CHAPTER 21
ACCOUNTING FOR LEASES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
MULTIPLE CHOICE—Computational
Answer No. Description
Accounting for Leases
21 – 3
MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
BRIEF EXERCISES
Item Description
BE21-110 Capital lease (essay).
BE21-111 Capital lease amortization and journal entries.
BE21-112 Operating lease.
EXERCISES
E21-113 Lease criteria for classification by lessor.
E21-114 Direct-financing lease (essay).
E21-115 Lessor accounting—sales-type lease.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 4
*E21-116 Lessee and lessor accounting (sale-leaseback).
*E21-117 Sale-leaseback.
Accounting for Leases
21 – 5
PROBLEMS
Item Description
P21-118 Lessee accounting—capital lease.
P21-119 Lessee accounting—capital lease.
P21-120 Lessor accounting—direct-financing lease.
CHAPTER LEARNING OBJECTIVES
1. Explain the nature, economic substance, and advantages of lease transactions.
2. Describe the accounting criteria and procedures for capitalizing leases by the lessee.
3. Contrast the operating and capitalization methods of recording leases.
4. Explain the advantages and economics of leasing to lessors and identify the
classifications of leases for the lessor.
5. Describe the lessor’s accounting for direct-financing leases.
6. Identify special features of lease arrangements that cause unique accounting problems.
7. Describe the effect of residual values, guaranteed and unguaranteed, on lease
accounting.
8. Describe the lessor’s accounting for sales-type leases.
9. List the disclosure requirements for leases.
*10. Describe the lessee’s accounting for sale-leaseback transactions.
11. Compare the accounting for leases under GAAP and IFRS.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 6
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
Item
Type
Type
Item
Type
Item
Type
Item
Type
Item
Type
Learning Objective 1
1.
TF
2.
TF
21.
MC
22.
MC
23.
MC
24.
MC
S25.
MC
Learning Objective 2
3.
TF
30.
MC
56.
MC
64.
MC
71.
MC
91.
MC
104.
MC
4.
TF
31.
MC
58.
MC
65.
MC
72.
MC
96.
MC
105.
MC
5.
TF
32.
MC
59.
MC
66.
MC
73.
MC
97.
MC
110.
BE
S26.
MC
52.
MC
60.
MC
67.
MC
74.
MC
100.
MC
111.
BE
P27.
MC
53.
MC
61.
MC
68.
MC
75.
MC
101.
MC
118.
P
28.
MC
54.
MC
62.
MC
69.
MC
76.
MC
102.
MC
119.
P
29.
MC
55.
MC
63.
MC
70.
MC
77.
MC
103.
MC
Learning Objective 3
6.
TF
33.
MC
P35.
MC
82.
MC
7.
TF
34.
MC
81.
MC
112.
BE
Learning Objective 4
8.
TF
36.
MC
78.
MC
94.
MC
9.
TF
57.
MC
83.
MC
113.
E
Learning Objective 5
10.
TF
37.
MC
S39.
MC
80.
MC
85.
MC
113.
E
120.
P
11.
TF
38.
MC
79.
MC
84.
MC
95.
MC
114.
E
Learning Objective 6
119.
P
Learning Objective 7
12.
TF
14.
TF
16.
TF
41.
MC
86.
MC
88.
MC
13.
TF
15.
TF
S40.
MC
85.
MC
87.
MC
Learning Objective 8
17.
TF
42.
MC
45.
MC
89.
MC
93.
MC
113.
E
18.
TF
S43.
MC
46.
MC
90.
MC
106.
MC
115.
E
19.
TF
P44.
MC
47.
MC
92.
MC
107.
MC
116.
E
Learning Objective 9
20.
TF
47.
MC
48.
MC
Learning Objective 10*
49.
MC
51.
MC
99.
MC
109.
MC
117.
E
50.
MC
98.
MC
108.
MC
116.
E
Learning Objective 11 – IFRS
1.
TF
3.
TF
5.
TF
7.
MC
9.
SA
2.
TF
4.
TF
6.
MC
8.
MC
Note: TF = True-False
MC = Multiple Choice
BE = Brief Exercise
E = Exercise
P = Problem
Accounting for Leases
21 – 7
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 8
TRUE-FALSE—Conceptual
1. Leasing equipment reduces the risk of obsolescence to the lessee and in many cases
passes the risk of residual value to the lessor.
2. The FASB agrees with the capitalization approach and requires companies to capitalize
all long-term leases.
3. Minimum rental payments are the same as minimum lease payments.
4. Executory costs should be excluded by the lessee in computing the present value of the
minimum lease payments.
5. A capitalized leased asset is always depreciated over the term of the lease by the lessee.
6. A lessee records interest expense in both a capital lease and an operating lease.
7. A benefit of leasing to the lessor is the return of the leased property at the end of the lease
term.
8. The distinction between a direct-financing lease and a sales-type lease is the presence or
absence of a transfer of title.
9. Lessors classify and account for all leases that don’t qualify as sales-type leases as
operating leases.
10. Direct-financing leases are in substance the financing of an asset purchase by the lessee.
11. Under the operating method, the lessor records each rental receipt as part interest
revenue and part rental revenue.
12. In computing the annual lease payments, the lessor deducts only a guaranteed residual
value from the fair value of a leased asset.
13. When the lessee agrees to make up any deficiency below a stated amount that the lessor
realizes in residual value, that stated amount is the guaranteed residual value.
14. Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of
amounts capitalized as a leased asset.
15. From the lessee’s viewpoint, an unguaranteed residual value is the same as no residual
value in terms of computing the minimum lease payments.
16. The lessor will recover a greater net investment if the residual value is guaranteed instead
of unguaranteed.
17. The primary difference between a direct-financing lease and a sales-type lease is the
manufacturer’s or dealer’s gross profit (or loss).
18. The gross profit amount in a sales-type lease is greater when a guaranteed residual value
exists.
Accounting for Leases
21 – 9
19. Companies must periodically review the estimated unguaranteed residual value in a
sales-type lease.
20. The FASB requires lessees and lessors to disclose certain information about leases in
their financial statements or in the notes.
MULTIPLE CHOICE—Conceptual
21. Major reasons why a company may become involved in leasing to other companies is
(are)
a. interest revenue.
b. high residual values.
c. tax incentives.
d. All of these answers are correct.
22. Which of the following is an advantage of captive leasing companies over the other
players in the leasing market?
a. They have access to low-cost funds allowing them to purchase assets at lower cost.
b. They are good at developing innovative contracts that help avoid accounting
problems.
c. They provide leasing arrangements for a wider range of products than the parent
company’s product line.
d. They have the paint-of–sale advantage in finding leasing customers.
23. Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.
24. While only certain leases are currently accounted for as a sale or purchase, there is
theoretic justification for considering all leases to be sales or purchases. The principal
reason that supports this idea is that
a. all leases are generally for the economic life of the property and the residual value of
the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were
owned.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 10
S25. An essential element of a lease is that the
a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year’s lease payments.
c. property that is the subject of the lease agreement must be held for sale by the lessor
prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased property.
S26. What impact does a bargain purchase option have on the present value of the minimum
lease payments computed by the lessee?
a. There is no impact as the option does not enter into the transaction until the end of the
lease term.
b. The lessee must increase the present value of the minimum lease payments by the
present value of the option price.
c. The lessee must decrease the present value of the minimum lease payments by the
present value of the option price.
d. The minimum lease payments would be increased by the present value of the option
price if, at the time of the lease agreement, it appeared certain that the lessee would
exercise the option at the end of the lease and purchase the asset at the option price.
P27. The amount to be recorded as the cost of an asset under capital lease is equal to the
a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset, whichever
is lower.
c. present value of the minimum lease payments plus the present value of any
unguaranteed residual value.
d. carrying value of the asset on the lessor’s books.
28. The methods of accounting for a lease by the lessee are
a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. None of these answers are correct.
29. Which of the following is a correct statement of one of the capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the
leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the
fair value of the leased property.
30. Minimum lease payments may include a
a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.
31. In computing depreciation of a leased asset, the lessee should subtract
a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.
Accounting for Leases
21 – 11
32. In computing the present value of the minimum lease payments, the lessee should
a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is
higher, assuming that the implicit rate is known to the lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is
lower, assuming that the implicit rate is known to the lessee.
d. None of these answers are correct.
33. Lessees prefer to account for their leases as operating lease because:
a. it increases their debt to total equity ratio.
b. it decreases the income tax expense.
c. it increases the amount of total assets.
d. it decreases the amount of liability reported.
34. From the lessee’s perspective, in the earlier years of a lease, the use of the
a. capital method will enable the lessee to report higher income, compared to the
operating method.
b. capital method will cause debt to increase, compared to the operating method.
c. operating method will cause income to decrease, compared to the capital method.
d. operating method will cause debt to increase, compared to the capital method.
P35. A lessee with a capital lease containing a bargain purchase option should depreciate the
leased asset over the
a. asset’s remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of the asset or the term of the lease, whichever is longer.
36. Based solely upon the following sets of circumstances indicated below, which set gives
rise to a sales-type or direct-financing lease of a lessor?
Transfers Ownership Contains Bargain Collectibility of Lease Any Important
By End Of Lease? Purchase Option? Payments Assured? Uncertainties?
a. No Yes Yes No
b. Yes No No No
c. Yes No No Yes
d. No Yes Yes Yes
37. Which of the following would not be included in the Lease Receivable account?
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included
38. In a lease that is appropriately recorded as a direct-financing lease by the lessor, the
unearned income
a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease’s expiration.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 12
S39. In order to properly record a direct-financing lease, the lessor needs to know how to
calculate the lease receivable. The lease receivable in a direct-financing lease is best
defined as
a. the amount of funds the lessor has tied up in the asset which is the subject of the
direct-financing lease.
b. the difference between the lease payments receivable and the fair value of the leased
property.
c. the present value of minimum lease payments.
d. the total book value of the asset less any accumulated depreciation recorded by the
lessor prior to the lease agreement.
S40. If the residual value of a leased asset is guaranteed by a third party
a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the lessee.
c. the net investment to be recovered by the lessor is reduced.
d. it is treated by the lessee as an additional payment and by the lessor as realized at the
end of the lease term.
41. When lessors account for residual values related to leased assets, they
a. include the residual value because they always assume the residual value will be
realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more gross profit on a sales-type lease with a guaranteed residual value
than on a sales-type lease with an unguaranteed residual value.
d. All of the answers are true with regard to lessors and residual values.
42. The initial direct costs of leasing
a. are generally borne by the lessee.
b. include incremental costs related to internal activities of leasing, and internal costs
related to costs paid to external third parties for originating a lease arrangement.
c. are expensed in the period of the sale under a sales-type lease.
d. All of the answers are true with regard to the initial direct costs of leasing.
S43. The primary difference between a direct-financing lease and a sales-type lease is the
a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer’s or dealer’s profit at (or loss) the inception of the
lease.
d. allocation of initial direct costs by the lessor to periods benefited by the lease
arrangements.
P44. A lessor with a sales-type lease involving an unguaranteed residual value available to the
lessor at the end of the lease term will report sales revenue in the period of inception of
the lease at which of the following amounts?
a. The minimum lease payments plus the unguaranteed residual value.
b. The present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed
residual value.
d. The present value of the minimum lease payments plus the present value of the
unguaranteed residual value.
Accounting for Leases
21 – 13
45. For a sales-type lease,
a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the cost
of goods sold.
c. the gross profit will be the same whether the residual value is guaranteed or
unguaranteed.
d. None of these answers are correct.
46. Which of the following statements is correct?
a. For direct-financing leases, initial direct costs are added to the net investment in the
lease.
b. For sales-type leases, initial direct costs are expensed in the year of incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the lease
term.
d. All of these answers are correct.
47. The Lease Liability account should be disclosed as
a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.
48. To avoid leased asset capitalization, companies can devise lease agreements that fail to
satisfy any of the four leasing criteria. Which of the following is not one of the ways to
accomplish this goal?
a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the
property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset’s residual value.
*49. If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is
therefore accounted for as a capital lease, who records the asset on its books and which
party records interest expense during the lease period?
Party recording the Party recording
asset on its books interest expense
a. Seller-lessee Purchaser-lessor
b. Purchaser-lessor Seller-lessee
c. Purchaser-lessor Purchaser-lessor
d. Seller-lessee Seller-lessee
*50. In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which
of the following is false?
a. The seller-lessee removes the asset from its books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the lease as an operating lease.
d. All of the answers are false statements.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 14
*51. When a company sells property and then leases it back, any gain on the sale should
usually be
a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income over the term of the lease.
MULTIPLE CHOICE—Computational
52. On December 1, 2015, Goetz Corporation leased office space for 10 years at a monthly
rental of $90,000. On that date Goetz paid the landlord the following amounts:
Rent deposit $ 90,000
First month’s rent 90,000
Last month’s rent 90,000
Installation of new walls and offices 720,000
$990,000
The entire amount of $990,000 was charged to rent expense in 2015. What amount
should Goetz have charged to expense for the year ended December 31, 2015?
a. $90,000
b. $96,000
c. $186,000
d. $720,000
53. On January 1, 2015, Dean Corporation signed a ten-year noncancelable lease for certain
machinery. The terms of the lease called for Dean to make annual payments of $150,000
at the end of each year for ten years with the title passing to Dean at the end of this
period. The machinery has an estimated useful life of 15 years and no salvage value.
Dean uses the straight-line method of depreciation for all of its fixed assets. Dean
accordingly accounted for this lease transaction as a capital lease. The lease payments
were determined to have a present value of $1,006,512 at an effective interest rate of 8%.
With respect to this capitalized lease, Dean should record for 2015
a. lease expense of $150,000.
b. interest expense of $67,101 and depreciation expense of $57,102.
c. interest expense of $80,521 and depreciation expense of $67,101.
d. interest expense of $68,522 and depreciation expense of $100,652.
Accounting for Leases
21 – 15
Use the following information for questions 54 through 59. (Annuity tables on page 21-25.)
On January 1, 2015, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a
storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably
predictable and no important uncertainties surround the amount of costs yet to be incurred by the
lessor. The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning each year.
(b) The fair value of the building on January 1, 2015 is $4,000,000; however, the book value
to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey
depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey’s incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual
rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey,
Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the
property.
54. What is the amount of the minimum annual lease payment? (Rounded to the nearest
dollar.)
a. $181,801
b. $581,801
c. $591,801
d. $601,801
55. What is the amount of the total annual lease payment?
a. $181,801
b. $581,801
c. $591,801
d. $601,801
56. From the lessee’s viewpoint, what type of lease exists in this case?
a. Sales-type lease
b. Sale-leaseback
c. Capital lease
d. Operating lease
57. From the lessor’s viewpoint, what type of lease is involved?
a. Sales-type lease
b. Sale-leaseback
c. Direct-financing lease
d. Operating lease
58. Yancey, Inc. would record depreciation expense on this storage building in 2015 of
(Rounded to the nearest dollar.)
a. $0.
b. $330,000.
c. $400,000.
d. $650,981.
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 16
59. If the lease were nonrenewable, there was no purchase option, title to the building does
not pass to the lessee at termination of the lease and the lease were only for eight years,
what type of lease would this be for the lessee?
a. Sales-type lease
b. Direct-financing lease
c. Operating lease
d. Capital lease
60. Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets
the criteria to be a capital lease for Metcalf. The six-year lease requires payment of
$136,000 at the beginning of each year, including $20,000 per year for maintenance,
insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor’s
implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1
for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at
8% is 4.99271. Metcalf should record the leased asset at
a. $679,008.
b. $651,548.
c. $579,154.
d. $555,732.
61. On December 31, 2014, Lang Corporation leased a ship from Fort Company for an eight-
year period expiring December 30, 2022. Equal annual payments of $300,000 are due on
December 31 of each year, beginning with December 31, 2014. The lease is properly
classified as a capital lease on Lang ‘s books. The present value at December 31, 2014 of
the eight lease payments over the lease term discounted at 10% is $1,760,528. Assuming
all payments are made on time, the amount that should be reported by Lang Corporation
as the total obligation under capital leases on its December 31, 2015 balance sheet is
a. $1,636,581.
b. $1,500,238.
c. $1,306,581.
d. $1,800,000.
Use the following information for questions 62 and 63.
On January 1, 2014, Sauder Corporation signed a five-year noncancelable lease for equipment.
The terms of the lease called for Sauder to make annual payments of $150,000 at the beginning
of each year for five years with the title passing to Sauder at the end of this period. The
equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-
line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease
transaction as a capital lease. The minimum lease payments were determined to have a present
value of $625,479 at an effective interest rate of 10%.
62. In 2014, Sauder should record interest expense of
a. $47,548.
b. $87,453.
c. $62,547.
d. $102,453.
63. In 2015, Sauder should record interest expense of
a. $32,547.
b. $52,303.
c. $47,548.
d. $52,302.
Accounting for Leases
21 – 17
64. On December 31, 2015, Kuhn Corporation leased a plane from Bell Company for an
eight-year period expiring December 30, 2022. Equal annual payments of $300,000 are
due on December 31 of each year, beginning with December 31, 2015. The lease is
properly classified as a capital lease on Kuhn’s books. The present value at December 31,
2015 of the eight lease payments over the lease term discounted at 10% is $1,760,528.
Assuming the first payment is made on time, the amount that should be reported by Kuhn
Corporation as the lease liability on its December 31, 2015 balance sheet is
a. $1,760,528.
b. $1,636,580.
c. $1,584,476.
d. $1,460,528.
Use the following information for questions 65 and 66.
On January 1, 2014, Ogleby Corporation signed a five-year noncancelable lease for equipment.
The terms of the lease called for Ogleby to make annual payments of $90,000 at the beginning of
each year for five years with title passing to Ogleby at the end of this period. The equipment has
an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of
depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a
capital lease. The minimum lease payments were determined to have a present value of
$375,289 at an effective interest rate of 10%.
65. With respect to this capitalized lease, for 2014 Ogleby should record
a. rent expense of $90,000.
b. interest expense of $28,529 and depreciation expense of $75,058.
c. interest expense of $28,529 and depreciation expense of $53,613.
d. interest expense of $45,000 and depreciation expense of $90,978.
66. With respect to this capitalized lease, for 2015 Ogleby should record
a. interest expense of $28,529 and depreciation expense of $53,613.
b. interest expense of $37,529 and depreciation expense of $53,613.
c. interest expense of $22,382 and depreciation expense of $53,613.
d. interest expense of $31,382 and depreciation expense of $53,613.
67. Emporia Corporation is a lessee with a capital lease. The asset is recorded at $810,000
and has an economic life of 8 years. The lease term is 5 years. The asset is expected to
have a fair value of $270,000 at the end of 5 years, and a fair value of $90,000 at the end
of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee
at the end of the lease term. What amount of depreciation expense would the lessee
record for the first year of the lease?
a. $162,000
b. $144,000
c. $108,000
d. $90,000
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 18
68. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $172,076, with the first payment due at lease inception. The lease
does not transfer ownership, nor is there a bargain purchase option. The equipment has a
4-year useful life and no salvage value. If Pisa, Inc.’s incremental borrowing rate is 10%
and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount
recorded for the leased asset at the lease inception?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $615,533
b. $545,456
c. $569,937
d. $600,000
69. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $172,076, with the first payment due at lease inception. The lease
does not transfer ownership, nor is there a bargain purchase option. The equipment has a
4-year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and
the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease
is properly classified as a capital lease, what is the amount of interest expense recorded
by Pisa, Inc. in the first year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $0
b. $49,241
c. $35,477
d. $45,596
70. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $172,076, with the first payment due at lease inception. The lease
does not transfer ownership, nor is there a bargain purchase option. The equipment has a
4 year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and
the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease
is properly classified as a capital lease, what is the amount of principal reduction recorded
when the second lease payment is made in Year 2?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $172,076
b. $122,833
c. $126,480
d. $136,599
Accounting for Leases
21 – 19
71. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $172,076, with the first payment due at lease inception. The lease
does not transfer ownership, nor is there a bargain purchase option. The equipment has a
4-year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and
the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Pisa, Inc. uses the
straight-line method to depreciate similar assets. What is the amount of depreciation
expense recorded by Pisa, Inc. in the first year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $0 because the asset is depreciated by Tower Company.
b. $142,484
c. $153,883
d. $150,000
72. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2015 it
leased equipment with a cost of $320,000 to Silver Point Co. The 5-year lease calls for a
10% down payment and equal annual payments at the end of each year. The equipment
has an expected useful life of 5 years. Silver Point’s incremental borrowing rate is 10%,
and it depreciates similar equipment using the double-declining balance method. The
selling price of the equipment is $520,000, and the rate implicit in the lease is 8%, which is
known to Silver Point Co. What is the amount of interest expense recorded by Silver Point
Co. for the year ended December 31, 2015?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. $46,800
b. $37,440
c. $41,600
d. $52,000
73. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2015 it
leased equipment with a cost of $320,000 to Silver Point Co. The 5-year lease calls for a
10% down payment and equal annual payments of $146,518 at the end of each year. The
equipment has an expected useful life of 5 years. Silver Point’s incremental borrowing rate
is 10%, and it depreciates similar equipment using the double-declining balance method.
The selling price of the equipment is $520,000, and the rate implicit in the lease is 8%,
which is known to Silver Point Co. What is the book value of the leased asset at
December 31, 2015?
a. $520,000
b. $416,000
c. $312,000
d. $332,800
Test Bank for Intermediate Accounting, Fifteenth Edition
21 – 20
74. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2015 it
leased equipment with a cost of $320,000 to Silver Point Co. The 5-year lease calls for a
10% down payment and equal annual payments at the end of each year. The equipment
has an expected useful life of 5 years. If the selling price of the equipment is $520,000,
and the rate implicit in the lease is 8%, what are the equal annual payments?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. $117,214
b. $108,530
c. $121,315
d. $130,237
Use the following information for questions 75 through 80. (Annuity tables on page 21-25.)
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the
purpose of leasing a machine to be used in its manufacturing operations. The following data
pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of
$287,432 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2015, is $800,000. The machine has a
remaining economic life of 10 years, with no salvage value. The machine reverts to the
lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8%
implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a
suit which is sufficiently material to make collectibility of future lease payments doubtful.
75. What type of lease is this from Alt Corporation’s viewpoint?
a. Operating lease
b. Capital lease
c. Sales-type lease
d. Direct-financing lease
76. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a
consequence of the lease during the fiscal year ended December 31, 2015?
a. Depreciation Expense
b. Rent Expense
c. Interest Expense
d. Depreciation Expense and Interest Expense
77. If the present value of the future lease payments is $800,000 at January 1, 2015, what is
the amount of the reduction in the lease liability for Alt Corp. in the second full year of the
lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest
dollar.)
a. $207,426
b. $223,426
c. $236,175
d. $228,175