217) On January 1, Sepe Vineyard Supply leased a truck for a five-year period, at which time
possession of the truck will revert back to the lessor. Annual lease payments are $11,000 due on
December 31 of each year, calculated by the lessor using a 4% discount rate. If Sepe’s revenues
exceed a specified amount during the lease term, Sepe will pay an additional $3,000 lease
payment at the end of the lease. Sepe estimates a 70% probability of meeting the target revenue
amount. What amount, if any, should be added to the right-of-use asset and lease liability under
the contingent rental agreement?
A) 0
B) $3,000
C) present value of $3,000
D) present value of $14,000
218) Cook the Books is the lessee in a lease agreement. From the perspective of the lessee, the
lease may be classified as:
A) operating, sales-type, indirect financing.
B) operating or finance.
C) operating or sales-type.
D) operating, finance, or sales-type.
219) ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease
may be classified as:
A) operating, sales-type, indirect financing.
B) operating or finance.
C) operating or sales-type.
D) operating, finance, or sales-type.
220) Interest expense is not calculated as the effective interest rate times the amount of the debt
outstanding during the interest period for:
A) bonds payable.
B) notes payable.
C) lease payable.
D) lease receivable.
221) In a finance lease:
A) the lessee records an asset and a liability for the present value of lease payments.
B) the lessor records an asset and a liability for the present value of lease payments.
C) the lessee records an asset and a liability for the total of the lease payments.
D) the lessor records an asset and a liability for the total of the lease payments.
222) In an operating lease:
A) the lessee records an asset and a liability for the present value of lease payments.
B) the lessor records a receivable for the present value of lease payments.
C) the lessee records an asset and a liability for the total of the lease payments.
D) the lessor records interest revenue.
223) Minnetonka Company leases an asset. Information regarding the lease:
• Fair value of the asset: $400,000.
• Useful life of the asset: 6 years with no salvage value.
• Lease term is 5 years.
• Annual lease payments are $60,000
• Implicit interest rate: 11%.
• Minnetonka can purchase the asset at the end of the lease period for $50,000.
What type of lease is this?
A) Operating.
B) Finance.
C) Short term.
D) Long term.
224) On January 1, 2018, Rastall Co. signed a long-term finance lease for an office building. The
terms of the lease required Rastall to pay $30,000 annually, beginning December 31, 2018, and
continuing each year for 30 years. On January 1, 2018, the present value of the lease payments is
$337,500 discounted at the 8% interest rate implicit in the lease. In Rastall’s December 31, 2018,
balance sheet, the lease payable should be
A) $307,500
B) $334,500
C) $337,500
D) $870,000
225) Jagadison Co. leases computer equipment to customers under sales-type leases. The
equipment has no residual value at the end of the lease and the leases do not contain purchase
options. Jagadison desires a return of 8% interest on a five-year lease of equipment with a fair
value of $970,425. The present value of an annuity due of $1 at 8% for five years is 4.313. What
is the total amount of interest revenue that Jagadison will earn over the life of the lease?
A) $154,575
B) $225,000
C) $388,080
D) $418,350
226) On January 2, 2018, Nori Mining Co. (lessee) entered into a 5-year lease for drilling
equipment. Nori accounted for the acquisition as a finance lease for $240,000, which includes a
$10,000 purchase option at the end of the lease. Nori is reasonably certain to exercise the
purchase option. Nori estimates that the equipment’s fair value will be $20,000 at the end of its 8-
year life. For the year ended December 31, 2018, what amount should Nori recognize as
amortization expense on the right-of-use asset?
A) $27,500
B) $30,000
C) $48,000
D) $46,000
227) Abhijit Co. leased equipment from Barua Corp. on July 1, 2018, for an 8-year period
expiring June 30, 2026. Equal annual payments on July 1 of each year are $120,000. The first
payment was made on July 1, 2018. The rate of interest contemplated by Abhijit and Barua is
10%. The cash selling price of the equipment is $704,000, and the cost of the equipment on
Barua’s accounting records is $560,000. The lease is appropriately recorded as a sales-type lease.
What is the amount of selling profit on the sale and interest revenue that Barua will record for the
year ended December 31, 2018?
Selling Profit
Interest Revenue
a.
$
9,000
$
29,200
b.
$
9,000
$
35,200
c.
$
144,000
$
29,200
d.
$
144,000
$
35,200
A) Option A
B) Option B
C) Option C
D) Option D
Present value of lease payments
and lease obligation, 7/1/2018
$
Initial payment made 7/1/2018
(120,000
)
Liability balance
$
Interest rate 10% =
$
For one-half year =
$
228) At the beginning of a finance lease, a guaranteed residual value should be:
A) Included as part of lease payments at present value.
B) Included as part of lease payments at future value.
C) Included as part of lease payments only to the extent that guaranteed residual value is
expected to exceed estimated residual value.
D) Excluded from lease payments.
229) Ira Bates Corp. entered into a 9-year finance lease on a warehouse on December 31, 2018.
Lease payments of $39,000, which includes maintenance service of $1,500, are due annually,
beginning on December 31, 2019, and every December 31 thereafter. The interest rate implicit in
the lease is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0.
What amount should Bates record as the lease payable at December 31, 2018?
A) $225,000
B) $234,000
C) $337,500
D) $351,000
230) On December 31, 2018, Bedford Corp. sold a machine to Sheila Company and
simultaneously leased it back for one year. Pertinent information at this date follows:
Sales price
$
940,000
Carrying amount
890,000
Present value of lease payments
($9,000 for 12 months at 12%)
102,300
Machine’s estimated remaining useful life
12 years
In Bedford’s December 31, 2018 income statement, the gain recognized from the sale of this
machine should be:
A) $ 0.
B) $ 4,167.
C) $337,600.
D) $50,000.
231) For companies that prepare their financial statements in accordance with IFRS, a lessee will
reassess variable lease payments that depend on an index or a rate:
A) not just when the lessee remeasures the right-of-use asset and lease liability for other reasons,
but also whenever there is a change in the cash flows resulting from a change in the reference
index or rate.
B) only when the lessee remeasures the right-of-use asset and lease liability for other reasons.
C) using the discount rate in effect at the beginning of the lease.
D) only when the terms of the lease are modified by the lessee and lessor.
232) Bishop Company is the lessee in an operating lease. Bishop will report straight-line lease
expense if it uses:
A) IFRS.
B) U.S. GAAP.
C) Either U.S. GAAP or IFRS.
D) Neither U.S. GAAP nor IFRS.
233) A lessee is allowed to elect not to record a right-of-use asset and lease payable at the
beginning of the lease term for a lease that has a lease term of 12 months or having a value of
$5,000 or less when using:
A) IFRS.
B) U.S. GAAP.
C) Either U.S. GAAP or IFRS.
D) Neither U.S. GAAP nor IFRS.
234) In connection with a lease of more than 12 months, the lessee always will record each of the
following except:
A) an asset.
B) interest revenue.
C) an expense.
D) a liability.
235) In connection with a lease transaction, the lessor would not record:
A) an asset.
B) depreciation.
C) interest revenue.
D) a liability.
236) In a ten-year finance lease agreement, the portion of the periodic lease payment that
represents interest in the third year is:
A) the same as in the fourth year.
B) the same as in the first year.
C) less than in the fourth year.
D) more than in the fourth year.
237) In a finance lease, the amortization of the right-of-use asset in the third year is:
A) the same as in the fourth year.
B) zero.
C) less than in the fourth year.
D) more than in the fourth year.
238) In an operating lease, the amortization of the right-of-use asset in the third year is:
A) the same as in the fourth year.
B) zero.
C) less than in the fourth year.
D) more than in the fourth year.
239) Lessee Company enters into a lease on January 1, 2018, that is accounted for as a finance
lease. The lease calls for quarterly payments of $15,000, beginning on January 1, 2018, and
continuing for 5 years. The last payment is due on October 1, 2022. The lease has an implicit
annual interest rate of 8%. The present value of an annuity due at 8% per period for 5 periods is
4.312; the present value of an annuity due at 2% per period for 20 periods is 16.678. What
amount will Lessee report as a lease payable (not including accrued interest) in its financial
statements dated December 31, 2018?
A) $198,720
B) $200,000
C) $203,658
D) $208,968
240) BBB Leasing purchased a machine for $250,000 and leased it to Jack Tupp Auto Repair on
January 1, 2018.
Lease description:
Quarterly rental payments
$16,315 at beginning of each period
Lease term
5 years (20 quarters)
No residual value; no BPO
Economic life of machine
5 years
Implicit interest rate
12%
Fair value of asset
$250,000
What is the balance in the lease payable account after the April 1, 2018, lease payment?
A) $224,381.
B) $233,685.
C) $232,569.
D) $241,185.
(Lessee)
Right-of-use asset (fair value)
Lease payable (fair value)
Lease payable
Cash (lease payment)
Interest expense (3% × [$250,000 – 16,315])
Lease payable (difference)
Cash (lease payment)
241) On January 1, 2018, PokemonGo Company leased equipment to Waldo Corporation under
a lease agreement that qualifies as an operating lease to Waldo. The present value of the end-of-
year lease payments of $138,585 discounted at 5% is $600,000. The expected economic life of
the asset is seven years. The lease term is five years. What would Waldo record as amortization
in 2018?
A) $ 90,000.
B) $108,585.
C) $120,000.
D) $0.
242) I. Lasch Co. recorded a right-of-use asset of $200,000 in a 10-year operating lease.
Payments of $32,550 are made annually at the end of each year. The interest rate charged by the
lessor was 10%. The balance in the right-of-use asset after the first year will be:
A) $180,000.
B) $187,450
C) $188,450.
D) $200,000.
243) I.D. Clair Co. recorded a right-of-use asset of $100,000 in a 10-year operating lease.
Payments of $14,795 are made annually at January 1 of each year beginning January 1, 2018.
The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at
December 31, 2018, will be:
A) $ 85,205.
B) $ 91,478.
C) $ 93,726.
D) $100,000.
244) Ivan Oder Co. recorded a right-of-use asset of $300,000 in a 10-year operating lease. Lease
payments of $44,385 are made annually at January 1 of each year beginning January 1, 2018.
The interest rate charged by the lessor was 10%.
Required: Prepare the appropriate journal entries on January 1, 2018, and December 31, 2018.
Round your answers to the nearest whole dollar amounts.
245) Hy Marx Co. recorded a right-of-use asset of $600,000 in a 10-year operating lease. Lease
payments are made annually at January 1 of each year beginning January 1, 2018. The interest
rate charged by the lessor was 10%.
Required: Prepare the appropriate journal entries on January 1, 2018, and December 31, 2018.
Round your answers to the nearest whole dollar amounts.
246) By the lessor, a lessee-guaranteed residual value at the beginning of a finance lease should
be:
A) Excluded from lease payments.
B) Included as part of lease payments at present value.
C) Included as part of lease payments at future value.
D) Included as part of lease payments only to the extent that guaranteed residual value is
expected to exceed estimated residual value.
247) Which of the following statements regarding a lessee-guaranteed residual value is true?
A) The lessor’s lease receivable should be increased by the amount of the residual value.
B) The lessor’s lease receivable should be increased by the amount of the residual value to the
extent that guaranteed residual value is expected to exceed estimated residual value.
C) The lessee’s right-of-use asset and lease payable at the beginning of the lease should be
increased by the present value of the residual value.
D) The lessee’s right-of-use asset and lease payable at the beginning of the lease should be
decreased by the present value of the residual value to the extent that guaranteed residual value is
expected to exceed estimated residual value.
248) The costs that (a) are associated directly with consummating a lease, (b) are essential to
acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are
referred to as:
A) Initial direct costs.
B) Consummating expenses.
C) Lease acquisition expenses.
D) Nonlease components.
249) The costs that (a) are associated directly with consummating a lease, (b) are essential to
acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are
referred to as initial direct costs. Initial direct costs are expensed at the beginning of the lease in:
A) A sales-type lease with a selling profit.
B) A sales-type lease without a selling profit.
C) Any sales-type lease.
D) An operating lease.
250) The costs that (a) are associated directly with consummating a lease, (b) are essential to
acquire the lease and (c) would not have been incurred had the lease agreement not occurred are
referred to as initial direct costs. Initial direct costs are added to the Lease Receivable in:
A) A sales-type lease with a selling profit.
B) A sales-type lease without a selling profit.
C) Any sales-type lease.
D) An operating lease.
251) The costs that (a) are associated directly with consummating a lease, (b) are essential to
acquire the lease and (c) would not have been incurred had the lease agreement not occurred are
referred to as initial direct costs. Initial direct costs are deferred and expensed over the lease
term, generally on a straight-line basis in:
A) A sales-type lease with a selling profit.
B) A sales-type lease without a selling profit.
C) Any sales-type lease.
D) An operating lease.
252) Star Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1 before
entering into an operating lease. Not including any indirect effects on earnings, when Star Corp.
records the operating lease, the immediate impact on these ratios is a(an):
Return on Assets
Debt/Equity
a.
increase
increase
b.
decrease
decrease
c.
increase
decrease
d.
decrease
increase
A) Option A
B) Option B
C) Option C
D) Option D
253) If the leaseback portion of a sale-leaseback transaction meets the criteria to be a finance
lease:
A) The seller-lessee will record a right-of-use asset.
B) The seller-lessee will record interest revenue.
C) The seller-lessee will record a gain or loss on the sale of an asset.
D) The seller-lessee will record a note payable.
254) If the leaseback portion of a sale-leaseback transaction meets the criteria to be a sales-type
lease, the buyer-lessor will:
A) record a lease receivable.
B) record an addition to property, plant, and equipment.
C) record interest revenue on a note receivable.
D) record a selling profit.
255) Jacobs Eatery leased restaurant equipment from Gamma Leasing. Gamma earns interest
under such arrangements at a 6% annual rate. The lease term is eight months with monthly
payments of $20,000 due at the end of each month. Jacobs Eatery elected the short-term lease
option. What is the effect of the lease on Jacobs Eatery’s earnings during the eight-month term
(ignore taxes)?
A) An initial expense of $160,000.
B) An expense of $20,000 initially and $20,000 at the end of 7 months.
C) An expense of $20,000 at the end of each of the 8 months.
D) No expense within the 8 month period.