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, Seventeenth 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 Finance lease (essay).
BE21–111 Finance lease amortization and journal entries.
BE21-112 Operating lease.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 4
EXERCISES
E21-113 Lease classification tests.
E21-114 Direct-financing lease and sales-type lease.
E21-115 Lessor accounting—sales-type lease.
*E21-116 Sale-leaseback.
*E21-117 Sale-leaseback.
PROBLEMS
Item Description
P21-118 Lessee accounting—Finance lease.
P21-119 Lessee accounting—Finance lease.
P21-120 Direct-financing lease.
CHAPTER LEARNING OBJECTIVES
1. Describe the environment related to leasing transactions.
2. Explain the accounting for finance leases.
3. Explain the accounting for operating leases.
4. Discuss the accounting and reporting for special features of lease arrangements.
*5. Describe the lessee’s accounting for sale-leaseback transactions.
*6. Describe the lessor’s accounting for a direct financing lease.
Accounting for Leases
21 – 5
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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TRUE-FALSE STATEMENTS
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MULTIPLE CHOICE QUESTIONS
1
K
39.
3
K
57.
2
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75.
2
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93.
2
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1
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40.
2
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58.
4
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76.
3
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94.
5
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41.
4
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59.
2
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2
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95.
5
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1
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42.
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78.
3
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96.
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6
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2
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79.
6
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97.
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2
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44.
4
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62.
2
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80.
3
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98.
5
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2
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45.
4
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63.
2
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81.
3
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99.
5
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2
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46.
4
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64.
2
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82.
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100.
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2
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4
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65.
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83.
3
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101.
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84.
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86.
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87.
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105.
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70.
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92.
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BRIEF EXERCISES
2
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111.
2
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112.
3
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EXERCISES
1-3
K
114.
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115.
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116.
5
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117.
5
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PROBLEMS
2
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119.
2, 4
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120.
6
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Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 6
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 the lease payments.
4. Executory costs should always be excluded by the lessee in computing the present value
of the lease payments.
5. A leased asset is always depreciated over the term of the lease by the lessee.
6. A lessee reports interest expense in both a finance 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. In an operating lease, the lessee reports both interest expense and amortization expense
on the income statement.
9. If a lease does not transfer control of the asset over the lease term, the lessor will
generally account for the lease as a sales-type lease.
10. Direct-financing leases involve a third party in addition to the lessee.
11. Under an operating lease, 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.
Accounting for Leases
21 – 7
13. If it is probable that the expected residual value is less than the guaranteed residual value,
the difference should be included in the computation of the lease liability.
14. Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of
amounts capitalized as a leased asset.
15. When a lease has an unguaranteed residual value, the lessor reduces sales revenue and
cost of goods sold by the present value of the unguaranteed residual value.
16. If a lease includes a bargain purchase option, the lessee must increase the present value
of the lease payments by the purchase option price.
17. The basic difference between a direct-financing lease and a sales-type lease relates to
the recognition of the profit on the sale.
18. The gross profit amount in a sales-type lease is greater when a guaranteed residual value
exists.
19. For operating leases, a lessor defers the initial direct costs and amortizes them as
expenses over the term of the lease.
20. In a sale-leaseback arrangement the seller-lessee transfers an asset to the buyer-lessor
and then leases the asset back from the buyer-lessor.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 8
MULTIPLE CHOICE—Conceptual
21. Which of the following are reasons why a company is involved in leasing to other
companies?
I. Interest revenue.
II. High residual values.
III. Tax incentives.
IV. Guaranteed bargain purchase options.
a. I, II, IV.
b. II, III, and IV.
c. I, III, and IV.
d. I, II, and III.
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 point–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. All long-term leases are capitalized.
c. Leases similar to installment purchases are capitalized.
d. All leases are capitalized.
24. While only certain leases are currently accounted for as a sale or purchase, there is
theoretical 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.
25. A single lease expense is recognized on the income statement for
a. an operating lease.
b. a finance lease.
c. both a finance lease and an operating lease.
d. neither a finance lease or an operating lease.
Accounting for Leases
21 – 9
S26. What impact does a bargain purchase option have on the present value of the 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 lease payments by the present
value of the option price.
c. The lessee must decrease the present value of the lease payments by the present
value of the option price.
d. The lease payments would be increased by the option price.
P27. The amount to be recorded as the cost of an asset under a finance lease is equal to the
a. present value of the lease payments.
b. present value of the lease payments or the fair value of the asset, whichever is lower.
c. present value of the lease payments plus the present value of any unguaranteed
residual value.
d. carrying value of the asset on the lessor’s books.
28. The classifications of a lease by the lessee are
a. operating and finance leases.
b. operating, sales, and finance leases.
c. operating and leveraged leases.
d. None of these answers are correct.
29. Which of the following is a correct statement of one of the classification tests?
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 lease payments (excluding executory costs) equal or exceed 90% of the fair value
of the leased property.
30. Lease payments include:
I. fixed payments.
II. variable payments based on an index.
III a bargain purchase option.
IV. a guaranteed residual value.
a. I, II, and III.
b. II, III, and IV.
c. I, II, and IV.
d. I, II, III, and IV.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 10
31. In computing amortization of a leased asset where there is no bargain purchase option,
the lessee should subtract
a. no 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.
32. In computing the present value of the lease payments, the lessee should
a. use its incremental borrowing rate in all cases.
b. use both its incremental borrowing rate and the implicit rate of the lessor, assuming
that the implicit rate is known to the lessee.
c. use the implicit rate of the lessor, assuming that the implicit rate is known to the
lessee.
d. use the implicit rate in all cases.
33. Which of the following is not one of the lease classification tests?
a. Transfer of ownership
b. Purchase option
c. Lease term
d. Collectibility
34. From the lessee’s perspective, in the earlier years of a lease,
a. finance leases will enable the lessee to report higher income, compared to operating
leases.
b. finance leases will cause debt to increase, compared to operating leases.
c. operating leases will cause income to increase, compared to finance leases.
d. operating leases will cause debt to increase, compared to finance leases.
P35. A lessee with a finance 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. Which of the following describes the lease term test?
a. If the lease term is 75% or more of the economic life, it is a finance lease.
b. If the lease term is 90% or more of the economic life, it is a finance lease.
c. If there is a bargain purchase option during the lease term, it is a finance lease.
d. If the asset has an alternative use during the lease term, it is a finance lease.
Accounting for Leases
21 – 11
37. Which of the following would be included in the Lease Receivable account?
I. Guaranteed residual value.
II. Unguaranteed residual value.
III. Executory costs
IV. Rental payments.
a. I and III only.
b. II, III, and IV.
c. I and II only.
d. I, II, and IV.
38. The lease receivable amount includes the present value of
a. rental payments plus the present value of guaranteed and unguaranteed residual
values.
b. rental payments only.
c. rental payments plus the present value of the unguaranteed residual value only.
d. rental payments plus the present value of the guaranteed residual value only.
39. In an operating lease, the lessee records
a. amortization expense.
b. interest expense.
c. lease expense.
d. amortization expense and lease expense.
40. In a finance lease, the lessee records
a. amortization expense only.
b. interest expense only.
c. lease expense only.
d. amortization expense and interest expense.
41. When lessors account for residual values related to leased assets, they
a. include the residual value in the receivable measurement because it is assumed 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. reduce the residual value by the executory costs.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 12
42. The initial direct costs of leasing
a. are generally borne by the lessee.
b. include incremental costs.
c. are expensed in the period of the sale under a sales-type lease.
d. include lessor advertising costs.
S43. The basic 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 profit on the sale.
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 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 lease payments plus the unguaranteed residual value.
b. The sales price less the present value of the residual value.
c. The cost of the asset to the lessor, less the present value of any unguaranteed
residual value.
d. The present value of the lease payments plus the present value of the unguaranteed
residual value.
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. assets are depreciated by the lessor.
46. The right-of-use asset is increased by
a. initial direct costs incurred by the lessee only.
b. lease incentives received.
c. prepaid lease payments only.
d. lease prepayments made by the lessee and initial direct costs incurred by the lessee.
Accounting for Leases
21 – 13
47. The Lease Liability account should be disclosed as
a. a current liability.
b. a noncurrent liability.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.
48. Additional lease adjustments that affect the measurement of lease assets and liabilities
include each of the following except?
a. executory costs.
b. initial direct costs.
c. internal costs.
d. lease prepayments and incentives.
*49. If the lease in a sale-leaseback transaction meets one of the five lease tests and is
therefore accounted for as a finance 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. If none of the five lease tests are satisfied in a sale-leaseback transaction, which of the
following statements is incorrect?
a. The seller-lessee continues to depreciate the asset.
b. The purchaser–lessor records a gain.
c. The seller-lessee records the lease as an operating lease.
d. The seller-lessee recognizes a gain or loss as appropriate.
*51. When a company sells property and then leases it back, any gain on the sale should
usually be
a. deferred and recognized as income over the term of the lease.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. recognized in the current year.
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 14
Multiple Choice Answers—Conceptual
MULTIPLE CHOICE—Computational
52. On December 1, 2021, Goetz Corporation leased office space for 10 years at a monthly
rental of $80,000. On that date Goetz paid the landlord the following amounts:
Rent deposit $ 80,000
First month’s rent 80,000
Last month’s rent 80,000
Installation of new walls and offices 640,000
$880,000
The entire amount of $880,000 was charged to rent expense in 2021. What amount
should Goetz have charged to expense for the year ended December 31, 2021?
a. $80,000
b. $85,333
c. $165,333
d. $640,000
53. On January 1, 2021, Dean Corporation signed a ten-year noncancelable lease for certain
machinery. The terms of the lease called for Dean to make annual payments of $220,000
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 finance lease. The lease payments
were determined to have a present value of $1,342,016 at an effective interest rate of 8%.
With respect to this lease, Dean should record for 2021
a. lease expense of $220,000.
b. interest expense of $89,468 and depreciation expense of $76,136.
c. interest expense of $107,361 and depreciation expense of $89,468.
d. interest expense of $91,363 and depreciation expense of $134,202.
Accounting for Leases
21 – 15
Use the following information for questions 54 through 59. (Annuity tables on page 21-32.)
On January 1, 2021, 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, 2021 is $6,000,000; however, the book value
to Holt is $4,950,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey
depreciates similar buildings using 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 $15,000 of executory costs related to taxes on the
property.
54. What is the annual lease payment excluding executory costs? (Rounded to the nearest
dollar.)
a. $272,703
b. $872,703
c. $887,703
d. $902,703
55. What is the total annual lease payment?
a. $272,703
b. $872,703
c. $887,703
d. $902,703
56. From the lessee’s viewpoint, what type of lease in this?
a. Sales-type lease
b. Sale-leaseback
c. Finance 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
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 16
58. Yancey, Inc. would record amortization expense on this asset in 2021 of (Rounded to the
nearest dollar.)
a. $0.
b. $495,000.
c. $610,139.
d. $976,471.
59. If the lease was nonrenewable, there was no bargain purchase option, title to the building
does not pass to the lessee at termination of the lease and the lease term was 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. Finance lease
60. Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets
the criteria to be a finance lease for Metcalf. The six-year lease requires payment of
$170,000 at the beginning of each year, including $25,000 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. $848,761.
b. $814,435.
c. $723,943.
d. $694,665.
61. On December 31, 2021, Lang Corporation leased a ship from Fort Company for an eight-
year period expiring December 30, 2029. Equal annual payments of $500,000 are due on
December 31 of each year, beginning with December 31, 2021. The lease is properly
classified as a finance lease on Lang ‘s books. The present value at December 31, 2021 of
the eight lease payments over the lease term discounted at 10% is $2,934,213. Assuming
all payments are made on time, the amount that should be reported by Lang Corporation as
the total liability for finance leases on its December 31, 2022 balance sheet is
a. $2,727,635.
b. $2,500,397.
c. $2,177,634.
d. $3,000,000.
Accounting for Leases
21 – 17
62. On January 1, 2021, Sauder Corporation signed a five-year noncancelable lease for
equipment. The terms of the lease called for Sauder to make annual payments of
$200,000 at the beginning of each year for five years beginning on January 1, 2021 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 finance lease. The lease payments were determined to have a present
value of $833,972 at an effective interest rate of 10%.
In 2021, Sauder should record interest expense of
a. $63,397.
b. $116,604.
c. $83,396.
d. $136,604.
63. On January 1, 2021, Sauder Corporation signed a five-year noncancelable lease for
equipment. The terms of the lease called for Sauder to make annual payments of
$200,000 at the beginning of each year for five years beginning on January 1, 2021 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 finance lease. The lease payments were determined to have a present
value of $833,972 at an effective interest rate of 10%.
. In 2022, Sauder should record interest expense of
a. $43,397.
b. $49,737.
c. $69,737.
d. $63,397.
64. On December 31, 2021, Kuhn Corporation leased a plane from Bell Company for a seven-
year period expiring December 31, 2028. Equal annual payments of $450,000 are due on
December 31 of each year, beginning with December 31, 2021. The lease is properly
classified as a finance lease on Kuhn’s books. The present value at December 31, 2021 of
the eight lease payments over the lease term discounted at 10% is $2,640,792. 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, 2021 balance sheet is
a. $2,640,792.
b. $2,454,870.
c. $2,376,714.
d. $2,190,792.
65. On January 1, 2021, Ogleby Corporation signed a five-year noncancelable lease for
equipment. The terms of the lease called for Ogleby to make annual payments of
$180,000 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 finance lease. The lease
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 18
payments were determined to have a present value of $750,578 at an effective interest
rate of 10%.
With respect to this lease, for 2021 Ogleby should record
a. rent expense of $180,000.
b. interest expense of $57,058 and amortization expense of $150,116.
c. interest expense of $57,058 and amortization expense of $107,225.
d. interest expense of $90,000 and amortization expense of $181,956.
66. On January 1, 2021, Ogleby Corporation signed a five-year noncancelable lease for
equipment. The terms of the lease called for Ogleby to make annual payments of
$180,000 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 finance lease. The lease
payments were determined to have a present value of $750,578 at an effective interest
rate of 10%.
With respect to this lease, for 2022 Ogleby should record
a. interest expense of $57,058.
b. interest expense of $75,058.
c. interest expense of $44,764.
d. interest expense of $62,764.
67. Emporia Corporation is a lessee with a finance lease. The asset is recorded at $900,000
and has an economic life of 8 years. The lease term is 5 years. The asset is expected to
have a fair value of $300,000 at the end of 5 years, and a fair value of $100,000 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 amortization expense would the
lessee record for the first year of the lease?
a. $180,000
b. $160,000
c. $120,000
d. $100,000
68. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $344,152, 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. $1,231,066
b. $1,090,912
c. $1,139,874
Accounting for Leases
21 – 19
d. $1,200,000
69. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $344,152, 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 finance 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. $98,482
c. $70,953
d. $91,192
70. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $344,152, 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 finance lease, what is the amount of Lease Liability reduction
recorded in first year after the lease inception.
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $344,152
b. $245,666
c. $252,960
d. $273,199
71. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal
annual payments of $344,152, 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 amortize similar assets. What is the amount of amortization
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 amortized by Tower Company.
b. $284,968
c. $307,767
d. $300,000
Test Bank for Intermediate Accounting, Seventeenth Edition
21 – 20
72. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it
leased equipment with a cost of $480,000 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 $780,000, 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, 2021?
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. $70,200
b. $56,160
c. $62,400
d. $78,000
73. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it
leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a
10% down payment and equal annual payments of $175,820 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 $780,000, 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, 2021?
a. $780,000
b. $624,000
c. $468,000
d. $499,200
74. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021,
it leased equipment with a cost of $480,000 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 $780,000,
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. $175,820
b. $162,795
c. $181,972
d. $195,356
75. 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: