ACCT 302 Read & Interact Spiceland, Nelson, & Thomas Chapter 15 solutions complete answers

ACCT 302 Read & Interact Spiceland, Nelson, & Thomas Chapter 15 solutions complete answers 

 

A lease is a contractual agreement by which a(n)        provides a(n)        the right to use an asset for a specified period of time.

 

Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply)

 

On January 1, Smith Co leased equipment from Bentley Corp. The lease agreement includes four annual payments beginning at the inception of the lease. The estimated useful life of the equipment is 7 years. The lease does not contain a purchase option. The present value of the minimum lease payments is $400,000. The fair value of the asset is $500,000. What type of lease is this for Smith Co?

 

The accounting in which of the following parallels that of an installment purchase?

 

In a typical finance lease, the first lease payment at the beginning of the lease consists of

 

A contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time is called a(n)       . (Enter one word per blank)

 

The right-of-use asset is amortized straight-line, unless the lessee's        of using the asset is different.

 

Lease payments are often        than installment payments.

 

Norma Manufacturing Company leases an asset to Maren Inc in a sales-type lease. The present value of the lease payments is $200,000 and the cost of the leased asset is $160,000. At the beginning of the four-year lease term, Norma should recognize a profit of:

 

A lease in which the rights and responsibilities of ownership are retained by the lessor is called a(n)        lease.

 

An operating lease

 

The accounting for finance leases is similar to the purchase of an asset using an        note.

 

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over three years of the equipment's five-year estimated useful life. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The present value of the lease payments is $357,710. The annual lease payment is $100,000; the first payment is due on January 1, 20X1. Franz should recognize the first lease payment by (Select all that apply)

 

After the first lease payment, each lease payment in a finance lease consists of an amount representing

 

In an operating lease, interest expense plus amortization expense is equal to

 

The        should recognize amortization of the right-of-use asset.

 

The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.

 

Munchin Manufacturing Company leases an asset to Peter Inc in a sales-type lease. The present value of the lease payments is $400,000 and the cost of the asset is $330,000. At the beginning of the five-year lease term, Munchin should recognize a profit of:

 

The short-cut method of accounting for leases

 

If a lease does not meet any of the criteria to be classified as a finance or sales-type lease, it is classified as a(n)        lease.

 

The lease term includes

 

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over three years of the equipment's five-year estimated useful life. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The present value of the lease payments is $357,710. The annual lease payment is $100,000; the first payment is due on January 1, 20X1. Tucker should recognize the first lease payment by (Select all that apply)

 

How is lease expense recorded by the lessee in an operating lease?

 

Agatha Corp. leases store space from Christie Company. Agatha agrees to pay $10,000 per month. In addition, if Agatha exceeds specified sales targets, it will pay additional monthly rent based on a percentage of those excess sales. The additional rent payments

 

The effective interest rate of return the lease payments provide the lessor is referred to as the

 

If a lease is modified and is reclassified from an operating to a sales-type lease, the lessor will record interest revenue at the ____________ rate, instead of the ___________ rate.

 

The short-cut method may be applied only if the maximum possible lease term is

 

The lease term is typically considered to be

 

Fit Company leases building space from Lease Corp. Fit Company agrees to pay Lease Corp an additional amount if Lease Corp attracts a higher amount of traffic through the doors resulting in more profit for Fit Company. How are these variable lease payments treated? (Select all that apply.)

 

Residual value is an estimate of

 

Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by three years, and to change the amount of lease payments. The additional three years were not originally an option. How should Lease Corp address this lease modification? (Select all that apply)

 

The        residual value is a commitment by the lessee that the lessor will recover a specified residual value at the end of the lease term. (Enter one word per blank)

 

A _____ is a lease provision giving the lessee the option to buy the leased property at the end of the lease term at a specified exercise price.

 

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over three years of the equipment's five-year estimated useful life. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The present value of the lease payments is $357,710. The annual lease payment is $100,000; the first payment is due on January 1, 20X1. Tucker should recognize the second lease payment by debiting (round to the nearest whole dollar and select all that apply)

 

When a portion of a lease payment represents the transfer of a good or service to the lessee, it is considered a

 

The estimated commercial value of leased property at the end of the lease term is known as

 

In which section of the statement of cash flows should a lessee report payments on an operating lease?

 

The ______ is a commitment by the lessee that the lessor will recover a specified residual value when the asset is returned to the lessor.

 

In a finance lease, the lessee records the interest portion of payments as a cash outflow from _____ activities, and the principal portion as a cash outflow from _____ activities on the Statement of Cash Flows.

 

For a sales-type lease, the lessor should report cash received on the lease as a(n) ______ activity.

 

A purchase option (Select all that apply)

 

Which of the following are required disclosures related to leases?

 

When is a nonlease component of a lease agreement recorded separately from the lease payments?

 

Who is the initial owner of the asset in a sale-leaseback transaction?

 

In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?

 

In a finance lease, the lessee reports the interest portion of the payment as a cash outflow from        activities, and it reports the portion representing principal repayment as a cash outflow from        activities.

 

Which of the following is true regarding how a lessor reports cash flows from a sales-type lease?

 

The _____ must disclose its net investment in the lease.

 

Which of the following occur in a sale-leaseback transaction?

 

 

3.
An additional cash payment is _____ when a bargain purchase option is included in the lease agreement.
 
 
4.
The _____ adds the present value of the bargain purchase option to the present value of periodic rental payments when computing the amount to be recorded as a right-of-use asset and a lease liability.
 
 
6.
Amortization of the right-of-use asset for an operating lease
 
 
7.
The amortization table for an operating lease allows the lessee to allocate each lease payment to __________ and ________.
 
 
8.
At the inception of a finance lease for computer equipment, the lessee should
 
 
9.
A bargain purchase option is a provision in a lease contract that
 
 
10.
Both the lessee and lessor use the same amortization schedule for a finance/sales-type lease. The lessee records interest __________ and the lessor records interest ______________.
 
 
11.
Cloud Corp. sold its equipment and immediately leased it back. The leaseback portion of the transaction was classified as an operating lease. The original cost of the equipment was $300,000. At the time of sale, the equipment had a carrying value of $200,000. The sale price was $250,000. Cloud should
 
 
12.
A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)
 
 
14.
Corr Inc. leases equipment from LM Leasing Corp. The lease requires rental payments of $20,000 per year for 5 years. Title of the property transfers at the end of the lease term. The equipment has a useful life of 10 years. How should the lease be classified by Corr?
 
 
15.
The cost of a leasehold improvement is depreciated or amortized over its _________ __________ to the lessee
 
 
17.
Debit lease receivable

Debit cost of goods sold

Credit sales revenue

credit inventory
 
 
18.
Depending on the nature of the leasing arrangement, a lease is accounted for
 
 
22.
First Lease Corp. leases equipment to Taylor. The interest rate implicit in the loan is 8% and is known to both parties. Taylor's incremental borrowing rate is 10%. Market rate on similar leases is averaging 9%. What interest rate should Taylor use to compute the present value of lease payments?
 
 
23.
A fixed payment for hazard insurance or property taxes is considered to be
 
 
24.
For an operating lease, the lessee will report
 
 
25.
From an accounting standpoint, legal ownership of a leased asset is _____ to the accounting method used.
 
 
26.
The gain on a sale-leaseback classified as a(n) _____ lease is recognized at the time of the sale.
 
 
27.
The gain on a sale-leaseback classified as an operating lease is
 
 
28.
Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should credit:
 
 
29.
Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should debit:
 
 
30.
How does a residual value in a finance/sales-type lease affect the lessee?
 
 
31.
How does a residual value in a finance/sales-type lease affect the lessor?
 
 
32.
How does the bargain purchase option affect the calculation of the amount to be recovered through periodic rental payments for the lessor?
 
 
 
 
 
 
 
 
 
 
 

33.
How does the bargain purchase option affect the calculation of the present value of the lease payments for the lessee?
 
 
34.
How is a fixed payment for hazard insurance or property taxes treated in a lease agreement?
 
 
35.
How is amortization expense computed on the right-of-use asset by the lessee in an operating lease?
 
 
36.
If a bargain purchase option is expected to be exercised, the lease term ends
 
 
37.
If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over
 
 
38.
If a leased asset is of a very specialized nature and has no alternative use to the lessor at the end of the lease term, (Select all that apply.)
 
 
40.
If the lease payments have a total value that represents "substantially all" of the asset's fair value, it is logical to identify the contract as ____________.
 
 
41.
If the lease term includes a bargain purchase option that is reasonably expected to be exercised, when does the lease term end for accounting purposes?
 
 
42.
In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.
 
 
44.
In an operating lease, the _________ records no asset or liability at the inception of the lease and the _______ records both.
 
 
46.
In which of the following ways can a lease be accounted for? (Select all that apply.)
 
 
47.
In which type of lease does the lessee report a single straight-line lease expense amount in its income statement?
 
 
48.
In which type of lease does the lessor record a lease receivable at the inception of the lease?
 
 
49.
In which type of lease does the lessor report a single lease revenue account with a straight-line amount?
 
 
52.
The journal entry to record the lessee's payment on a short-term lease under the shortcut method will include a debit to
 
 
53.
The journal entry to record the lessor's receipt of payment on a short-term lease would include which of the following entries?
 
 
54.
Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the
 
 
55.
Lease Corp leases equipment to Samuel Company in a sales-type lease. The present value of the lease payments is $250,000. The lease includes an unguaranteed residual value with a present value of $50,000. The rate implicit in the contract is 6% and the lease term is five years. Which of the following are included in the journal entry for Lease Corp to record this lease?
 
 
 
 
 
 
 
 
 

56.
Lease Corp leases equipment to Western Company in a sales-type lease. The present value of the lease payments is $450,000. The lease includes an unguaranteed residual value with a present value of $50,000. Which of the following complete the journal entry for Lease Corp to record this lease?
 
 
57.
A leasehold improvement should be depreciated or amortized over
 
 
60.
A lease structured as an installment purchase is called a(n) ___________ lease by the lessee.
 
 
61.
The lessee amortizes the right-of-use asset over the asset's useful life, when (Select all that apply.)
 
 
62.
Lessee

Lessor
 
 
63.
A lessee makes leasehold improvements to leased property that will revert back to the lessor at the end of the lease. During the term of the lease, the leasehold improvements are reported on the
 
 
64.
The lessee records the right-of-use asset as
 
 
65.
The lessee's payment in an operating lease is
 
 
66.
Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease, Ludwig Corporation should record
 
 
67.
Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease, (Select all that apply)
 
 
68.
The most common reasons for a sale-leaseback transaction are to
 
 
69.
The most likely motivation for a sale-leaseback transaction is to generate _____.
 
 
72.
North Company leased equipment from Lease Corp in a finance/sales-type lease. The annual payments equal $105,000. Payments include $5,000 which Lease Corp will use to pay the annual maintenance fee on the equipment. How should Lease Corp record the first payment? (Select all that apply)
 
 
73.
North Company leased equipment from Lease Corp in a finance/sales-type lease. The annual payments equal $105,000. Payments include $5,000 which Lease Corp will use to pay the annual maintenance fee on the equipment. How should North Company record the first payment? (Select all that apply)
 
 
 
 
 
 
 
 
 

74.
Off-balance-sheet financing refers to the practice of
 
 
75.
The ______ of leased property is an estimate of what its commercial value will be at the end of the lease term
 
 
76.
On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Assuming that Marion chooses the short-cut method, at the commencement of the lease before the first lease payment is made, Marion should
 
 
77.
On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Both companies choose the short-cut option. Marion recognizes the first lease payment by debiting
 
 
78.
On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipment's entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000, and the first payment is made at the inception of the lease. Donelson should record which of the following in connection with the second payment?
 
 
79.
On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000, and the first payment is made at the inception of the lease. Mitchell should recognize the second lease payment by
 
 
80.
On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipment's entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000. For the year ended 20X1, Mitchell should allocate the cost of the right-of-use asset by
 
 
81.
On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000. Mitchell should recognize the first lease payment on January 1, 20X1 by
 
 
82.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual lease payment is $100,000; the first payment is due on January 1, 20X1. Franz should recognize receipt of the second lease payment by crediting (Select all that apply)
 
 
83.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual lease payment is $100,000; the first payment is due on January 1, 20X1. Tucker should recognize the second lease payment by debiting (Select all that apply.)
 
 
 
 
 
 
 
 
 

84.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual lease payment is $100,000. Tucker should recognize the first lease payment on January 1, 20X1 by (Select all that apply)
 
 
85.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should credit
 
 
86.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should debit
 
 
87.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000. Tucker should allocate the cost of the right-of-use asset annually by (round to a whole dollar)
 
 
88.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should debit
 
 
 

92.
On January 1, Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment from Electronics Plus at a cost of $500,000. The lease agreement specifies three annual payments of $100,000 beginning at the inception of the lease. The useful life of the asset is estimated to be five years, but Warren will lease the asset for a total of three years. The present value of the three lease payments is $273,554. At the inception of the lease Best Lease Co. should
 
 
93.
On January 1, Warren Corporation leases equipment from Best Lease Co. Best Lease Co. purchased the equipment from Electronics Plus at a cost of $500,000. The lease agreement specifies three annual payments of $100,000 beginning at the inception of the lease. The useful life of the asset is estimated to be five years, but Warren will lease the asset for a total of three years. The present value of the three lease payments is $273,554. At the inception of the lease Warren should
 
 
94.
On January 1, Year 1, Samuel Company leases equipment from Lease Corp. The lease agreement specifies five annual payments of $50,000, with the first payment due at lease signing (January 1, Year 1), and at each January 1 from Year 2 to Year 5. At the end of the lease term, the equipment will be returned to the lessor and is expected to have a residual value of $30,000. The estimated useful life of the equipment is six years. The interest rate in the financing arrangement is 6%. The cost to Lease Corp of manufacturing the equipment is $150,000. The journal entry for the Lessor on January 1, Year 1 will include the following in its entry:
 
 
96.
The periodic lease payment in an operating lease reduces the outstanding lease balance so that at the end of the lease term the outstanding balance is equal to
 
 
97.
Periods covered by renewal options
 
 
98.
The present value of a residual asset in a lease
 
 
99.
The present value of the residual value is ______ in/from the lease receivable, and it is ______ in/from sales and cost of goods sold for the lessor.
 
 
100.
The primary motivation for the new accounting guidance on leases was to
 
 
102.
The rate of interest incurred by the lessee if funds were borrowed to purchase the leased asset is known as the ______ rate.
 
 
103.
A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value.
 
 
104.
A reasonable conclusion is that the "major part" of the leased asset's life is included in the lease, if _____ of the remaining economic life of the asset is covered by the lease term.
 
 
106.
The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments.
 
 
 
 
 
 
 
 
 
 

107.
The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments from the lessee.
 
 
109.
The rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.
 
 
110.
Roots, Inc. needed to improve its cash position. Thus, on December 31, it decided to sell one of its warehouses for its fair value of $250,000, and lease it back from the purchaser. Prior to sale, the warehouse had a carrying value of $220,000 (original cost $260,000). Under the 7 year lease agreement, Roots will make annual payments of $33,799, beginning the date of the lease signing. The annual lease payments provide the lessor with a 6% rate of return. On December 31, the date of the lease signing, Roots should
 
 
111.
Sales revenue for the lessor ________ the expected residual value to be recovered.
 
 
112.
Samuel Company leased equipment from Lease Corp. The cost of the equipment to Lease Corp was $300,000. Lease Corp will require Samuel to make the first payment on the day of the lease signing (January 1 of Year 1), with the next four payments due on January 1 of Years 2 - 5. At the end of Year 5, the equipment is expected to have a residual value of $50,000. The estimated useful life of the equipment is seven years. If the five lease payments are of an equal amount, what payment amount provides Lease Corp with a return of 6%?
 
 
113.
Sarah Company leases a machine with a fair value of $200,000 from Eden Inc. The present value of the future lease payments is $120,000. At the inception of the lease, Sarah should (Select all that apply.)
 
 
114.
Selma leases equipment from ABC Corp. The 4-year lease requires payments of $10,000 per year, beginning at the inception of the lease. The fair value of the equipment at the inception of the lease is $100,000. The equipment has a 6-year life. Selma's incremental borrowing rate is 6%. The lease does not transfer title and does not have a bargain purchase option. How should the lease be classified by Selma?
 
 
117.
Smith Company leased equipment from FirstLease Corp. The cost of the equipment to FirstLease was $500,000. The present value of the expected residual value is $40,000. The lease includes six annual payments beginning on the first day of the lease. If the six lease payments are of an equal amount, what payment amount would provide FirstLease Corp with a return of 10%?
 
 
118.
Smith leases a piece of equipment from Marvin Company. The lease has a bargain purchase option which is expected to be exercised at the end of the lease. The useful life of the equipment is 10 years and the lease term is 8 years. Which number of years should be used to compute amortization?
 
 
119.
The _____ subtracts the present value of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments.
 
 
 
 
 
 
 
 
 

120.
True or false: A lessee and a lessor will use similar amortization schedules for recording interest.
 
 
121.
True or false: The exercise of a bargain purchase option is reasonably certain.
 
 
122.
True or false: The incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments.
 
 
123.
True or false: The incremental borrowing rate is the rate the lessee would expect to pay a bank if funds were borrowed to purchase the asset.
 
 
124.
True or false: The residual value of a leased asset impacts the lessee's calculation of effective interest.
 
 
125.
True or false: When a bargain purchase option exists, a renewal option is considered irrelevant because it is assumed that the purchase option will be exercised.
 
 
126.
True or false: When a bargain purchase option is present, the lessor subtracts the future value of the exercise price from the amount to be recovered to determine the amount to be recovered through rental payments.
 
 
127.
The two basic lease classifications by a lessee are
 
 
128.
The two basic lease classifications by a lessor are
 
 
129.
Under the shortcut method, the lessee recognizes
 
 
130.
When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a
 
 
133.
When recording a finance lease, the amount initially recognized for the right-of-use asset is the
 
 
134.
When the lessor's implicit rate is unknown, which rate should be used to calculate the present value of the lease payments for the lessee?
 
 
135.
Which method should normally be used to amortize the right-of-use asset?
 
 
136.
Which of the following are criteria for classification as a finance lease? (Select all that apply.)
 
 
 

138.
Which of the following are required disclosures for lessees and lessors?
 
 
140.
Which of the following best describes the period over which the right-of-use asset is amortized when ownership transfers at the end of the lease?
 
 
141.
Which of the following is true regarding accounting for an operating lease?
 
 
143.
Which one of the following will determine classification of a lease transaction as a finance lease?
 
 
145.
Who owns the asset in an operating lease?
 
 
 

 

3.
An additional cash payment is _____ when a bargain purchase option is included in the lease agreement.

a.) expected
b.) possible
c.) unlikely
 
 
4.
An advanced payment on an operating lease is allocated to _____ over the lease term by the lessor.

a.) prepaid rent
b.) unearned revenue
c.) rent expense
d.) rent revenue
 
 
5.
An advanced payment on an operating lease should be classified by the lessor as

a.) a contra-asset.
b.) rent expense for the period.
c.) deferred rent revenue.
d.) a lease receivable.
Rationale:
The lessor does not record a lease receivable for an operating lease
 
 
7.
At the inception of a finance lease for computer equipment, the lessee should

a.) debit lease receivable
b.) debit right-of-use asset
c.) debit lease payable
d.) debit computer equipment
e.) credit lease payable
 
 
8.
Corr Inc. leases equipment from LM Leasing Corp. The lease requires rental payments of $20,000 per year for 5 years. Title of the property transfers at the end of the lease term. The equipment has a useful life of 10 years. How should the lease be classified by Corr?

a.) operating lease
b.) finance lease
c.) unable to determine the classification by the information given
 
 
9.
The cost of a leasehold improvement is depreciated or amortized over its ___________ ___________ to the lessee.
 
 
10.
Depending on the nature of the leasing arrangement, a lease is accounted for

a.) as a rental agreement only.
b.) as a purchase/sale only.
c.) as a rental or a purchase/sale
 
 
11.
The desired rate of return for the lessor when determining the lease payments is referred to as the _____ interest rate.

a.) incremental borrowing
b.) implicit
c.) simple
 
 
14.
For an operating lease, the lessee will report

a.) separate interest expense and depreciation expense on the right-of-use asset.
b.) a single lease expense.
c.) separate interest expense and amortization expense on the right-of-use asset.
 
 
16.
From an accounting standpoint, legal ownership of a leased asset is _____ to the accounting method used.

a.) relevant
b.) irrelevant
 
 
17.
The gain on a sale-leaseback classified as a(n) _____ lease is recognized at the time of the sale.

a.) operating
b.) direct financing
c.) finance
d.) sales-type
 
 
18.
**Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should credit:

a.) inventory for $320,000
b.) sales revenue for $320,000
c.) equipment for $200,000
d.) deferred profit on lease $120,0
 
 
 
 
 
 
 
 
 
 

19.
Glueck Inc. leases an asset with a cost of $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Glueck should debit:

a.) lease receivable for $200,000
b.) profit on lease for $120,000
c.) lease receivable for $320,000
d.) equipment for $200,00
 
 
20.
A guaranteed residual value ___________ the calculation of the present value of the lease payments when comparing that amount to the fair value of the asset in determining lease classification.

a.) Is irrelevant to
b.) is included in
c.) is not included in
 
 
21.
A guaranteed residual value ___________ the calculation of the present value of the lease payments when comparing that amount to the fair value of the asset in determining lease classification.

a.) is not included in
b.) Is irrelevant to
c.) is included in
 
 
22.
How does a residual value in a finance/sales-type lease affect the lessee?

a.) The lessee lease payments are lower.
b.) The residual value is added to the lease liability
c.) The residual value is added to the right-of-use asset
d.) The lessee lease payments are higher.
e.) The lessee is unaffected.
 
 
23.
How does a residual value in a finance/sales-type lease affect the lessor?

a.) The lessor includes the residual value in lease receivable computations regardless of guarantee.
b.) The lessor includes the residual value in lease receivable computations only if guaranteed.
c.) The lessor lease receipts are higher.
d.) The lessor is unaffected.
e.) The residual value is added to the lease liability computations
 
 
24.
How does the bargain purchase option affect the calculation of the amount to be recovered through periodic rental payments for the lessor?

a.) Decreases
b.) No effect
c.) Increases
 
 
25.
How does the bargain purchase option affect the calculation of the present value of the lease payments for the lessee?

a.) Decreases
b.) No effect
c.) increases
 
 
27.
How is lease revenue recorded by the lessor in an operating lease?

a.) On a front-load basis
b.) On an accelerated basis
c.) On a straight-line basis
 
 
28.
How is lease revenue recorded by the lessor in an operating lease?

a.) On a straight-line basis
b.) On an accelerated basis
c.) On a front-load basis
 
 
29.
How should the lessee account for an expected cash payment when the value of the leased asset at the end of the lease is expected to be less than the guaranteed residual value?

a.) The lessee should increase the right-of-use asset and lease liability by the amount of the expected cash payment.
b.) The lessee should increase the right-of-use asset and lease liability by the present value of the expected cash payment.
c.) The lessee adjusts the amount of the cash payments paid to the lessor throughout the life of the lease.
d.) The lessee does not have to account for predicted differences between the value of the leased asset and the guaranteed residual value.
 
 
30.
If a lease contains a bargain purchase option, the lessee should amortize the right-of-use asset over

a.) the useful life of the asset or the lease term, whichever is shorter.
b.) the useful life of the asset or the lease term, whichever is longer.
c.) the lease term.
d.) the useful life of the asset
 
 
31.
if a leased asset is of a very specialized nature and has no alternative use to the lessor at the end of the lease term, (Select all that apply.)

a.) it is accounted for as a finance lease.
b.) only the lessee receives the risks and rewards of ownership.
c.) only the lessor receives the risks and rewards of ownership.
d.) it is accounted for as an operating lease
 
 
32.
if a leased asset is specialized and has no alternative use to the lessor, then the lessee accounts for it as a(n) __________ lease.
 
 
33.
if a lease does not meet any of the criteria to be classified as a finance or sales-type lease, it is classified as a(n) _______________ lease.
 
 
 
 
 
 
 
 
 

35.
If a lease modification substantially lengthens the amount of time the lessee has the right to use an asset, it is possible that the lessee might need to switch its lease classification from ___________________ to __________________
 
 
36.
If a lease payment depends on an index or rate, any changes in the lease payments due to changes in that index or rate

a.) is just reported as additional lease expense for the lessee and lease revenue for the lessor.
b.) cause immediate remeasurement of the liability and right-of-use asset.
c.) are used to calculate the right-of-use asset and lease liability only if they are remeasured for another reason.
 
 
37.
If future lease payments are uncertain, they are considered as part of present value calculations only if they

a.) increase over time
b.) are subject to a maximum.
c.) are in-substance fixed payments
 
 
38.
If the lease payments have a total value that represents "substantially all" of the asset's fair value, it is logical to identify the contract as ____________.

a.) non-cancelable.
b.) an operating lease.
c.) a bargain purchase option.
d.) equivalent to a sale.
 
 
41.
In a(n) _____ lease, recording lease expense should reflect straight line rental of the asset during the lease term.

a.) operating
b.) finance
c.) sales-type
 
 
42.
In an operating lease, interest expense plus amortization expense is equal to

a.) the straight-line lease payment.
b.) the straight-line lease amount plus interest.
c.) the straight-line lease amount less interest.
 
 
43.
In an operating lease, the lessee reports lease ____________ and the lessor reports lease ____________ both on a straight-line basis. (Enter only one word per blank.)
 
 
44.
In an operating lease, the lessor

a.) receives less than 25% of the remaining benefits of the asset.
b.) transfers substantially all of the remaining benefits of the asset to the lessee.
c.) rents the asset to the lessee for a period of time.
 
 
45.
*****In an operating lease, who reports the leased asset on their balance sheet?

a.) The lessee
b.) Both the lessor and the lessee
c.) The lessor
 
 
46.
In a short-term lease, periodic rental payments are

a.) recorded as rent expense by the lessee.
b.) capitalized by the lessee.
c.) recorded as rent revenue by the lessor.
d.) capitalized by the lessor.
 
 
47.
The incremental borrowing rate is

a.) the rate the lessee would pay a bank to borrow funds.
b.) the rate the lessor wants to earn when deciding the size of lease payments.
c.) the rate implicit in the lease agreement.
 
 
48.
Initial direct costs include (Select all that apply)

a.) costs necessary to acquire the lease
b.) costs the would not have been incurred if the lease agreement did not exist
c.) costs associated with completing the lease agreement
d.) leasehold improvements that extend the life of the leased asset
e.) legal fees for lease negotiations and drafting documents
 
 
49.
Initial direct costs incurred by the lessee are

a.) expensed at the beginning of the lease.
b.) added to the right-of-use asset.
c.) deferred and expensed over the lease term.
 
 
50.
In its income statement, what two amounts does the lessee combine into a single lease expense amount reported as a straight-line amount each period when accounting for an operating lease?

a.) Interest expense
b.) Amortization expense
c.) Depreciation expense
d.) Executory costs
 
 
51.
In which of the following ways can a lease be accounted for? (Select all that apply.)

a.) As a purchase/sale agreement with debt financing.
b.) As a purchase/sale agreement with equity financing.
c.) As a rental agreement.
d.) As an estate gift.
 
 
 
 
 
 
 
 
 

53.
In which type of lease does the lessee report a single straight-line lease expense amount in its income statement?

a.) Operating
b.) Finance
c.) Operating and finance
 
 
56.
__________ __________ is an estimate of a leased asset's commercial value at the end of the lease term. (Enter only one word per blank.)
 
 
57.
Lease accounting guidance suggests that a "major part" of the leased asset's life is 75% or more of the

a.) life used for tax purposes.
b.) remaining economic life plus lease term.
c.) lease term.
d.) remaining economic life.
 
 
58.
Lease Corp leases equipment to Samuel Company in a sales-type lease. The present value of the lease payments is $250,000. The lease includes an unguaranteed residual value with a present value of $50,000. The rate implicit in the contract is 6% and the lease term is five years. Which of the following are included in the journal entry for Lease Corp to record this lease?

a.) Credit residual asset $50,000
b.) Credit equipment $300,000
c.) Debit lease receivable $250,000
d.) Debit right of use asset $300,000
 
 
59.
Lease Corp leases equipment to Western Company in a sales-type lease. The present value of the lease payments is $450,000. The lease includes an unguaranteed residual value with a present value of $50,000. Which of the following complete the journal entry for Lease Corp to record this lease?

a.) debit lease receivable $450,000
b.) credit equipment $500,000
c.) credit equipment $450,000
d.) debit lease receivable $500,000
 
 
63.
A lease is classified as a finance lease by the lessee and a sales-type lease by the lessor if the present value of _____ constitutes "substantially all" of the fair value of the asset.

a.) lease payments including an unguaranteed residual value
b.) the lessee-guaranteed residual value
c.) lease payments excluding any lessee-guaranteed residual value
d.) lease payments including any lessee-guaranteed residual value
 
 
65.
A lease structured as an installment purchase is called a(n) ____________ lease by the lessee.
 
 
68.
Legal fees for executing lease documents, and the preparation and processing cost of lease documents are referred to as

a.) nonlease cost components
b.) initial direct costs.
c.) leasehold improvements
d.) lease direct costs
 
 
69.
A lessee makes leasehold improvements to leased property that will revert back to the lessor at the end of the lease. During the term of the lease, the leasehold improvements are reported on the

a.) lessor's balance sheet as a liability.
b.) lessee's balance sheet as an asset.
c.) lessee's balance sheet as a liability.
d.) lessor's balance sheet as an asset.
 
 
70.
The lessee records the right-of-use asset as

a.) the historic cost of the asset.
b.) the market value of the asset.
c.) the present value of lease payments.
 
 
 
 
 
 
 
 
 

71.
The lessee's payment in an operating lease is

a.) reported as a single lease expense.
b.) allocated between interest expense and amortization for the right-of-use asset.
c.) all recorded as interest expense.
d.) all recorded as amortization expense for the right-of-use asset.
 
 
72.
The lessor's gross investment in the lease is the total of periodic rental payments

a.) less any guaranteed residual value.
b.) plus any residual value.
c.) only.
 
 
73.
Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease, Ludwig Corporation should record

a.) a lease payable.
b.) a right-to-use asset.
c.) a lease receivable.
d.) lease expense.
 
 
74.
Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease, (Select all that apply)

a.) Ludwig records a right-of-use asset.
b.) Ludwig records a lease payable.
c.) Kluge records a lease payable.
d.) Kluge records a right-of-use asset.
 
 
75.
Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

Lessor's cost of equipment

a.) debit lease rec
b.) debit COGS
c.) Credit sales rev
d.) credit inventory
 
 
76.
Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

Lessor's cost of the equipment less the PV of the residual value

a.) debit lease rec
b.) debit COGS
c.) Credit sales rev
d.) credit inventory
 
 
77.
Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

PV of lease payments plus the PV of the residual value

a.) debit lease rec
b.) debit COGS
c.) Credit sales rev
d.) credit inventory
 
 
78.
Match each calculation with the journal entry required for the lessor on a sales-type lease with a residual value.

Sales less the PV of the residual value

a.) debit lease rec
b.) debit COGS
c.) Credit sales rev
d.) credit inventory
 
 
79.
Match the treatment of initial direct costs incurred by the lessor with the correct lease classification.

Deferred and expensed over the lease term by increasing the lease receivable

a.) Sales-type lease with selling profit
b.) Sales-type lease with no selling profit
c.) Operating lease
 
 
80.
Match the treatment of initial direct costs incurred by the lessor with the correct lease classification.

Deferred and expensed over the lease term typically on a straight-line basis

a.) Sales-type lease with selling profit
b.) Sales-type lease with no selling profit
c.) Operating lease
 
 
81.
Match the treatment of initial direct costs incurred by the lessor with the correct lease classification.

Expensed at the beginning of the lease

a.) Sales-type lease with selling profit
b.) Sales-type lease with no selling profit
c.) Operating lease
 
 
82.
The most common reasons for a sale-leaseback transaction are to

a.) replace an old asset with a new one.
b.) refinance at a lower rate.
c.) generate cash.
d.) record a loss on a fixed asset.
 
 
83.
The most likely motivation for a sale-leaseback transaction is to generate _____.
 
 
 
 
 
 
 
 
 

84.
Munchin Manufacturing Company leases an asset to Peter Inc in a sales-type lease. The present value of the lease payments is $400,000 and the cost of the asset is $330,000. At the beginning of the five-year lease term, Munchin should recognize a profit of:

a.) $400,000
b.) $0
c.) $70,000
d.) $330,000
 
 
87.
North Company leased equipment from Lease Corp in a finance/sales-type lease. The annual payments equal $105,000. Payments include $5,000 which Lease Corp will use to pay the annual maintenance fee on the equipment. How should Lease Corp record the first payment? (Select all that apply)

a.) credit lease receivable $105,000
b.) credit maintenance fee payable $5,000
c.) credit lease receivable $100,000
d.) debit cash $105,000
e.) debit cash $100,000
 
 
88.
North Company leased equipment from Lease Corp in a finance/sales-type lease. The annual payments equal $105,000. Payments include $5,000 which Lease Corp will use to pay the annual maintenance fee on the equipment. How should North Company record the first payment? (Select all that apply)

a.) credit cash $100,000
b.) credit cash $105,000
c.) debit maintenance expense $5,000
d.) debit lease payable $100,000
e.) debit lease payable $105,000
 
 
89.
The ______ of leased property is an estimate of what its commercial value will be at the end of the lease term.

a.) bargain purchase option
b.) residual value
c.) depreciation expense
d.) lease payment
 
 
90.
On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Assuming that Marion chooses the short-cut method, at the commencement of the lease before the first lease payment is made, Marion should

a.) credit lease payable for $80,000
b.) not make any journal entry
c.) credit payable for $20,000
 
 
91.
On January 1, 20X1, Kilian Inc. leases equipment with a fair value of $140,000 and a useful life of four years to Marion Company for one year. Under the lease term, Marion makes four quarterly payments of $20,000 beginning on January 1. Both companies choose the short-cut option. Marion recognizes the first lease payment by debiting

a.) lease payable
b.) interest expense
c.) lease expense
 
 
92.
On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipment's entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000, and the first payment is made at the inception of the lease. Donelson should record which of the following in connection with the second payment?

a.) Debit to lease receivable of $45,000.
b.) Credit to lease receivable of $35,259.
c.) Credit to interest revenue of 11,991.
d.) Credit to cash for $45,000.
Rationale:
 
 
93.
On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000, and the first payment is made at the inception of the lease. Mitchell should recognize the second lease payment by

a.) debiting lease payable for $33,009.
b.) debiting cash for $45,000.
c.) debiting interest expense for $9,741.
d.) debiting lease expense for $35,249.
 
 
94.
On January 1, 20X1, Mitchell Company leases equipment from Donelson Corp. for the equipments entire useful life of six years. Donelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000. Mitchell should recognize the first lease payment on January 1, 20X1 by

a.) debiting interest expense for $11,991.
b.) crediting right-of-use asset for $45,000.
c.) debiting cash for $45,000.
d.) debiting lease payable for $45,000
 
 
 
 
 
 
 
 
 

95.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual lease payment is $100,000; the first payment is due on January 1, 20X1. Tucker should recognize the second lease payment by debiting (Select all that apply.)

a.) interest expense for $26,497
b.) lease payable for $100,000
c.) lease payable for $73,503
d.) lease expense for $100,000
 
 
96.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual lease payment is $100,000. Tucker should recognize the first lease payment on January 1, 20X1 by (Select all that apply)

a.) debiting lease payable for $65,503
b.) crediting cash for $100,000
c.) debiting interest expense for $34,497
d.) debiting lease expense for $100,000
e.) debiting lease payable for $100,000
 
 
97.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should credit

a.) Lease revenue for $500,000
b.) Equipment for $431,213
c.) Gross profit on lease of $68,787
d.) Equipment for $500,000
 
 
98.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should credit

a.) Lease revenue for $500,000
b.) Gross profit on lease of $68,787
c.) Equipment for $431,213
d.) Equipment for $500,000
 
 
99.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Franz should debit

a.) No journal entry is necessary at the commencement of the lease
b.) Lease receivable for $431,213
c.) Lease receivable for $100,000
 
 
100.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should credit

a.) Lease payable for $500,000
b.) Lease payable for $431,213
c.) No journal entry is necessary at the commencement of the lease
 
 
101.
On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should debit

a.) Right-of-use asset for $431,213
b.) Equipment for $500,000
c.) Right-of-use asset for $500,000
d.) Equipment for $431,213
 
 
 
 
 
 
 
 
 
 

105.
On January 1, Year 1, Samuel Company leases equipment from Lease Corp. The lease agreement specifies five annual payments of $50,000, with the first payment due at lease signing (January 1, Year 1), and at each January 1 from Year 2 to Year 5. At the end of the lease term, the equipment will be returned to the lessor and is expected to have a residual value of $30,000. The estimated useful life of the equipment is six years. The interest rate in the financing arrangement is 6%. The cost to Lease Corp of manufacturing the equipment is $150,000. The journal entry on January 1, Year 1 will include the following in its entry:

a.) credit equipment $150,000
b.) debit lease receivable $245,673
c.) debit cost of goods sold $150,000
d.) credit sales revenue $223,255
e.) credit sales revenue $245,673
 
 
106.
An operating lease

a.) is similar to a typical rental agreement.
b.) transfers the risks and rewards of ownership.
c.) is similar to a sales-type lease.
 
 
107.
Periods covered by renewal options

a.) are only included in the lease term if a bargain purchase option is present.
b.) are not included in the lease term if a bargain purchase option is present.
c.) are always included in the lease term.
 
 
108.
The present value of a residual asset in a lease

a.) reduces the lessee's lease payments regardless of guarantee
b.) provides a source of recovery of the lessor's investment regardless of guarantee
c.) provides a source of recovery of the lessor's investment only when guaranteed
d.) reduces the lessee's lease payments only when guaranteed
 
 
109.
The present value of the residual value is ______ in/from the lease receivable, and it is ______ in/from sales and cost of goods sold for the lessor.

a.) excluded; excluded
b.) excluded; included
c.) included; excluded
d.) included; included
 
 
111.
A reasonable conclusion is that _____ of the fair value of the asset amounts to "substantially all" of the fair value.

a.) 75% or less
b.) 75% or more
c.) 90% or more
d.) 90% or less
 
 
112.
A reasonable conclusion is that the "major part" of the leased asset's life is included in the lease, if _____ of the remaining economic life of the asset is covered by the lease term.

a.) 90% or less
b.) 90% or more
c.) 75% or less
d.) 75% or more
 
 
114.
The residual value of a leased asset _______ the amount the lessor needs to recover through periodic lease payments from the lessee.

a.) increases
b.) has no effect on
c.) reduces
 
 
116.
The rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.

a.) are
b.) are not
 
 
117.
The rights granted to a lessee under a finance lease ________ the same as those granted to a company that purchases an asset.

a.) are not
b.) are
 
 
118.
Sales revenue for the lessor ________ the expected residual value to be recovered.

a.) does not include
b.) does include
c.) is equal to
 
 
119.
Samuel Company leased equipment from Lease Corp. The cost of the equipment to Lease Corp was $300,000. Lease Corp will require Samuel to make the first payment on the day of the lease signing (January 1 of Year 1), with the next four payments due on January 1 of Years 2 - 5. At the end of Year 5, the equipment is expected to have a residual value of $50,000. The estimated useful life of the equipment is seven years. If the five lease payments are of an equal amount, what payment amount provides Lease Corp with a return of 6%?

a.) $50,000
b.) $55,990
c.) $35,714
d.) $41,838
e.) $60,000
 
 
 
 
 
 
 
 
 

120.
Selling profit exists in a sales-type lease when the

a.) cost of the asset is greater than the fair value.
b.) present value of the lease payments is greater than the cost of the asset.
c.) carrying value of the asset is greater than the present value of the lease payments.
d.) cost of the asset is greater than the present value of the lease payments.
 
 
121.
Selma leases equipment from ABC Corp. The 4-year lease requires payments of $10,000 per year, beginning at the inception of the lease. The fair value of the equipment at the inception of the lease is $100,000. The equipment has a 6-year life. Selma's incremental borrowing rate is 6%. The lease does not transfer title and does not have a bargain purchase option. How should the lease be classified by Selma?

a.) sales-type
b.) operating
c.) Finance
 
 
125.
The ______________ should recognize amortization of the right-of-use asset.
 
 
126.
Smith Company leased equipment from FirstLease Corp. The cost of the equipment to FirstLease was $500,000. The present value of the expected residual value is $40,000. The lease includes six annual payments beginning on the first day of the lease. If the six lease payments are of an equal amount, what payment amount would provide FirstLease Corp with a return of 10%?

a.) $76,667
b.) $104,367
c.) $105,619
d.) $96,018
e.) $100,000
 
 
127.
Smith leases a piece of equipment from Marvin Company. The lease has a bargain purchase option which is expected to be exercised at the end of the lease. The useful life of the equipment is 10 years and the lease term is 8 years. Which number of years should be used to compute amortization?

a.) 10
b.) 8
c.) 18
 
 
128.
Sometimes a lease agreement includes a commitment by the lessee that the lessor will recover a specified amount when the asset is returned. This is known as

a.) guaranteed residual value.
b.) unguaranteed residual value.
c.) bargain purchase option.
d.) guaranteed interest value.
 
 
129.
The _____ subtracts the present value of a bargain purchase option price to determine the amount that must be recovered through the periodic rental payments.

a.) lessee
b.) lessor
c.) both
 
 
130.
Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Lease Corp account for this lease modification? (Select all that apply)

a.) credit sales revenue for $300,000
b.) debit accumulated depreciation for $142,857
c.) debit cost of goods sold for $357,143
d.) debit right-of-use asset for $200,000
e.) debit cost of goods sold for $500,000
f.) credit lease payable for $200,000
g.) debit lease receivable for $300,000
h.) credit asset $500,000
 
 
131.
*****Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by four years, and to change the amount of lease payments. The additional four years were not originally an option. The increase in present value of lease payments for Taylor is $200,000. The present value of the remaining lease payments for Lease Corp is $300,000. The initial cost of the equipment to Lease Corp was $500,000. The useful life of the equipment is estimated to be seven years and depreciation is computed straight-line with no residual value. How should Taylor account for this lease modification? (Select all that apply)


a.) debit right-of-use asset for $500,000
b.) credit lease payable for $200,000
c.) debit right-of-use asset for $200,000
d.) credit lease payable for $500,000
e.) credit sales revenue for $300,000
f.) debit lease receivable for $300,000
 
 
 
 
 
 
 
 
 

133.
Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by three years, and to change the amount of lease payments. The additional three years were not originally an option. How should Taylor address this lease modification? (Select all that apply)

a.) Update the right-of-use asset for the increase in present value
b.) Recognize straight-line expense of the lease payments
c.) Terminate the original lease and create a new lease with the new terms
d.) Reclassify from an operating lease to a finance lease
 
 
134.
The journal entry to record the lessee's payment on a short-term lease under the shortcut method will include a debit to

a.) rent expense.
b.) depreciation expense.
c.) lease obligation.
d.) interest expense.
 
 
135.
True or false: The exercise of a bargain purchase option is reasonably certain.
 
 
136.
True or false: The incremental borrowing rate is the rate the lessee would expect to pay a bank if funds were borrowed to purchase the asset.
 
 
137.
True or false: The residual value of a leased asset impacts the lessee's calculation of effective interest.
 
 
138.
True or false: When a bargain purchase option exists, a renewal option is considered irrelevant because it is assumed that the purchase option will be exercised.
 
 
139.
True or false: When a bargain purchase option is present, the lessor subtracts the future value of the exercise price from the amount to be recovered to determine the amount to be recovered through rental payments.
 
 
140.
The two basic lease classifications by a lessee are

a.) investing and financing.
b.) current and noncurrent.
c.) sales-type and direct-financing.
d.) operating and finance
 
 
141.
The two basic lease classifications by a lessor are

a.) investing and financing.
b.) current and noncurrent.
c.) operating and direct-financing.
d.) operating and sales-type.
 
 
142.
Under the shortcut method, the lessee recognizes

a.) a right-to-use asset at the commencement of the lease
b.) the total lease payable by amortizing it over the lease term
c.) rent expense over the lease term
 
 
143.
What interest rate is used to compute the present value of the remaining lease payments when a lease term is reassessed and changed?

a.) The lessor's initial incremental borrowing rate
b.) The lessee's initial incremental borrowing rate
c.) The lessor's incremental borrowing rate at the time of the reassessment
d.) The lessee's incremental borrowing rate at the time of the reassessment
 
 
144.
When a leased asset is returned at the end of the lease term and the actual residual value is less than the initial estimated residual value, _____ for the difference between estimate and actual.

a.) the lessee records a loss
b.) the lessor records a loss
c.) the lessee records a gain
d.) the lessor records a gain
 
 
145.
When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a

a.) turnaround sale.
b.) sale-leaseback.
c.) contingent sale.
d.) recourse lease.
 
 
 
 
 
 
 
 
 

147.
When are the right-of-use asset and lease liability remeasured and adjusted for changes in the amount of payments due to a change in index or rate? (Select all that apply)

a.) When the consumer price index changes
b.) When current interest rates change
c.) When the lease is modified giving the lessee an additional right-of-use
d.) When the lease term is reassessed and changed
 
 
149.
When recording a finance lease, the amount initially recognized for the right-of-use asset is the

a.) fair value of the leased asset
b.) present value of the lease payments
c.) sum of the future lease payments
d.) cost basis of the leased asset
 
 
150.
When there is a change in lease term,

a.) the original classification of the lease is not changed regardless of change in lease term.
b.) the previous accounting for the lease is reversed and the lease is accounted for using the new classification effective the first day of the lease.
c.) a lease initially classified as an operating lease may need to be reclassified as a finance lease.
 
 
151.
When there is a change in the lease term, the _____ is required to reassess the classification of the lease. A _____ is not permitted to reassess its initial determination of the lease term.

a.) lessee; lessor
b.) lessor; lessee
c.) borrower; creditor
 
 
153.
When the rights and responsibilities of ownership are retained by the lessor, the lease is classified as a(n) ______ lease.

a.) finance
b.) operating
c.) capital
d.) sales-type
 
 
154.
Which of the following are criteria for classification as a finance lease? (Select all that apply.)

a.) Ownership of the asset is retained by the lessor.
b.) Ownership of the asset transfers to the lessee.
c.) The lease includes a purchase option the lessee is reasonably certain to exercise.
d.) The asset will have an alternative use to the lessor at the end of the lease term.
e.) The present value of the total lease payments is less than substantially all of the fair value of the asset.
f.) The present value of the total lease payments is greater than substantially all of the fair value of the asset.
 
 
155.
Which of the following are included in the lease payments used in present value calculations?

a.) Uncertain future additional payments
b.) Unmeasurable contingent rent payments
c.) In-substance fixed lease payments
 
 
157.
Which of the following are required disclosures for lessees and lessors?

a.) identity of the lessee and lessor
b.) future payments in each of the next 5 years
c.) description of the leasing arrangements
d.) future payments for total remaining years
 
 
 
 
 
 
 
 
 

160.
Which of the following occur in a lease?

a.) Lessee has the right to use an asset for a specified period of time.
b.) Contractual agreement.
c.) Lessee owns the asset at completion of payments.
d.) Lessee pays the lessor periodic cash payments.
 
 
162.
Which of the following was one of the four criteria used to determine if a lease was a capital lease under preexisting GAAP?

a.) The lease term is at least 50% or more of the economic life of the leased asset.
b.) The present value of the minimum lease payments is 90% or more of the fair value of the asset
c.) There is an unguaranteed residual value.
d.) The economic life of the asset is 90% or more of the lease term
 
 
163.
Which of the following was one of the four criteria used to determine if a lease was a capital lease under preexisting GAAP?

a.) The present value of the minimum lease payments is 90% or more of the fair value of the asset
b.) The lease term is at least 50% or more of the economic life of the leased asset.
c.) The economic life of the asset is 90% or more of the lease term
d.) There is an unguaranteed residual value.
 
 
164.
Which of the following were the criteria used to classify a capital lease under preexisting GAAP?

a.) The lease term is for 75% or more of the useful life of the leased asset.
b.) The lease term is for 90% or more of the useful life of the asset.
c.) The lease contains a bargain purchase option.
d.) Title to the property transfers at the end of the lease period.
e.) The present value of the sum of lease payments equals or exceeds substantially all of the fair value of the underlying asset.
f.) The lease term is for a "major part" of the remaining economic life of the asset.
g.) The present value of the minimum lease payments is 90% or more of the fair value of the leased asset.
 
 
165.
Which of the following would be included in the lessor's gross investment in the lease?

a.) residual value
b.) depreciation expense
c.) executory costs
d.) periodic lease payments
 
 
166.
Which of the following would justify reassessment of a lease term?

a.) Leasehold improvements
b.) Residual value
c.) Purchase option
d.) Change in incremental borrowing rate
 
 
167.
Which one of the following will determine classification of a lease transaction as a finance lease?

a.) The lease term is for 50% of the remaining economic life of the leased asset.
b.) Ownership of the asset remains with the lessor at the end of the lease.
c.) The present value of the lease payments is 50% of the fair value of the leased asset.
d.) The asset is of a very specialized nature and will have no alternative use to the lessor.