Accounting for Leases
21 – 21
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of
$574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2021, is $1,600,000. 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.
What type of lease is this from Alt Corporation’s viewpoint?
a. Operating lease
b. Finance lease
c. Sales-type lease
d. Direct-financing lease
76. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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
$574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2021, is $1,600,000. 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.
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, 2021?
a. Amortization Expense
b. Lease Expense
c. Interest Expense
d. Amortization Expense and Interest Expense
77. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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
$574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2021, is $1,600,000. 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.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 22
(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.
If the present value of the future lease payments is $1,600,000 at January 1, 2021, 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 finance lease? (Rounded to the nearest
dollar.)
a. $414,852
b. $446,852
c. $472,350
d. $456,350
78. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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
$574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2021, is $1,600,000. 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.
From the viewpoint of Yates, what type of lease agreement exists?
a. Operating lease
b. Finance lease
c. Sales-type lease
d. Direct-financing lease
79. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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
$574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2021, is $1,600,000. 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.
Accounting for Leases
21 – 23
If Yates records this lease as a direct-financing lease, what amount would be recorded as
Lease Receivable at the inception of the lease?
a. $574,864
b. $1,572,563
c. $1,600,000
d. $1,724,592
80. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 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
$574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2021, is $1,600,000. 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.
Which of the following lease-related revenue and expense items would be recorded by
Yates if the lease is accounted for as an operating lease?
a. Lease Revenue only
b. Interest Revenue only
c. Depreciation Expense only
d. Lease Revenue and Depreciation Expense
81. Hook Company leased equipment to Emley Company on July 1, 2020, for a one-year
period expiring June 30, 2021, for $80,000 a month. On July 1, 2021, Hook leased this
piece of equipment to Terry Company for a three-year period expiring June 30, 2024, for
$100,000 a month. The original cost of the equipment was $6,400,000. The equipment,
which has been continually on lease since July 1, 2016, is being depreciated on a straight–
line basis over an eight-year period with no salvage value. Assuming that both the lease
to Emley and the lease to Terry are appropriately recorded as operating leases for
accounting purposes, what is the amount of income (expense) before income taxes that
each would record as a result of the above facts for the year ended December 31, 2021?
Hook Emley Terry
a. $280,000 $(480,000) $(600,000)
b. $280,000 $(480,000) $(1,000,000)
c. $1,080,000 $(80,000) $(200,000)
d. $1,080,000 $(880,000) $(600,000)
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 24
82. Hull Co. leased equipment to Riggs Company on May 1, 2021. At that time the
collectibility of the lease payments was not probable. The lease expires on May 1, 2022.
Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it.
Hull’s accounting records showed a book value for the equipment on May 1, 2021, of
$4,900,000. Hull’s depreciation on the equipment in 2021 was $630,000. During 2021,
Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance
and other related costs under the terms of the lease of $112,000 in 2021. After the lease
with Riggs expires, Hull will lease the equipment to another company for two years.
Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the
year ended December 31, 2021, should be
a. $518,000.
b. $630,000.
c. $1,148,000.
d. $1,260,000.
83. Hull Co. bought equipment and immediately leased it to Riggs Company on May 1, 2021.
At that time the collectibility of the lease payments was not probable. The lease expires
on May 1, 2022. Riggs could have bought the equipment from Hull for $5,600,000 instead
of leasing it. Hull’s accounting records showed a book value for the equipment on May 1,
2021, of $4,900,000. Hull’s depreciation on the equipment in 2021 was $630,000. During
2021, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred
maintenance and other related costs under the terms of the lease of $112,000 in 2021.
After the lease with Riggs expires, Hull will lease the equipment to another company for
two years.
The income before income taxes derived by Hull from this lease for the year ended
December 31, 2021, should be
a. $518,000.
b. $630,000.
c. $1,148,000.
d. $1,260,000.
Accounting for Leases
21 – 25
84. On January 2, 2021, Hanson Leasing Company leases equipment to Foley Co. with 5
equal annual payments of $240,000 each, payable beginning January 2, 2021. Foley Co.
agrees to guarantee the $150,000 residual value of the asset at the end of the lease term.
The expected value of the residual is $0. Foley’s incremental borrowing rate is 10%,
however it knows that Hanson’s implicit interest rate is 8%. The journal entry Hanson
makes at January 2, 2021 includes a debit to right-of-use asset for?
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. $897,674.
b. $1,034,910.
c. $1,061,013.
d. $1,137,673.
85. Mays Company has a machine with a cost of $750,000 which also is its fair value on the
date the machine is leased to Park Company. The lease is for 6 years and the machine is
estimated to have an unguaranteed residual value of $75,000. If the lessor’s interest rate
implicit in the lease is 12%, the six beginning-of–the-year lease payments would be
a. $162,874.
b. $154,623.
c. $146,587.
d. $125,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 26
86. On January 2, 2021, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $160,000 each, payable beginning January 2, 2021. Brick Co.
agrees to guarantee the $150,000 residual value of the asset at the end of the lease term.
The expected value of the residual value is $50,000. Brick’s incremental borrowing rate is
10%, however it knows that Gold Star’s implicit interest rate is 8%. What journal entry
would Brick Co. make at January 2, 2021 to record the lease?
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. Right-of-Use Asset 598,449
Lease Liability 598,449
b. Right-of-Use Asset 758,449
Cash 160,000
Lease Liability 598,449
c. Right-of-Use Asset 689,940
Cash 160,000
Lease Liability 529,940
d. Right–of-Use Asset 707,342
Cash 160,000
Lease Liability 547,342
87. On January 2, 2021, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $160,000 each, payable beginning January 2, 2021. Brick Co.
agrees to guarantee the $150,000 residual value of the asset at the end of the lease term.
The expected value of the residual value is $50,000. Brick’s incremental borrowing rate is
10%, however it knows that Gold Star’s implicit interest rate is 8%. What journal entry
would Brick Co. make at January 1, 2022 to record the second lease payment?
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. Lease Liability 112,124
Interest Expense 47,876
Cash 160,000
b. Lease Liability 117,604
Interest Expense 42,396
Cash 160,000
c. Lease Liability 160,000
Cash 160,000
d. Lease Liability 116,212
Interest Expense 43,788
Cash 160,000
Accounting for Leases
21 – 27
88. Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the
basis that the residual value was guaranteed and Geary gets to recognize all the profits.
At the end of the lease term, before the lessee transfers the asset to the lessor, the leased
asset and liability accounts have the following balances:
Right-of-Use Asset $400,000
Less accumulated depreciation—finance lease 384,000
$ 16,000
Interest payable $ 1,520
Lease liability 14,480
$16,000
If, at the end of the lease, the fair value of the residual value is $11,800, what gain or loss
should Dains record?
a. $2,680 gain
b. $6,280 loss
c. $4,200 loss
d. $11,800 gain
89. Harter Company leased machinery to Stine Company on July 1, 2021, for a ten-year
period expiring June 30, 2031. Equal annual payments under the lease are $250,000 and
are due on July 1 of each year. The first payment was made on July 1, 2021. The rate of
interest used by Harter and Stine is 9%. The lease receivable before the first payment is
$1,750,000 and the cost of the machinery on Harter’s accounting records was $1,550,000.
Assuming that the lease is appropriately recorded as a sale for accounting purposes by
Harter, what amount of interest revenue would Harter record for the year ended
December 31, 2021?
a. $157,500
b. $135,000
c. $67,500
d. $0
90. Pye Company leased equipment to the Polan Company on July 1, 2021, for a ten-year
period expiring June 30, 2031. Equal annual payments under the lease are $240,000 and
are due on July 1 of each year. The first payment was made on July 1, 2021. The rate of
interest contemplated by Pye and Polan is 9%. The lease receivable before the first
payment is $1,680,000 and the cost of the equipment on Pye’s accounting records was
$1,488,000. Assuming that the lease is appropriately recorded as a sale for accounting
purposes by Pye, what is the amount of profit on the sale and the interest revenue that
Pye would record for the year ended December 31, 2021?
a. $192,000 and $151,200
b. $192,000 and $129,600
c. $192,000 and $64,800
d. $0 and $0
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 28
91. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc.,
on July 1, 2021. The lease is appropriately accounted for as a sales-type lease by Metro
and as a finance lease by Sands. The lease is for a 10-year period (the useful life of the
asset) expiring June 30, 2031. The first of 10 equal annual payments of $828,000 was
made on July 1, 2021. Metro had purchased the equipment for $5,250,000 on January 1,
2021, and established a list selling price of $7,200,000 on the equipment. Assume that the
present value at July 1, 2021, of the rent payments over the lease term discounted at 8%
(the appropriate interest rate) was $6,000,000.
Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia–
tion and interest expense that Sands should record for the year ended December 31,
2021?
a. $300,000 and $206,880
b. $300,000 and $240,000
c. $3,600,000 and $206,880
d. $3,600,000 and $160,000
92. Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc.,
on July 1, 2021. The lease is appropriately accounted for as a sales-type lease by Metro
and as a finance lease by Sands. The lease is for a 10-year period (the useful life of the
asset) expiring June 30, 2031. The first of 10 equal annual payments of $828,000 was
made on July 1, 2021. Metro had purchased the equipment for $5,250,000 on January 1,
2021, and established a list selling price of $7,200,000 on the equipment. Assume that the
present value at July 1, 2021, of the rent payments over the lease term discounted at 8%
(the appropriate interest rate) was $6,000,000.
What is the amount of profit on the sale and the amount of interest revenue that Metro
should record for the year ended December 31, 2021?
a. $0 and $137,920
b. $750,000 and $206,880
c. $750,000 and $240,000
d. $1,200,000 and $480,000
93. Roman Company leased equipment from Koenig Company on July 1, 2021, for an eight-
year period expiring June 30, 2029. Equal annual payments under the lease are $800,000
and are due on July 1 of each year. The first payment was made on July 1, 2021. The rate
of interest contemplated by Roman and Koenig is 8%. The lease receivable before the
first payment is $4,965,000 and the cost of the equipment on Koenig’s accounting records
was $4,400,000. Assuming that the lease is appropriately recorded as a sale for
accounting purposes by Koenig, what is the amount of profit on the sale and the interest
income that Koenig would record for the year ended December 31, 2021?
a. $0 and $0
b. $0 and $166,600
c. $565,000 and $166,600
d. $565,000 and $198,600
Accounting for Leases
21 – 29
94. Gage Co. purchases land and constructs a service station and car wash for a total of
$540,000. At January 2, 2021, when construction is completed, the facility and land on
which it was constructed are sold to a major oil company for $600,000 and immediately
leased from the oil company by Gage. Fair value of the land at time of the sale was
$60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line
depreciation for its other various business holdings. The economic life of the facility is 15
years with zero salvage value. Title to the facility and land will pass to Gage at termination
of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2021 $600,000.00
Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39
From the viewpoint of the lessor, what type of lease is involved above?
a. Sales-type lease
b. Sale-leaseback
c. Direct-financing lease
d. Operating lease
95. Gage Co. purchases land and constructs a service station and car wash for a total of
$540,000. At January 2, 2021, when construction is completed, the facility and land on
which it was constructed are sold to a major oil company for $600,000 and immediately
leased from the oil company by Gage. Fair value of the land at time of the sale was
$60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line
depreciation for its other various business holdings. The economic life of the facility is 15
years with zero salvage value. Title to the facility and land will pass to Gage at termination
of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2021 $600,000.00
Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39
What is the discount rate implicit in the amortization schedule presented above?
a. 12%
b. 10%
c. 8%
d. 6%
96. Gage Co. purchases land and constructs a service station and car wash for a total of
$540,000. At January 2, 2021, when construction is completed, the facility and land on
which it was constructed are sold to a major oil company for $600,000 and immediately
leased from the oil company by Gage. Fair value of the land at time of the sale was
$60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line
depreciation for its other various business holdings. The economic life of the facility is 15
years with zero salvage value. Title to the facility and land will pass to Gage at termination
of the lease. A partial amortization schedule for this lease is as follows:
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 30
Payments Interest Amortization Balance
Jan. 2, 2021 $600,000.00
Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39
The total lease-related expenses recognized by the lessee during 2022 is
a. $96,000.
b. $97,647.
c. $110,235.
d. $92,235.
97. Gage Co. purchases land and constructs a service station and car wash for a total of
$540,000. At January 2, 2021, when construction is completed, the facility and land on
which it was constructed are sold to a major oil company for $600,000 and immediately
leased from the oil company by Gage. Fair value of the land at time of the sale was
$60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line
depreciation for its other various business holdings. The economic life of the facility is 15
years with zero salvage value. Title to the facility and land will pass to Gage at termination
of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2021 $600,000.00
Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39
What is the amount of the lessee’s liability to the lessor after the December 31, 2023
payment?
a. $600,000
b. $562,353
c. $520,942
d. $475,389
*98. Gage Co. purchases land and constructs a service station and car wash for a total of
$540,000. At January 2, 2021, when construction is completed, the facility and land on
which it was constructed are sold to a major oil company for $600,000 and immediately
leased from the oil company by Gage. Fair value of the land at time of the sale was
$60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line
depreciation for its other various business holdings. The economic life of the facility is 15
years with zero salvage value. Title to the facility and land will pass to Gage at termination
of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2021 $600,000.00
Dec. 31, 2021 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2022 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2023 97,646.71 52,094.19 45,552.52 475,389.39
Accounting for Leases
21 – 31
The total lease-related income recognized by the lessee during 2022 is which of the
following?
a. $ -0-
b. $4,000
c. $6,000
d. $60,000
*99. On June 30, 2021, Falk Co. sold equipment to an unaffiliated company for $2,000,000.
The equipment had a book value of $1,080,000 and a remaining useful life of 10 years.
That same day, Falk leased back the equipment at $12,000 per month for 5 years with no
option to renew the lease or repurchase the equipment. Falk’s lease expense for this
equipment for the year ended December 31, 2021, should be
a. $288,000.
b. $72,000.
c. $120,000.
d. $96,000.
Multiple Choice Answers—Computational
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 32
Future Value of Ordinary Annuity of 1
Period 5% 6% 8% 10% 12%
1 1.00000 1.00000 1.00000 1.00000 1.00000
2 2.05000 2.06000 2.08000 2.10000 2.12000
3 3.15250 3.18360 3.24640 3.31000 3.37440
4 4.31013 4.37462 4.50611 4.64100 4.77933
5 5.52563 5.63709 5.86660 6.10510 6.35285
6 6.80191 6.97532 7.33592 7.71561 8.11519
7 8.14201 8.39384 8.92280 9.48717 10.08901
8 9.54911 9.89747 10.63663 11.43589 12.29969
9 11.02656 11.49132 12.48756 13.57948 14.77566
10 12.57789 13.18079 14.48656 15.93743 17.54874
Present Value of an Ordinary Annuity of 1
Period 5% 6% 8% 10% 12%
1 .95238 .94340 .92593 .90909 .89286
2 1.85941 1.83339 1.78326 1.73554 1.69005
3 2.72325 2.67301 2.57710 2.48685 2.40183
4 3.54595 3.46511 3.31213 3.16986 3.03735
5 4.32948 4.21236 3.99271 3.79079 3.60478
6 5.07569 4.91732 4.62288 4.35526 4.11141
7 5.78637 5.58238 5.20637 4.86842 4.56376
8 6.46321 6.20979 5.74664 5.33493 4.96764
9 7.10782 6.80169 6.24689 5.75902 5.32825
10 7.72173 7.36009 6.71008 6.14457 5.65022
Accounting for Leases
21 – 33
MULTIPLE CHOICE—CPA Adapted
100. Lease A does not contain a bargain purchase option, but the lease term is equal to 90
percent of the estimated economic life of the leased property. Lease B does not transfer
ownership of the property to the lessee by the end of the lease term, but the lease term is
equal to 75 percent of the estimated economic life of the leased property. How should the
lessee classify these leases?
Lease A Lease B
a. Operating lease Finance lease
b. Operating lease Operating lease
c. Finance lease Finance lease
d. Finance lease Operating lease
101. On December 31, 2021, Burton, Inc. leased machinery with a fair value of $1,575,000
from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual
payments of $300,000 beginning December 31, 2021. The lease is appropriately
accounted for by Burton as a finance lease. Burton’s incremental borrowing rate is 11%.
Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2021 balance sheet, Burton should report a lease liability of
a. $1,137,240.
b. $1,275,000.
c. $1,408,770.
d. $1,437,240.
102. On December 31, 2021, Harris Co. leased a machine from Catt, Inc. for a five-year period.
Equal annual payments under the lease are $2,100,000 (including $100,000 annual
executory costs) and are due on December 31 of each year. The first payment was made
on December 31, 2021, and the second payment was made on December 31, 2022. The
five lease payments are discounted at 10% over the lease term. The present value of
lease payments at the inception of the lease and before the first annual payment was
$8,756,727. The lease is appropriately accounted for as a finance lease by Harris. In its
December 31, 2022 balance sheet, Harris should report a lease liability of
a. $6,340,000.
b. $6,240,000.
c. $5,706,000.
d. $5,222,400.
103. A lessee had a ten-year finance lease requiring equal annual payments. The reduction of
the lease liability in year 2 should equal
a. the current liability shown for the lease at the end of year 1.
b. the current liability shown for the lease at the end of year 2.
c. the reduction of the lease liability in year 1.
d. one–tenth of the original lease liability.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 34
104. On January 2, 2021, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy
duty drill press. The lease stipulated annual payments of $300,000 starting at the
beginning of the first year, with title passing to Hernandez at the expiration of the lease.
Hernandez treated this transaction as a finance lease. The drill press has an estimated
useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation
for all of its plant assets. Aggregate lease payments were determined to have a present
value of $1,800,000, based on implicit interest of 10%.
In its 2021 income statement, what amount of interest expense should Hernandez report
from this lease transaction?
a. $0
b. $135,000
c. $150,000
d. $180,000
105. On January 2, 2021, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy
duty drill press. The lease stipulated annual payments of $300,000 starting at the
beginning of the first year, with title passing to Hernandez at the expiration of the lease.
Hernandez treated this transaction as a finance lease. The drill press has an estimated
useful life of 15 years, with no salvage value. Hernandez uses straight–line amortization
for all of its plant assets. Aggregate lease payments were determined to have a present
value of $1,800,000, based on implicit interest of 10%.
In its 2021 income statement, what amount of amortization expense should Hernandez
report from this lease transaction?
a. $300,000
b. $240,000
c. $180,000
d. $120,000
106. In a lease that is recorded as a sales-type lease by the lessor, interest revenue
a. should be recognized in full as revenue at the lease’s inception.
b. should be recognized over the period of the lease using the straight–line method.
c. should be recognized over the period of the lease using the effective interest method.
d. does not arise.
107. Torrey Co. manufactures equipment that is sold or leased. On December 31, 2021, Torrey
leased equipment to Dalton for a five-year period ending December 31, 2026, at which
date ownership of the leased asset will be transferred to Dalton. Equal payments under
the lease are $1,100,000 (including $100,000 executory costs) and are due on December
31 of each year. The first payment was made on December 31, 2021. Collectibility of the
remaining lease payments is probable. The lease receivable before the first payment is
$3,850,000, and cost is $3,000,000. For the year ended December 31, 2021, what
amount of income should Torrey realize from the lease transaction?
a. $850,000
Accounting for Leases
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b. $1,100,000
c. $1,150,000
d. $1,650,000
*108. Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the
building. The lease was reported as a finance lease. At the time of the sale, the gain
should be reported as
a. a deferred gain.
b. comprehensive income net of income tax.
c. a separate component of stockholders’ equity.
d. operating income.
109. Farm Co. leased equipment to Union Co. on July 1, 2021, and properly recorded the
sales-type lease at $135,000, the present value of the lease payments discounted at 10%.
The first of eight annual lease payments of $20,000 due at the beginning of each year of
the lease term was received and recorded on July 3, 2021. Farm had purchased the
equipment for $110,000. What amount of interest revenue from the lease should Farm
report in its 2021 income statement?
a. $0
b. $5,500
c. $5,750
d. $6,750
Multiple Choice Answers—CPA Adapted
Test Bank for Intermediate Accounting, Seventeenth Edition
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DERIVATIONS — Computational
No. Answer Derivation
Accounting for Leases
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 38
DERIVATIONS — Computational (cont.)
No. Answer Derivation