $40,000 and RST will earn a $4,000 dealer's profit and 12 percent interest revenue. Therefore, RST will receive year-end lease payments of: A) $10,702 B) $8,213 C) $7,333 D) $12,090 Answer: D Explanation:

A) B) C) D)

31

74)

75) On January 1st, 2014, ABC Inc. (the lessor) agrees to lease a piece of specialized piece of

machinery to DEF Inc. (the lessee) for 5 years. ABC Inc. is a financial intermediary specializing in leasing arrangements such as the one described below. Details are as follows: Fair value of machinery at inception of the lease: $100,000.

Lease term: 5 years (no bargain renewal terms).

Executory costs of $10,000 are reimbursed by the lessee.

5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.

Bargain purchase option at end of lease: $5,000. It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.

Economic life of the asset is 10 years, after which the equipment will be worthless.

Straight-line depreciation applies.

ABC's implicit interest rate with respect to this lease is 10%. This is rate is known by DEF Inc. DEF Inc's incremental borrowing rate is 9%.

What would be the amount of finance revenue that ABC Inc. would recognize throughout the lease?

A) $20,000 B) $23,000 C) $5,000 D) $15,000 Answer: A Explanation:

A) B) C) D)

32

75)

76) On January 1, 2014, LOR leased a machine (original cost $60,000) to LES for a 5-year

76)

period at an implicit interest rate of 15 percent. The lease qualified as a direct financing lease and the annual lease payments ($17,306) are made each December 31. LOR retained the $4,000 estimated unguaranteed residual value (i.e., the machine reverts to LOR at the end of the lease term). Therefore, at inception date (January 1, 2014), LOR's net receivable and LES's liability would be (round to the nearest dollar):

1 2 3 4

LOR Receivable $60,000 $58,011 $60,000 $58,011 A) Choice 1

Answer: C Explanation:

LES Liability $60,000 $58,011 $58,011 $60,000

B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D)

77) WXZ entered into a direct financing lease with TUV for the use of an asset which cost

77)

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

A) B) C) D)

78) What amount of sales is recognized by the lessor in a sales type lease when the residual

value is unguaranteed?

A) Market value of the asset leased.

B) Cost of asset leased less present value of unguaranteed residual value.

C) Cost of asset leased.

D) Market value of asset leased less present value of unguaranteed residual value.

Answer: D Explanation:

A) B) C) D)

33

78)

79) On January 1st, 2014, ABC Inc. (the lessor) agrees to lease a piece of specialized piece of

79)

machinery to DEF Inc. (the lessee) for 5 years. ABC Inc. is a financial intermediary specializing in leasing arrangements such as the one described below. Details are as follows: Fair value of machinery at inception of the lease: $100,000.

Lease term: 5 years (no bargain renewal terms).

Executory costs of $10,000 are reimbursed by the lessee.

5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.

Bargain purchase option at end of lease: $5,000. It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.

Economic life of the asset is 10 years, after which the equipment will be worthless.

Straight-line depreciation applies.

ABC's implicit interest rate with respect to this lease is 10%. This is rate is known by DEF Inc. DEF Inc's incremental borrowing rate is 9%.

Assuming that this qualifies as a finance lease, at what amount would DEF Inc. capitalize the leased machinery at the inception of the lease as per IFRS (rounded)?

A) $95,907 B) $99,012 C) $100,000 D) $100,763 Answer: B Explanation:

A) B) C) D)

80) The basic accounting issue for lessors is:

80)

A) revenue recognition during the lease term.

B) expense recognition during the lease term.

C) determination of the cost of the leased asset.

D) computing depreciation on the leased asset.

Answer: A Explanation:

A) B) C) D)

81) The amount of each rental payment on a sales type lease includes: A) a return of cost, and interest.

B) interest and profit.

C) a return of cost, interest, and profit.

D) a return of cost.

Answer: C Explanation:

A) B) C) D)

34

81)

82) Under a sales-type lease, the difference between the cost of the leased asset and the lease

82)

receivable is accounted for by the lessor and lessee as follows:

1 2 3 4 5

Lessor Gross margin Interest revenue Gross margin Interest revenue Gross margin A) Choice 1

Answer: E Explanation:

Lessee Not recognized Not recognized Interest expense Included in capitalization of the leased asset Included in capitalization of the leased asset B) Choice 2

C) Choice 3

D) Choice 4

A) B) C) D) E)

83) All of the following are methods of avoiding capitalization except: A) use of a third party.

B) shorten the lease term.

C) use of contingent rent.

D) legal agreement.

Answer: D Explanation:

E) Choice 5

A) B) C) D)

35

83)

84) On January 1, 2014, WXY signed an operating lease agreement, which required $5,800

84)

annual rentals to be paid at the end of each year. The accounting period ends December 31. At the end of 2014, WXY (lessee) should make the following entry: A) Please see the following table: Rent paid in advance 5,800 Cash

5,800

B) Please see the following table:

Leased asset Cash

5,800 5,800

C) Please see the following table:

Rent expense Lease liability

5,800 5,800

D) Please see the following table:

Rent expense Cash Answer: D Explanation:

5,800 5,800

A) B) C) D)

85) The appropriate valuation of an operating lease on the balance sheet of a lessee is: A) the absolute sum of the lease payments.

B) zero unless the lessee made a prepayment of rent.

C) the present value of the sum of the lease payments discounted at an appropriate rate.

D) the market value of the asset at the date of the inception of the lease.

Answer: B Explanation:

A) B) C) D)

36

85)

86) In a sale and leaseback arrangement, the lessee is also: A) a third party guarantor

B) the buyer

C) the new owner of the property

D) the seller

Answer: D Explanation:

86)

A) B) C) D)

87) Which of the following statements best describes the finance lease guidelines under

87)

ASPE from the lessee's point of view?

A) The present value of the minimum lease payments must be equal to 90% or more of the asset's fair value.

B) The lease term must be at least 75% of the asset's life.

C) The criteria for finance leases is met if either the lease term is at least 75% of the asset's life or the present value of the minimum lease payment is equal to 90% or more of the asset's fair value.

D) The criteria for finance leases are met if the lease term is at least 75% of the asset's life AND the present value of the minimum lease payment is equal to 90% or more of the asset's fair value.

Answer: B Explanation:

A) B) C) D)

88) If the lessor records unearned rent at the inception of a lease, then the lease must: A) be a direct financing lease.

B) be an operating lease.

C) contain a bargain purchase option.

D) be an annuity due.

Answer: B Explanation:

A) B) C) D)

37

88)

89) A lease with a three-year term calls for a $5,000 payment at the end of each of those

years. The three payments are the only ones required in the lease. The residual value at the end of the lease term is not guaranteed. The asset reverts to the lessor at the end of the term. The lessee has no way of knowing the unguaranteed residual value at the end of the lease term, or the one at the end of the asset's useful life, or the total useful life of the asset at inception. However, the lessee does know the lessor's implicit rate (10%), and the asset's fair market value at inception ($14,000). The lessee's borrowing rate on similar debt is 8%. Therefore: A) lessee has a finance lease as the lease term is at least 75% of the asset's remaining life at inception.

B) lessee has an operating lease as none of the four criteria are fulfilled.

C) lessee has a finance lease as the present value of lessee minimum lease payments exceeds 90% of the asset's fair market value at inception.

D) lessee has an operating lease as the present value of lessee minimum lease payments is less than 90% of the asset's fair market value at inception E) the 90% criterion does not apply in this case Answer: C Explanation:

A) B) C) D) E)

38

89)

90) On January 1, 2014, BE Company collected a $15,000 cash, non-refundable, bonus

90)

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: A) Please see the following table:

Unearned rent revenue Rent revenue

3,000 3,000

B) Please see the following table:

Cash Rent revenue

15,000 15,000

C) Please see the following table:

Lease receivable Rent revenue

3,000 3,000

D) Please see the following table:

Unearned rent revenue Rent revenue Answer: D Explanation:

2,361 2,361

A) B) C) D)

91) Lessee ABC INC. leased from Lessor QRS a machine that cost $35,000, which was

properly classified as a finance lease by both parties. Assume the lessor used a 12 percent implicit interest rate and that the lessee was informed of that rate. The lease did not include a bargain purchase option and the estimated residual value at termination of the lease was zero. Equal semi-annual lease payments are to be made at the start of each such period, including one on the date the lease was signed. The amount of each semi-annual payment, assuming a five-year lease term, would be: A) $9,709 B) $2,074 C) $2,916 D) $4,755 E) $4,486 Answer: E Explanation:

A) B) C) D) E)

39

91)

92) LAS owns a building in North Bay. LAS enters into an agreement with BH as follows:

92)

LAS sells the building to BH on 1/1/2014 for $1,900,000 (the building's fair value on that date was $1,800,000) and immediately leases it back for $500,000 per year for 10 years. The remaining life of the building is estimated at 20 years. The historical cost of the building was $9,000,000 and accumulated amortization amounted to $7,000,000.

Assuming that ASPE applies, and that the lease qualifies as a finance lease, the net effect of this transaction on the statement of comprehensive income in the year of sale would be: A) a reduction to net income of $490,000.

B) a reduction to net income of $510,000.

C) a reduction to net income of $495,000.

D) a reduction to net income of $505,000.

Answer: D Explanation:

A) B) C) D)

93) In a sale and leaseback arrangement, the lessee is also: A) the seller.

B) a third party guarantor.

C) the new owner of the property.

D) the buyer.

Answer: A Explanation:

A) B) C) D)

94) If the residual value of a leased asset turns out to be more than the amount guaranteed by

the lessee, the: A) lessor must pay the lessee the amount of the excess.

B) lessee may reduce depreciation expense for the prior year, through a prior period adjustment, to take into account the excess.

C) lessor is under no obligation to compensate the lessee for the excess.

D) lessee may reduce the annual rentals for the excess.

Answer: C Explanation:

93)

A) B) C) D)

40

94)

95) CDE leased equipment from HIJ on December 31, 2014, for a 10-year period (also the

95)

useful life of the asset). Equal annual payments under the lease are $50,000 and are due on December 31 of each year. The first payment was made on December 31, 2014, and the second payment was made on the next due date. The present value at December 31, 2014, of the minimum lease payments over the lease term discounted at 10 percent (the implicit rate computed by HIJ and known by CDE) was $338,000. CDE's incremental borrowing rate was 12 percent at December 31, 2014. The lease is appropriately accounted for as a finance lease by CDE. What should be the balance in CDE's liability under finance lease account at December 31, 2015?

A) $266,800 B) $272,560 C) $400,000 D) $303,980 Answer: A Explanation:

A) B) C) D)

96) 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?

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

A) B) C) D)

41

96)

97) A company became a lessee by leasing equipment on January 1, 2014 from a lessor. The

97)

lease has the following characteristics: Original useful life of asset Both lessor and lessee use 10% for lease capitalization Market value of equipment at lease inception Book value of equipment at lease inception Remaining useful life of equipment at inception A third party guarantees the entire residual value of

14 years $200,000 $150,000 10 years $31,887

Six end-of-year lease payments are due beginning December 31, 2014 in the amount of $41,788 The lease term ends December 31, 2019 Assume this is a finance lease for both parties. What is the present value of minimum lease payments for the lessee?

A) $180,000 B) $178,233 C) $181,998 D) $194,566 E) $200,000 Answer: C Explanation:

A) B) C) D) E)

98) When the lessee guarantees only a portion of the estimated residual value, the: A) lessor's and lessee's accounting entries will be symmetrical.

B) guaranteed portion is disregarded when computing the annual rentals.

C) lessee only takes into account the guaranteed portion when computing depreciation

expense.

D) lessee will never have to compensate the lessor for the excess of the guaranteed amount over the actual residual value.

Answer: C Explanation:

A) B) C) D)

42

98)

99) Amanda Company leased an office building for six years for an annual rent of $170,000.

99)

The lessor agreed to forgive the first year of the lease (i.e. payments would not begin until the second year). The entry in the second year would include a debit to: A) rent expense-some other amount.

B) rent expense-$28,333.

C) rent expense-$170,000.

D) rent expense-$141,667.

Answer: D Explanation:

A) B) C) D)

100) A lessee capitalized a lease with a 1/1/x1 inception and which required annual lease

100)

payments of $5,000 to be paid each December 31 beginning 12/31/x1. The lessee is to pay an additional $200 each December 31 for maintenance and insurance for the year ending on that date. The last lease payment is due 12/31/x6, on which date the title to the asset transfers to the lessee. The asset is expected to be used by the lessee until 12/31/x9 at which time the asset will have no residual value. What is the total expense related to the lease recognized by the lessee in 20x4? Both lessor and lessee use 10%.

A) $4,797 B) $6,008 C) $4,598 D) $2,378 E) $7,620 Answer: A Explanation:

A) B) C) D) E)

101) A lessee that enters into a finance lease must disclose which of the following?

1) Any significant finance lease arrangements.

2) Any contingent rent recognized as expense during the period.

3) The net carrying value of each class of leased asset at the reporting date.

4) Total future minimum lease payments.

5) A reconciliation between total minimum future lease payments and their present value.

A) 1, 2, 3, 4 & 5.

B) 1, 2 & 3.

C) 1, 2 & 4.

D) 1, 2, 3 & 4.

Answer: A Explanation:

A) B) C) D)

43

101)

102) When the lessee guarantees the residual value at the end of the lease term, the:

102)

A) lessor will use this amount in computing periodic depreciation expense.

B) lessee may have to pay the lessor additional cash if the actual residual value is not

equal to the estimated residual value.

C) lessee will have to pay the lessor additional cash because the guaranteed residual value was included in computing the annual rental amounts.

D) lessor will receive an additional cash flow at the end of the lease term.

Answer: B Explanation:

A) B) C) D)

103) What amount of sales is recognized by the lessor in a sales type lease when the residual

103)

value is guaranteed?

A) Market value of the asset leased.

B) Cost of asset leased less present value of guaranteed residual value.

C) Cost of asset leased.

D) Market value of asset leased less present value of guaranteed residual value.

Answer: A Explanation:

A) B) C) D)

104) The lessor recognizes a profit at the inception of the lease when the lease is classified as

104)

a(n): A) sales-type lease.

B) direct financing lease.

C) non-finance lease.

D) operating lease.

Answer: A Explanation:

A) B) C) D)

105) Initial direct costs are:

105)

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.

Answer: B Explanation:

A) B) C) D)

44