Chapter 21—Accounting for Leases Key
1. On January 1, Lessee Company incorrectly recorded a capital lease as an operating lease. The ratio of debt to
stockholders’ equity would be
2. On January 1, Lessee Company incorrectly recorded a 10-year operating lease as a capital lease. The lease
requires annual payments. As a result of the recording error, Lessee Company’s assets and total liabilities will
be
Total Assets
Total Liabilities
I.
not affected
not affected
II.
not affected
understated
III.
understated
overstated
IV.
overstated
overstated
3. On January 1, Lessee Company incorrectly recorded a 10-year capital lease as an operating lease. The lease
requires annual payments. As a result of the recording error, Lessee Company’s current ratio and debt to
stockholders’ equity ratio will be
Debt to Stockholders’
Current Ratio
Equity Ratio
I.
not affected
not affected
II.
understated
understated
III.
overstated
overstated
IV.
overstated
understated
5. On January 1, Lessor Company incorrectly recorded a 10-year operating lease as a capital lease. The lease
requires annual payments. As a result of the recording error, Lessor Company’s rent revenue and interest
revenue will be
Rent Revenue
Interest Revenue
I.
not affected
not affected
II.
overstated
understated
III.
understated
overstated
IV.
understated
understated
6. Which is an advantage of leasing from a lessee’s viewpoint?
7. From the lessee’s viewpoint, all of the following are advantages of leasing except that
8. Which is not an advantage of leasing from a lessee’s viewpoint?
9. From the lessor’s standpoint, all of the following statements are true regarding leasing except that
10. Minimum lease payments do not include
11. The lease term includes the fixed non-cancellable term of the lease plus
12. According to current GAAP, leased property recorded as a capital lease normally should be reported as a
long-term or intangible asset on the balance sheet of the lessee and the lessor as follows:
Lessee
Lessor
I.
included
included
II.
included
not included
III.
not included
not included
IV.
not included
included
13. For a lease that contains a bargain purchase option, minimum lease payments include
14. If a lease qualifies as a capital lease, which of the following combinations of payments would be included?
15. Executory costs
16. Which of the following criteria would not apply in determining if a lease is a capital lease if the beginning
of the lease term falls within the last 25% of the total estimated economic life of the leased asset?
17. If a lease is classified as a capital lease because the present value of the minimum lease payments is equal to
90% or more of the fair value of the leased property, the time period to be used by the lessee to amortize the
leased property is the
18. If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the
time period to be used by the lessee to amortize the leased property is
19. According to current GAAP, leased property could be reported as an asset on the balance sheet of the lessee
and the lessor as follows:
Lessee
Lessor
I.
included
included
II.
included
not included
III.
not included
not included
20. Which of the following facts would require a lessee to classify a lease as a capital lease?
21. The lessee should classify a non-cancellable long-term lease as a capital lease if
22. Which of the following correctly states a lessee criterion for classifying a lease as a capital lease?
23. Which of the following correctly states a lease capitalization criterion from the point of view of the lessee?
24. If a non-cancellable lease contains a bargain purchase option, the lessee is expected to be able to pay all
future rents, and the lessor is expected to incur unreimbursable costs during the lease term, the lessee and lessor
should classify the lease as
Lessee
Lessor
I.
operating
operating
II.
operating
capital
III.
capital
capital
IV.
capital
operating
25. On January 1, 2010, Leslie Company signed a lease agreement requiring ten annual payments of $14,000,
beginning December 31, 2010. The agreement was classified as a capital lease. When reviewing Leslie’s
accounting records, which of the following would not be expected?
26. Exhibit 21-1
On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60,000,
beginning December 31, 2010. The lease qualifies as a capital lease. Victor’s incremental borrowing rate was
9% and the lessor’s implicit rate, known by Victor, was 10%. The present value factors of an ordinary annuity
of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively.
Refer to Exhibit 21-1. The balance of the lease obligation on January 1, 2011, for financial reporting purposes
after the lease payment would be (round answers to the nearest dollar)
27. Exhibit 21-1
On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60,000,
beginning December 31, 2010. The lease qualifies as a capital lease. Victor’s incremental borrowing rate was
9% and the lessor’s implicit rate, known by Victor, was 10%. The present value factors of an ordinary annuity
of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively.
Refer to Exhibit 21-1. The interest expense for 2010 would be (round answers to the nearest dollar)
28. Exhibit 21-1
On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60,000,
beginning December 31, 2010. The lease qualifies as a capital lease. Victor’s incremental borrowing rate was
9% and the lessor’s implicit rate, known by Victor, was 10%. The present value factors of an ordinary annuity
of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively.
Refer to Exhibit 21-1. The balance of the lease obligation for financial reporting purposes on December 31,
2010, after the lease payment would be (round answers to the nearest dollar)
29. On January 1, 2010, Wally Company signed a four-year lease requiring annual payments of $45,000, with
the first payment due on January 1, 2010. Wally’s incremental borrowing rate was 6%. Actuarial information for
6% follows:
3 Periods
4 Periods
5 Periods
Present value of an annuity due of 1 @ 6%
2.83339
3.67301
4.46511
Present value of ordinary annuity of 1 @ 6%
2.67301
3.46511
4.21236
Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010
(rounded to the nearest dollar)?
30. On January 1, 2010, Remy Corp., a lessee, signed a five-year capital lease for new equipment. The lease
requires annual payments of $8,000. The first payment is due on December 31, 2010. Remy guaranteed a
residual value of $2,000. On December 31, 2014, Remy returned the asset to the lessor, and the asset was
appraised at a value of $1,500. Remy should record which of the following on December 31, 2014?
31. When a lessee makes periodic cash payments for an operating lease, which of the following accounts is
increased?
32. If a lessee classifies a lease as a capital lease and uses the straight-line method of amortization, the amount
33. On January 1, 2010, Karen Corp. leased equipment by signing a five-year lease that required five payments
of $60,000 due on December 31 of each year. Karen has a 9% cost of capital and capitalized the lease on
January 1, 2010, in the amount of $233,379. As of December 31, 2012, what amount is reported as the current
portion of the lease liability?
34. On January 1, 2010, Mabel Company leased equipment by signing a five-year lease that required five
payments of $90,000 due on December 31 of each year. The equipment remains the property of the lessor at the
end of the lease, and Mabel does not guarantee any residual value. Using a rate of 10%, Mabel capitalized the
lease on January 1, 2010, in the amount of $341,172. What is the amount of the lease liability on December 31,
2011?
35. On January 1, 2010, Rayma Co. leased equipment by signing a five-year lease that required five payments
of $30,000 due on January 1 of each year with the first payment due January 1, 2010. The equipment remains
the property of the lessor at the end of the lease and Rayma does not guarantee any residual value. Using a 10%
cost of capital, Rayma capitalized the lease on January 1, 2010, in the amount of $125,096. What is the amount
of current portion of the lease liability Rayma should report on the December 31, 2011, balance sheet?
36. On January 1, 2010, Rayma Co. leased equipment by signing a six-year lease that required six payments of
$30,000 due on January 1 of each year with the first payment due January 1, 2010. The equipment remains the
property of the lessor at the end of the lease, and Rayma does not guarantee any residual value. Using an 8%
cost of capital, Rayma capitalized the lease on January 1, 2010, in the amount of $149,781. What is the total
amount of lease liability (including interest) Rayma should report as of December 31, 2011?
37. A capital lease should be recorded in the lessee’s accounts at the inception of the lease in an amount equal
to
38. On January 1, 2010, Rachel Company leased equipment by signing a five-year lease that required five
payments of $30,000 due on December 31 of each year. The equipment remains the property of the lessor at the
end of the lease, and Rachel does not guarantee any residual value. Using a rate of 7%, Rachel capitalized the
lease on January 1, 2010, in the amount of $123,006. What is the amount of interest expense Rachel should
report on its 2011 income statement?
39. When a lessee makes periodic cash payments for a capital lease, which of the following accounts is
decreased?
40. On January 1, 2010, Matilda Company signed a four-year lease requiring annual payments of $15,000 with
the first payment due on January 1, 2010. The fair value of the equipment leased was $50,000. Matilda’s
incremental borrowing rate was 6%. Actuarial information for 6% follows:
3 Periods
4 Periods
5 Periods
Present value of annuity due of $1
2.83339
3.67301
4.46511
Present value of ordinary annuity of $1
2.67301
3.46511
4.21236
Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010
(rounded to the nearest dollar)?
41. On January 1, 2010, Becky Company signed a lease agreement requiring six annual payments of $50,000,
beginning December 31, 2010. The lease qualifies as an operating lease. Becky’s incremental borrowing rate
was 9% and the lessor’s implicit rate, known by Becky, was 10%. The present value factors of an ordinary
annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively.
Rounded to the nearest dollar, interest and rent expenses for 2010 would be
Interest
Rent
I.
$50,000
$ 0
II.
$ 0
$22,430
III.
$22,430
$50,000
IV.
$ 0
$50,000
42. On January 1, 2010, Marty Inc. leased equipment by signing a five-year lease that required five payments of
$60,000 due on January 1 of each year with the first payment due January 1, 2010. The equipment remains the
property of the lessor at the end of the lease and Marty does not guarantee any residual value. Marty accounted
for the lease as an operating lease, and using a rate of 10%, determined its present value on January 1, 2010, to
be $250,194. What is the amount of current lease liability Marty should report on its December 31, 2010
balance sheet?
43. When a lessee makes periodic cash payments for a capital lease, which of the following accounts is
increased?
44. Exhibit 21-2
On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease
payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first
payment will be made at December 31, 2010. In addition, Maury guarantees the residual value to be $10,000 at
the end of the lease term. Maury correctly uses the lessor’s implicit interest rate, which is 12%. The present
value factors for five periods at 12% are as follows:
Present value of $1
0.567427
Present value of ordinary annuity of $1
3.604776
Refer to Exhibit 21-2. The interest expense associated with the leased equipment for the year ending December 31, 2010, is
45. Exhibit 21-2
On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease
payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first
payment will be made at December 31, 2010. In addition, Maury guarantees the residual value to be $10,000 at
the end of the lease term. Maury correctly uses the lessor’s implicit interest rate, which is 12%. The present
value factors for five periods at 12% are as follows:
Present value of $1
0.567427
Present value of ordinary annuity of $1
3.604776
Refer to Exhibit 21-2. What would be the debit to Leased Equipment under Capital Leases on January 1, 2010? (Round amounts to the nearest
dollar.)
46. Exhibit 21-2
On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease
payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first
payment will be made at December 31, 2010. In addition, Maury guarantees the residual value to be $10,000 at
the end of the lease term. Maury correctly uses the lessor’s implicit interest rate, which is 12%. The present
value factors for five periods at 12% are as follows:
Present value of $1
0.567427
Present value of ordinary annuity of $1
3.604776
Refer to Exhibit 21-2. If the Maury Company uses the straight-line method of depreciation for its assets, the depreciation expense for the leased
equipment for the year ending December 31, 2010, is
47. Exhibit 21-2
On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease
payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first
payment will be made at December 31, 2010. In addition, Maury guarantees the residual value to be $10,000 at
the end of the lease term. Maury correctly uses the lessor’s implicit interest rate, which is 12%. The present
value factors for five periods at 12% are as follows:
Present value of $1
0.567427
Present value of ordinary annuity of $1
3.604776
Refer to Exhibit 21-2. What is the correct interest expense for the year ending December 31, 2011, for the lease obligation? (Round answers to the
nearest dollar.)
48. Which of the following statements regarding the calculation of the lessee’s depreciation expense for a capital
49. Which of the following items would not be included in the calculation of the capital lease obligation?
50. Ginnie, Inc. entered into a five-year capital lease on December 31, 2010. This lease requires five minimum
annual lease payments due on December 31 of each year. The first minimum payment was paid on December
31, 2010. This payment included which of the following?
Interest Expense
Lease Liability
I.
No
Yes
II.
Yes
No
III.
Yes
Yes
IV.
No
No
51. On January 1, 2010, Scarlett signed a lease agreement with Amber. Amber will use the equipment and make
ten annual payments of $15,000 beginning December 31, 2010. The lease is considered to be a capital lease.
52. On January 1, 2010, Scarlett signed a lease agreement with Amber. Amber will use the equipment and make
ten annual payments of $15,000 beginning December 31, 2010. The lease is considered to be a sales-type lease.
When reading the Scarlett income statement, you would expect to find which of the following accounts?
53. On January 1, 2010, Larry, Inc. leased equipment, signing a five-year lease that requires five payments of
$40,000 due on January 1 of each year with the first payment due January 1, 2010. Larry accounted for the lease
as a capital lease. Using a rate of 9%, Larry determined the present value on January 1, 2010, to be $169,589.
What is the amount of the long-term lease obligation that Larry should report on its December 31, 2011 balance
sheet?
54. An operating lease should be recorded in the lessee’s accounts at the inception of the lease at an amount
equal to
55. The Rupert Company leased a machine at the beginning of 2010. The machine, which had cost the lessor
$85,000, was properly capitalized by Rupert at $73,734.84. A lease payment of $16,563 is due at the end of
each year. The expected life of the machine is seven years, and the term of the lease is five years. At the
beginning of 2015, the machine will be returned to the lessor. Both Rupert and the lessor use the straight-line
method of depreciation. What amount of depreciation expense should Rupert record in 2010 for the machine
(round calculations up to the nearest dollar)?
56. On January 3, 2010, the Walton Corporation signed a 10-year non-cancellable lease for manufacturing
equipment. The fair value of the equipment at that time was $550,000. At the end of the lease period, the
equipment, which has an estimated life of 15 years, will be returned to the lessor. Additional information is
below:
Lease payments (year-end)
$80,000
Walton Corporation’s incremental borrowing rate
10%
Lessor’s implicit interest rate (known to Walton)
12%
Present value factor for an ordinary annuity of 10 years
at 10%
6.144567
Present value factor for an ordinary annuity of 10 years
at 12%
5.650223
Walton should
57. Which of the following is not a required disclosure by a lessee of an operating lease?
58. When is it appropriate for the lessee to use the lessor’s implicit rate to discount the minimum lease
payments?
59. The lessee’s footnote disclosures should include the future minimum rental payments as of the date of the
latest balance sheet presented, in the aggregate and for a certain number of succeeding fiscal years. This number
of years is
60. The lessee should report capital lease obligations on the balance sheet as
61. Which of the following is a required disclosure by a lessee of a capital lease?
62. A lease will be treated as a direct financing lease by the lessor when
63. For a sales-type lease, cost of goods sold is valued by the lessor at
64. Depreciation expense will be recorded in the accounts of the
65. Which of the following statements is true about initial direct costs?
66. Which of the following facts would require a lessor to classify a lease as an operating lease?
67. A direct financing lease differs from a sales-type lease in that
68. Dillon Co., a lessor, signed a direct financing lease on January 1. The cost and fair value of the machine that
was leased was $60,000. The implicit interest rate was 6%. The lease period was seven years, with the first
payment due immediately. Actuarial information for 6% follows:
6 Years
7 Years
8 Years
Present value of ordinary annuity of $1
4.91732
5.58238
6.20979
What is the annual lease payment to be collected by Dillon?
69. On January 1, 2010, Stanley Corp., a lessor, signed a direct financing lease. Stanley was to receive annual
year-end payments of $8,000 for ten years, after which there was a guaranteed residual value of $6,000. The
implicit interest rate was 8%. Actuarial information for 8%, ten periods follows:
Present value of ordinary annuity of $1
6.71008
Present value of amount of $1
0.46319
On January 1, 2010, Stanley should record a debit to Lease Receivable for
70. When a lessor receives cash on an operating lease, which of the following accounts is increased?
71. In a sales-type lease
72. A lessor enters into a sales-type lease. Which of the following statements is true if the leased asset has an
unguaranteed residual value?
73. Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease
should be
74. A six-year operating lease requires annual rent payments of $15,000 for years 1, 2, and 3, and annual rent
payments of $10,000 for years 4, 5, and 6. The agreement also requires the lessor to pay a $1,800 annual
insurance premium for the leased property. Which of the following amounts should be recognized as the rental
revenue in year 1 by the lessor?
75. Which of the following items should be included in the calculation of the lessor’s gross receivable?
Periodic Lease
Executory Costs
Unguaranteed
Rental Payments
Paid by Lessee
Residual Value
I.
Yes
Yes
Yes
II.
Yes
Yes
No
III.
Yes
No
No
IV.
Yes
No
Yes
76. One of the distinguishing characteristics of a direct financing lease is that
77. Exhibit 21-3
On January 1, 2010, Quincy Company enters into a five-year sales-type lease with Andy Company. The lease
requires Andy to make five annual payments at the beginning of the year, with the first payment due January 1,
2010. The lease includes a bargain purchase price of $10,000. Quincy requires a 10% rate of return. The cost to
Quincy of the property is $100,000, and it has a fair value of $150,000. Present value factors for a 10% interest
rate are as follows:
Present value of $1 for n = 1
0.909091
Present value of $1 for n = 5
0.620921
Present value of an ordinary annuity for n = 5
3.790787
Present value of an annuity due for n = 5
4.169865
Refer to Exhibit 21-3. The annual lease payment Quincy would require is (round the answer to the nearest dollar)
78. Exhibit 21-3
On January 1, 2010, Quincy Company enters into a five-year sales-type lease with Andy Company. The lease
requires Andy to make five annual payments at the beginning of the year, with the first payment due January 1,
2010. The lease includes a bargain purchase price of $10,000. Quincy requires a 10% rate of return. The cost to
Quincy of the property is $100,000, and it has a fair value of $150,000. Present value factors for a 10% interest
rate are as follows:
Present value of $1 for n = 1
0.909091
Present value of $1 for n = 5
0.620921
Present value of an ordinary annuity for n = 5
3.790787
Present value of an annuity due for n = 5
4.169865
Refer to Exhibit 21-3. The sales revenue to be recognized by Quincy on January 1, 2010, is
79. Exhibit 21-4
On January 1, 2010, General Leasing Company entered into a direct financing lease with a lessee, Lee
Company. The lease agreement calls for five equal annual payments of $60,000 at the beginning of each year
with the first payment due on January 1, 2010. The leased property has an estimated residual value of $10,000,
which Lee does not guarantee. The property remains the property of General at the end of the lease term.
General desires a 12% rate of return. Present value factors for a 12% interest rate are as follows:
Present value of $1 for n = 1
0.892857
Present value of $1 for n = 5
0.567427
Present value of an ordinary annuity for n = 5
3.604776
Present value of an annuity due for n = 5
4.037349
Refer to Exhibit 21-4. The cost of the leased property to General is (round the answer to the nearest dollar)