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Chapter 15 Leases
59. What would be the amount of interest expense recorded with payment 5?
a. $2,000.
b. $ 893.
c. $7,107.
d. $1,107.
60. Since the lease payments under a lease agreement are normally paid at the beginning of each
period, the appropriate compound interest table to be used to determine the amount at which
the leased asset should be recorded is the:
a. Ordinary annuity table.
b. Present value of $1 table.
c. Present value of an annuity due table.
d. Future value of an annuity due table.
61. On October 1, 2016, Justine Company purchased equipment from Napa Inc. in exchange for
a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct
1, 2017. Similar borrowings have carried an 11% interest rate. The equipment would be
recorded at:
a. $2,500,000.
b. $2,225,000.
c. $1,847,950.
d. $2,115,270.
62. Titanic Corporation leased executive limos under terms of $20,000 down and four equal
annual payments of $30,000 on the anniversary date of the lease. The interest rate implicit in
the lease is 11%. The first year's interest expense would be:
a. $13,200.
b. $10,238.
c. $33,200.
d. $15,543.
63. When a capital lease is first recorded at the inception of the lease, the lessee typically debits:
a. Leased asset.
b. Rent expense.
c. Lease expense.
d. Lease receivable.
64. On January 1, 2016, Calloway Company leased a machine to Zone Corporation. The lease
qualifies as a direct financing lease. Calloway paid $240,000 for the machine and is leasing it
to Zone for $34,000 per year, an amount that will return 10% to Calloway. The present value
of the minimum lease payments is $240,000. The lease payments are due each January 1,
beginning in 2016. What is the appropriate interest entry on December 31, 2016?
a.
Cash
24,000
Interest revenue
24,000
b.
Cash
20,600
Interest receivable
20,600
Chapter 15 Leases
c.
Interest receivable
20,600
Interest revenue
20,600
d.
Interest receivable
24,000
Interest revenue
24,000
65. Francisco leased equipment from Julio on December 31, 2016. The lease is a 10-year lease
with annual payments of $150,000 due on December 31 of each year beginning December 31,
2016. The present value of the lease is $1,020,000. Francisco's incremental borrowing rate is
12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be
the balance in Francisco lease liability at December 31, 2017?
a. $824,400.
b. $807,000.
c. $806,400.
d. $792,000.
66. Additional lessor conditions for classification as a capital lease are consistent with the criteria
of:
Chapter 15 Leases
a. Matching.
b. Cause and effect.
c. Materiality.
d. Revenue recognition.
67. A sales-type lease differs from a direct financing lease in one respect:
a. The lessor receives a manufacturer's or dealer's profit.
b. The lessor receives more interest than on a direct financing lease.
c. The lessor receives less interest than on a direct financing lease.
d. The lessor uses a longer amortization period than on a direct financing lease.
68. Recording a sales-type lease is similar to recording:
a. A purchase on account.
b. An exchange of assets.
c. A sale of a fixed asset.
d. A sale of merchandise on account.
69. On January 1, 2016, Princess Corporation leased equipment to King Company. The lease term
is eight years. The first payment of $675,000 was made on January 1, 2016. The equipment
cost Princess Corporation $3,600,000. The present value of the minimum lease payments is
$3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest
rate for this lease is 10%, how much interest revenue will Princess record in 2017 on this
lease?
a. $261,000.
b. $328,500.
c. $325,350.
Chapter 15 Leases
d. $293,850.
70. On January 1, 2016, Packard Corporation leased equipment to Hewlitt Company. The lease
term is eight years. The first payment of $450,000 was made on January 1, 2016. Remaining
payments are made on December 31 each year, beginning with December 31, 2016. The
equipment cost Packard Corporation $2,400,000. The present value of the minimum lease
payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming
the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt
in the December 31, 2017, balance sheet?
a. $1,950,000.
b. $1,509,000.
c. $1,959,000.
d. $1,704,900.
71. The lessee's option to purchase a leased asset at a price that is sufficiently lower than the
asset's expected fair value so that the exercise of the option appears reasonably assured is
called a:
a. Bargain purchase option.
b. Lessee buy-out option.
c. Lessor sell-out option.
d. Guaranteed purchase option.
72. A noncancelable lease contains a bargain purchase option. The fair value of the asset exceeds
the lessor's cost of the asset. Collectibility of the lease payments is assured and there are no
material cost uncertainties surrounding the lease. Therefore, the lease will be accounted for by
the lessor as a(n):
a. Sales-type lease.
b. Direct financing lease.
c. Operating lease.
d. Guaranteed lease.
73. XYZ Company leased equipment to West Corporation under a lease agreement that qualifies
as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The
present value of the asset is $600,000. The expected economic life of the asset is 10 years. The
lease term is five years. Using the straight-line method, what would West record as annual
depreciation?
a. $120,000.
b. $61,000.
c. $60,000.
d. $0.
74. A guaranteed residual value at the inception of a capital lease should be:
a. Excluded from minimum lease payments.
b. Included as part of minimum lease payments at present value.
c. Included as part of minimum lease payments at future value.
d. Included as part of minimum lease payments only to the extent that guaranteed residual
value is expected to exceed estimated residual value.
75. If the lessee expects to obtain title to leased property due to a bargain purchase option or
passage of title at the end of the lease term:
a. The lessee ignores any residual value for the leased property.
b. The lessor ignores any residual value for the leased property.
c. The lessee adds the present value of the residual value to the amount recorded for the
lease.
d. The lessor will always charge a higher annual lease rate.
Chapter 15 Leases
76. Which of the following statements regarding guaranteed residual values is true for the lessee?
a. The asset and liability at the inception of the lease should be increased by the amount of
the residual value.
b. The asset and liability at the inception of the lease should be decreased by the amount of
the residual value.
c. The asset and liability at the inception of the lease should be increased by the present
value of the residual value.
d. The asset and liability at the inception of the lease should be decreased by the present
value of the residual value.
77. ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as
a direct financing lease. The cost of the asset is $120,000. The lease contains a bargain
purchase option that is effective at the end of the fifth year. The expected economic life of the
asset is 10 years. The lease term is five years. The asset is expected to have a residual value of
$2,000 at the end of 10 years. Using the straight-line method, what would Best record as
annual depreciation?
a. $23,600.
b. $12,200.
c. $12,000.
d. $11,800.
78. If the residual value of a leased asset turns out to be more than the amount guaranteed by the
Chapter 15 Leases
lessee, the:
a. Lessor must compensate the lessee for the excess.
b. Lessee must pay the lessor the amount of the excess.
c. Lessee will reduce the last year's depreciation.
d. Lessor is not obligated to compensate the lessee for the excess.
79. What are the three types of expenses that a lessee experiences with a capital lease?
a. Lease expense, executory costs, interest expense.
b. Depreciation expense, lease expense, interest expense.
c. Executory costs, lease expense, depreciation expense.
d. Depreciation expense, interest expense, executory costs.
80. Costs incurred by the lessor that are associated directly with originating a lease and are
essential to acquire that lease are called initial direct costs. Initial direct costs are recorded as
assets and amortized over the term of the lease in:
a. An operating lease.
b. A capital lease.
c. A direct financing lease.
d. A sales-type lease.
81. Costs incurred by the lessor that are associated directly with originating a lease and are
essential to acquire that lease are called initial direct costs. Initial direct costs are matched with
the interest revenues they help generate in:
a. An operating lease.
b. A capital lease.
c. A direct financing lease.
Chapter 15 Leases
d. A sales-type lease.
82. Costs incurred by the lessor that are associated directly with originating a lease and are
essential to acquire that lease are called initial direct costs. Initial direct costs are expensed at
the inception of the lease in:
a. An operating lease.
b. A capital lease.
c. A direct financing lease.
d. A sales-type lease.
83. N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2016. Lease
payments of $26,000, which includes real estate taxes of $1,000, are due annually, beginning
on December 31, 2017, and every December 31 thereafter. N does not know the interest rate
implicit in the lease; N's incremental borrowing rate is 9%. The rounded present value of an
ordinary annuity for nine years at 9% is 6.0. What amount should N report as capitalized lease
liability at December 31, 2016?
a. $150,000.
b. $156,000.
c. $225,000.
d. $234,000.
84. If the lessee and lessor use different interest rates to account for a capital lease, then:
a. Total expenses for the lessee will be different from the lessor's total revenues.
Chapter 15 Leases
b. Total expenses for the lessee will equal the lessor's total revenues.
c. GAAP has been violated by at least one party.
d. The lessee will report more net income for the year.
85. On December 31, 2016, Perry Corporation leased equipment to Admiral Company for a five-
year period. The annual lease payment, excluding executory costs, is $40,000. The interest
rate for this lease is 10%. The payments are due on December 31 of each year. The first
payment was made on December 31, 2016. The normal cash price for this type of equipment
is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2016, by
what amount will Perry's pretax earnings increase due to this lease?
a. $20,000.
b. $24,000.
c. $28,500.
d. $40,000.
86. S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including
any indirect effects on earnings, the immediate impact of recording a capital lease on these
ratios is a(an):
Return on Assets Debt / Equity
a. increase increase
b. decrease decrease
c. increase decrease
d. decrease increase
87. C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings,
the rate of return on assets is immediately increased when C records:
A Capital Lease An Operating Lease
a. yes yes
b. no no
c. yes no
d. no yes
88. B Corp. has a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the
debt/equity ratio is increased when B records:
A Capital Lease An Operating Lease
a. yes yes
b. no no
c. yes no
d. no yes
89. L Corp. recorded a capital lease in February using an annuity due present value table. The
company’s December 31 statement of cash flows using the indirect method will report:
a. An addition to net income for depreciation.
b. A cash inflow from financing activities.
c. A cash outflow from investing activities.
Chapter 15 Leases
d. A cash inflow from operating activities.
90. M Corp. recorded a capital lease in February using an annuity due present value table. The
company’s December 31 statement of cash flows using the direct method will report:
a. A cash inflow from investing activities.
b. A cash outflow from financing activities.
c. A cash outflow from investing activities.
d. A cash inflow from operating activities.
91. P Corp. leased an asset to L Corp. using an operating lease in February. P Corp.’s December
31 statement of cash flows will report:
a. A cash outflow from investing activities.
b. A cash outflow from financing activities.
c. A cash inflow from operating activities.
d. No cash outflow.
92. J Corp. entered into an operating lease in February. The company’s December 31 statement of
cash flows will report:
a. A cash outflow from investing activities.
b. A cash outflow from financing activities.
c. A cash outflow from operating activities.
d. No cash outflow.
93. Which of the following statements characterizes a sale-leaseback arrangement?
a. The lessee also is the seller.
b. The lessor treats the lease as an operating lease.
c. The lessee buys the asset from a third party.
d. The lessor's interest rate is always higher than in a capital lease.
94. In a sale-leaseback arrangement, the lessee is also:
a. The new owner of the property.
b. The buyer.
c. A third-party guarantor.
d. The seller.
95. On December 31, 2016, B Corp. sold a machine to Royal and simultaneously leased it back
for one year. Pertinent information at this date follows:
Sales price $720,000
Book value 660,000
Present value of lease rentals 68,200
($6,000 for 12 months at 12%)
Estimated remaining useful life 12 years
In B's December 31, 2016, balance sheet, the deferred revenue from the sale of this machine
should be:
a. $ 0.
b. $ 8,200.
c. $60,000.
d. $68,200.
96. If the leaseback portion of a sale-leaseback transaction is classified as an operating lease:
a. Any gain is deferred and recognized as a reduction of rent expense.
b. Any gain is deferred and recognized as a reduction of depreciation.
c. Any gain is recognized at the lease’s inception.
d. There can be no gain.
97. If the leaseback portion of a sale-leaseback transaction is classified as a capital lease:
Chapter 15 Leases
a. Any gain is deferred and recognized as a reduction of rent expense.
b. Any gain is deferred and recognized as a reduction of depreciation.
c. Any gain is recognized at the lease’s inception.
d. There can be no gain.
98. Under both U.S. GAAP and IFRS, a lease is a capital lease (called a finance lease under IFRS)
if substantially all risks and rewards of ownership are transferred. In making this
determination, more judgment, and less specificity, is applied using:
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
Respond to questions 99– 111 with the presumption that the guidance provided by the new
Accounting Standards Update is being applied.
99. Damon is the lessee in connection with a Type A lease. Under the new ASU, Damon would
not record:
a. Depreciation expense.
b. Amortization expense.
c. Interest expense.
d. A right-of-use asset.
Chapter 15 Leases
100. Matt Co. is the lessor in connection with a Type B lease. Under the new ASU, Matt Co. would
record:
a. Depreciation expense.
b. A right-of-use asset.
c. Amortization expense.
d. Interest revenue.
101. Barr Corp. is the lessee in a Type A lease. Under the new ASU, Barr would record:
a. Depreciation expense.
b. A right-of-use asset.
c. Lease expense.
d. Interest revenue.
102. Mann Co. is the lessor in a six-year Type A lease beginning December 31, 2016. The
agreement specifies that Woo Corp. make equal annual lease payments on December 31 of
each year. Under the new ASU, in its 2017 income statement:
a. Woo will report interest expense and amortization expense.
b. Woo will report interest expense and depreciation expense.
c. Mann will report interest revenue and depreciation expense.
d. Mann will report interest revenue and amortization expense.
103. Warren Co. recorded a right-of-use asset of $800,000 in a 10-year Type A lease. The interest
rate charged by the lessor was 8%. Under the new ASU, the balance in the right-of-use asset
after two years will be:
a. $648,000.
b. $640,000.
c. $804,000.
d. $968,000.
104. Red Co. recorded a right-of-use asset of $100,000 in a 10-year Type A lease. Payments of
$16,275 are made annually at the end of each year. The interest rate charged by the lessor was
10%. Under the new ASU, the balance in the lease payable after two years will be:
a. $ 80,000.
b. $ 86,823.
c. $116,309.
d. $121,000.
Chapter 15 Leases
105. Blue Co. recorded a right-of-use asset of $100,000 in a 10-year Type B lease. Payments of
$16,275 are made annually at the end of each year. The interest rate charged by the lessor was
10%. Under the new ASU, the balance in the right-of-use asset after two years will be:
a. $ 80,000.
b. $ 86,823.
c. $100,000.
d. $121,000.
106. We classify a lease as a Type A lease if:
a. the present value of lease payments is less than the asset’s book value.
b. the present value of lease payments is less than the asset’s fair value.
c. the usual risks and rewards are transferred to the lessee
d. the usual risks and rewards are retained by the lessor.
107. On January 1, 2016, Green Co. recorded a right-of-use asset of $270,360 in a Type B
lease. The lease calls for ten annual payments of $40,000 at the beginning of each year.
The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at
December 31, 2016, will be:
a. $270,360.
Chapter 15 Leases
b. $253,396.
c. $243,324.
d. $230,360.
Use the following to answer questions 108 ‒ 110:
Karla Salons leased equipment from SmithCo on July 1, 2016, in a Type A lease. The present
value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of
$12,000 are due each year beginning July 1, 2016. SmithCo had constructed the equipment
recently for $66,000, and its retail fair value was $80,000.
108. Under the new ASU, what amount of interest revenue from the lease should SmithCo report in
its December 31, 2016, income statement?
a. $12,000.
b. $ 4,000.
c. $ 3,400.
d. $ 5,000.
109. Under the new ASU, what amount did SmithCo record in its income statement for the
reporting year ending December 31, 2016, in connection with the lease?
a. $ 3,400.
b. $14,000.
c. $17,400.
d. $20,800.
