46) What is the outstanding balance after payment 9?
A) $8,929.
B) $13,463.
C) $5,000.
D) $5,537.
47) When a lease qualifies as a finance lease, what amount is recorded as the cost of the right-of-
use asset?
A) The present value of the lease payments, exclusive of nonlease components.
B) The present value of the lease payments plus nonlease components.
C) The sum of the gross lease payments.
D) The present value of the lease payments plus the present value of nonlease components.
48) For a finance lease, an amount equal to the present value of the lease payments should be
recorded by the lessee as a(n):
A) Asset and a liability.
B) Asset and a different amount should be recorded as a liability.
C) Liability and a different amount should be recorded as an asset.
D) Expense.
49) Like other assets, the cost of a leasehold improvement is allocated as depreciation expense
over its useful life to the lessee, which will be:
A) The shorter of the physical life of the asset or the lease term.
B) The physical life of the asset.
C) The lease term.
D) A time period determined by management.
50) A sales-type lease is reported in the lessor’s balance sheet as:
A) An asset.
B) A liability.
C) Interest revenue.
D) A contra account to lease liability.
51) For a right-of-use asset under a lease that qualifies as a finance lease because the lease
contains a purchase option and the option is reasonably certain to be exercised, the amortization
period used by the lessee must be:
A) The same period that was used by the lessor.
B) The economic life of the asset at the time the lease agreement took effect.
C) The term of the lease.
D) The term of the lease or the economic life of the asset, whichever is shorter.
52) If the lessor retains title to leased property under the terms of the lease:
A) The amount to be recovered through periodic lease payments is reduced by the present value
of any residual amount.
B) The amount to be recovered through periodic lease payments is increased by the present value
of the residual amount.
C) The amount to be recovered will be the same as if there were no residual value.
D) The lessor will record a greater amount of depreciation due to the residual value.
Use the information below to answer the following questions.
Refer to the following lease amortization schedule. The five payments are made annually starting
with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at
the end of the five-year lease. The asset has an expected economic life of eight years.
Lease
Payment
Cash
Payment
Effective
Interest
Decrease in
Balance
Outstanding
Balance
34,600
1
8,000
??
??
26,600
2
8,000
2,660
5,340
21,260
3
8,000
2,126
5,874
15,386
4
8,000
1,539
6,461
8,925
5
8,000
??
??
??
6
2,000
182
1,818
0
53) What is the effective annual interest rate?
A) 9%.
B) 10%.
C) 11%.
D) 20%.
54) What amount would the lessee record as annual amortization on the asset using the straight-
line method, assuming no residual value?
A) $3,325.
B) $6,920.
C) $4,325.
D) $5,320.
55) What is the total interest paid over the term of the lease?
A) $42,000.
B) $8,200.
C) $7,400.
D) $3,460.
56) What is the outstanding balance after payment 5?
A) $1,818.
B) $2,000.
C) $2,182.
D) $3,818.
57) What would be the amount of interest expense recorded with payment 5?
A) $2,000.
B) $893.
C) $7,107.
D) $1,107.
58) 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
right-of-use 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.
59) On October 1, 2018, Sonoma Company leased equipment from Napa Inc. in lease payable in
five equal annual payments of $500,000, beginning Oct 1, 2019. Similar transactions have
carried an 11% interest rate. The right-of-use asset would be recorded at: (FV of $1, PV of $1,
FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
A) $0.
B) $1,847,950.
C) $2,115,270.
D) $2,500,000.
60) Titanic Corporation leased executive limos under terms of a $20,000 first payment upon
signing the lease 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: (FV of
$1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
A) $13,200.
B) $10,238.
C) $33,200.
D) $15,543.
61) When a finance lease is first recorded at the beginning of the lease, the lessee typically
debits:
A) Right-of-use asset.
B) Rent expense.
C) Lease expense.
D) Lease receivable.
62) On January 1, 2018, Calloway Company leased a machine to Zone Corporation. The lease
qualifies as a sales-type 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 lease
payments is $240,000. The lease payments are due each January 1, beginning in 2018. What is
the appropriate interest entry on December 31, 2018?
A)
Cash
24,000
Interest revenue
24,000
B)
Cash
20,600
Interest receivable
20,600
C)
Interest receivable
20,600
Interest revenue
20,600
D)
Interest receivable
24,000
Interest revenue
24,000
)
%
63) Francisco leased equipment from Julio on December 31, 2018. The lease is a 10-year lease
with annual payments of $150,000 due on December 31 of each year beginning December 31,
2018. The present value of the lease payments 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, 2019?
A) $824,400.
B) $807,000.
C) $806,400.
D) $792,000.
64) Durney Co. recorded a right-of-use asset of $800,000 in a ten-year finance lease. The interest
rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:
A) $648,000
B) $640,000
C) $880,000
D) $968,000
65) Recording a sales-type lease with a selling profit 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.
66) On January 1, 2018, Princess Corporation leased equipment to King Company. The lease
term is eight years. The first payment of $675,000 was made on January 1, 2018. The equipment
cost Princess Corporation $3,600,000. The present value of the 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 2019 on this lease?
A) $261,000.
B) $328,500.
C) $325,350.
D) $293,850.
67) On January 1, 2018, Packard Corporation leased equipment to Hewlitt Company. The lease
term is eight years. The first payment of $450,000 was made on January 1, 2018. Remaining
payments are made on December 31 each year, beginning with December 31, 2018. The
equipment cost Packard Corporation $2,400,000. The present value of the 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, 2019, balance sheet?
A) $1,950,000.
B) $1,509,000.
C) $1,959,000.
D) $1,704,900.
68) 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 certain sometimes
is called a:
A) Bargain purchase option.
B) Lessee buy-out option.
C) Lessor sell-out option.
D) Guaranteed purchase option.
69) A noncancelable lease contains an 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 certain. The fair value of the asset exceeds the lessor’s cost of the asset. Therefore, the
lease will be accounted for by the lessor as a(n):
A) Sales-type lease.
B) Financing lease.
C) Operating lease.
D) Guaranteed lease.
70) XYZ Company leased equipment to West Corporation under a lease agreement that qualifies
as a finance lease to West but not as a result of a bargain purchase option or a title transfer. The
present value of the lease payments is $600,000. The expected economic life of the asset is seven
years. The lease term is five years. Using the straight-line method, what would West record as
annual amortization?
A) $120,000.
B) $61,000.
C) $60,000.
D) $0.
71) By the lessee, 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.
72) If the lessee expects to obtain title to leased property due to a purchase option that is
reasonably certain to be exercised or the 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.
73) Which of the following statements regarding lessee-guaranteed residual values is true for the
lessee?
A) The asset and liability at the beginning of the lease should be increased by the amount of the
residual value to the extent that guaranteed residual value is expected to exceed estimated
residual value.
B) The asset and liability at the beginning of the lease should be decreased by the amount of the
residual value to the extent that guaranteed residual value is expected to exceed estimated
residual value.
C) The asset and liability at the beginning of the lease should be increased by the present value
of the residual value to the extent that guaranteed residual value is expected to exceed estimated
residual value.
D) The asset and liability 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.
74) ABC Company leased equipment to Best Corporation under a lease agreement that qualifies
as a finance 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 amortization?
A) $23,600.
B) $12,200.
C) $12,000.
D) $11,800.
75) If the residual value of a leased asset turns out to be more than the amount guaranteed by the
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.
76) What are the three types of expenses that a lessee experiences with a finance lease?
A) Lease expense, payments for nonlease components, interest expense.
B) Amortization expense, lease expense, interest expense.
C) Payments for nonlease components, lease expense, amortization expense.
D) Amortization expense, interest expense, payments for nonlease components.
77) 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 incurred by the lessee are:
A) added to the right-of-use asset and expensed over an amortization period.
B) recorded as an expense at the beginning of the lease.
C) deferred in an operating lease until the asset is returned to the lessor.
D) a reduction to the lease liability at the beginning of the lease.
78) 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 incurred by the lessor are deferred and
expensed over the lease term:
A) Only in an operating lease.
B) Only in a sales-type lease with selling profit.
C) Only in a sales-type lease with no selling profit.
D) In both an operating lease and a sales-type lease with no selling profit.
79) 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) An operating lease.
B) A sales-type lease with selling profit.
C) A sales-type lease with no selling profit.
D) Both an operating lease and a sales-type lease with no selling profit.
80) N Corp. entered into a nine-year finance lease on a warehouse on December 31, 2018. Lease
payments of $26,000, which includes maintenance services of $1,000, are due annually,
beginning on December 31, 2019, 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
recorded lease liability at December 31, 2018?
A) $150,000.
B) $156,000.
C) $225,000.
D) $234,000.
81) If the lessee and lessor use different interest rates to account for a finance/sales-type lease,
then:
A) The lessee is unaware of the lessor’s implicit rate.
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.
82) On December 31, 2018, Perry Corporation leased equipment to Admiral Company for a five-
year period. The annual lease payment, excluding nonlease components, 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, 2018. 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, 2018, by what amount
will Perry’s earnings increase due to this lease (ignore taxes)?
A) $20,000.
B) $24,000.
C) $28,500.
D) $0.
83) S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. The immediate
impact of recording a finance lease on these ratios is a(n):
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
84) C Corp., a lessee, has a rate of return on assets of 10%. The rate of return on assets is
immediately increased when C 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