85) B Corp. is a lessee and has a debt/equity ratio of 2 to 1. The debt/equity ratio is increased
when B records:
A Finance Lease
An Operating Lease
a.
yes
yes
b.
no
no
c.
yes
no
d.
no
yes
A) Option A
B) Option B
C) Option C
D) Option D
86) L Corp. recorded a finance lease in February of Year 1 using an annuity due present value
table. The company’s statement of cash flows for the year ending December 31, Year 1 using the
indirect method will report:
A) An addition to net income for amortization.
B) A cash inflow from financing activities.
C) A cash outflow from investing activities.
D) A cash inflow from operating activities.
87) M Corp. recorded a finance lease in February of Year 1 using an annuity due present value
table. The company’s statement of cash flows for the year ending December 31, Year 1 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.
88) P Corp. leased an asset to L Corp. using an operating lease in February of Year 1. P Corp.’s
statement of cash flows for the year ending December 31, Year 1 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.
89) J Corp. is a lessee that entered into an operating lease in February of Year 1. The company’s
statement of cash flows for the year ending December 31, Year 1 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.
90) 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 always is higher than in a finance lease.
91) In a sale-leaseback arrangement, the lessee also is:
A) The new owner of the property.
B) The buyer.
C) A third-party guarantor.
D) The seller.
92) On December 31, 2018, 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, 2018, balance sheet, the recognized gain from the sale of this machine
should be:
A) $0.
B) $8,200.
C) $60,000.
D) $68,200.
93) 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.
94) In an eight-year finance lease, the portion of the annual lease payment that represents interest
in the lease’s third year payment is:
A) The same as in the fourth year.
B) The same as in the first year.
C) Less than in the second year.
D) More than in the second year
95) Damon is the lessee in connection with a finance lease. Damon will not record:
A) Depreciation expense.
B) Amortization expense.
C) Interest expense.
D) A right-of-use asset.
96) Matt Co. is the lessor in connection with an operating lease. Matt Co. would record:
A) Depreciation expense.
B) A right-of-use asset.
C) Amortization expense.
D) Interest revenue.
97) Barr Corp. is the lessee in a finance lease. Barr would record:
A) Depreciation expense.
B) A right-of-use asset.
C) Lease expense.
D) Interest revenue.
98) Mann Co. is the lessee in a six-year lease that the lessor classifies as a sales-type lease. The
lease payments begin December 31, 2018. The agreement specifies that Woo Corp. make equal
annual lease payments on December 31 of each year. In its 2019 income statement:
A) Woo will report interest expense and amortization expense.
B) Woo will report interest expense and lease expense.
C) Mann will report interest revenue and depreciation expense.
D) Mann will report interest revenue and amortization expense.
99) Warren Co. recorded a right-of-use asset of $800,000 in a 10-year finance lease. The interest
rate charged by the lessor was 8%. 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.
100) Red Co. recorded a right-of-use asset of $100,000 in a 10-year finance lease. Payments of
$16,275 are made annually at the end of each year. The interest rate charged by the lessor was
10%. The balance in the lease payable after two years will be:
A) $80,000.
B) $86,823.
C) $116,309.
D) $121,000.
101) Blue Co. recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments
of $16,275 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 two years will be:
A) $80,000.
B) $86,823.
C) $100,000.
D) $121,000.
102) We classify a lease as a finance 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 lessee obtains control of the use of the asset.
D) the usual risks and rewards are retained by the lessor.
103) On January 1, 2018, Green Co. recorded a right-of-use asset of $270,360 in an operating
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, 2018, will be:
A) $270,360.
B) $253,396.
C) $243,324.
D) $230,360.
104) Karla Salons leased equipment from Smith Co. on July 1, 2018, in a finance 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, 2018. Smith Co. had constructed the equipment
recently for $66,000, and its retail fair value was $80,000.
What amount of interest revenue from the lease should Smith Co. report in its December 31,
2018, income statement?
A) $12,000.
B) $4,000.
C) $3,400.
D) $5,000.
105) Karla Salons leased equipment from Smith Co. on July 1, 2018, in a finance 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, 2018. Smith Co. had constructed the equipment
recently for $66,000, and its retail fair value was $80,000.
What amount did Smith Co. record in its income statement for the reporting year ending
December 31, 2018, in connection with the lease? (ignore taxes.)
A) $3,400.
B) $14,000.
C) $17,400.
D) $20,800.
106) Karla Salons leased equipment from Smith Co. on July 1, 2018, in a finance 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, 2018. Smith Co. had constructed the equipment
recently for $66,000, and its retail fair value was $80,000.
The total decrease in earnings (pretax) in Karla’s December 31, 2018, income statement would be
(ignore taxes):
A) $5,000.
B) $7,400.
C) $8,400.
D) $9,000.
107) Cady Salons leased equipment from Smith Co. on January 1, 2018, in an operating lease.
The present value of the lease payments discounted at 10% was $80,000. Ten annual lease
payments of $12,000 are due at each January 1 beginning January 1, 2018. The amortization of
the right-of-use asset for the reporting year ending December 31, 2018, would be:
A) $ 5,200.
B) $ 6,800.
C) $ 8,000.
D) $12,000.
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Reduces the lessor’s lease payment calculation.
B) The amount recorded as a right-of-use asset by the lessee.
C) Accounting for these is based on substance over form.
D) Legal fees, commissions, and lease processing costs.
E) Leasehold improvements.
108) Finance leases
109) Present value of lease payments
110) Initial direct costs
111) Bargain purchase option
112) Depreciable assets
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Marketing tool for lessor.
B) Residual value.
C) Maintenance fees.
D) Additional cash payment included in lease liability calculation.
E) Rent payments plus guaranteed residual value.
113) Lessor’s lease receipts
114) Lessee’s guarantee
115) Nonlease components
116) Bargain purchase option
117) Sales-type lease
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) PV of lease payments plus PV of unguaranteed residual value.
B) Deducted in lessor’s computation of rental payments.
C) Lease payable.
D) Sum of lease payments.
E) Periodic rent payments plus lessee-guaranteed residual value.
118) PV of bargain purchase option price
119) Lessee’s lease payments
120) Lessor’s net investment
121) PV of lease payments
122) Gross investment
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Associated directly with consummating a lease.
B) Contingent rentals.
C) Title transfers to lessee.
D) Sum of lessor’s lease payments.
E) Exercise reasonably certain.
123) Gross investment
124) Requires disclosure only
125) Depreciation period over useful life
126) Initial direct costs
127) Bargain purchase option
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Lessor’s rate of return.
B) Reported as assets.
C) Based on term of lease or useful life depending on lease contract.
D) Calculated as lease payments plus unguaranteed residual value.
E) Calculated as effective rate times balance.
128) Discount rate
129) Amortization on right-of-use assets
130) Leasehold improvements
131) Interest expense
132) Lessor’s gross investment
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Lessor reports rent revenue.
B) Included with initial direct costs.
C) Operating costs borne by the lessee.
D) Viewed as an additional payment when guaranteed by lessee.
E) Viewed as an additional payment when reasonably certain.
133) Purchase option
134) Sales-type lease selling expense
135) Residual value
136) Operating lease
137) Nonlease components
Listed below are 15 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Periodic rent payments plus lessee-guaranteed residual value.
B) Deducted in lessor’s computation of lease payments.
C) Leasehold improvements.
D) Cash paid to satisfy residual value guarantee.
E) Sales-type lease selling expense.
F) Depreciation longer than lease term.
G) Sale-leaseback as operating lease.
H) PV of lease payments plus PV of unguaranteed residual value.
I) Future lease payments in each of the next five years.
J) Periodic rent payments plus unguaranteed residual value.
K) Lease payments plus guaranteed residual value.
L) Outstanding balance times effective rate.
M) Nonlease payments.
N) Rent revenue.
O) Purchase price less than fair value.
138) Interest expense
139) Disclosure only
140) Lessor’s gross investment
141) Lessee’s lease payments
142) Lessor’s net investment
143) Initial direct costs
144) Operating lease
145) Bargain purchase option
146) Depreciable assets
147) Loss to lessee
148) Finance lease expense
149) PV of bargain purchase option price
150) Title transfers to lessee
151) Revenue recognition
152) Lessor’s lease payments