Chapter 20: Accounting for Leases
54. On January 1, 2016, Rhyme 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, 2016. The equipment remains the property of the
lessor at the end of the lease, and Rhyme does not guarantee any residual value. Using an 8% cost of capital, Rhyme
capitalized the lease on January 1, 2016, in the amount of $149,781. What is the total amount of lease liability
(including interest) Rhyme should report as of December 31, 2017?
a.
$99,364
b.
$107,313
c.
$119,781
d.
$121,415
b
1
Moderate
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55. A capital lease should be recorded in the lessee’s accounts at the inception of the lease in an amount equal to
a.
the present value of the minimum lease payments less the executory costs included in the minimum lease
payments.
b.
the total value of the future rental payments less any estimated contingent payments.
c.
the total value of future rental payments less any executory payments included in the future payments.
d.
the total value of the minimum lease payments less executory costs, if any.
a
1
Easy
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Bloom’s: Remembering
56. On January 1, 2016, Donna 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 Donna does not guarantee any residual value. Using a rate of 8%, Donna capitalized the lease on January 1, 2016,
in the amount of $119,781. What is the amount of interest expense Donna should report on its 2017 income
statement?
a.
$9,582
b.
$7,949
c.
$20,418
d.
$22,051
b
1
Moderate
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Bloom’s: Understanding
57. When a lessee makes periodic cash payments for a capital lease, which of the following accounts is decreased?
a.
b.
c.
d.
c
1
Easy
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Bloom’s: Remembering
58. On January 1, 2016, Madison Company signed a four-year lease requiring annual payments of $15,000 with the first
payment due on January 1, 2016. The fair value of the equipment leased was $50,000. Madison’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, 2016 (rounded to the nearest dollar)?
a.
$48,185
b.
$50,000
c.
$51,977
d.
$55,095
b
1
Moderate
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Bloom’s: Understanding
59. On January 1, 2016, Becky Company signed a lease agreement requiring six annual payments of $45,000, beginning
December 31, 2016. 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, what are the amounts for interest expense and rent expense for 2016?
Interest
Rent
I.
$45,000
$ 0
II.
$ 0
$18,168
III.
$18,168
$45,000
IV.
$ 0
$45,000
a.
I
b.
II
c.
III
d.
IV
d
1
Moderate
ACCT.WHAL.16.20.3 – LO: 20.3
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Bloom’s: Analyzing
60. When a lessee makes periodic cash payments for a capital lease, which of the following accounts is increased?
a.
b.
c.
d.
d
1
Easy
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Bloom’s: Understanding
Exhibit 20-2
On January 1, 2016, Mary 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, 2016. In addition, Mary guarantees the residual value to be $8,000 at the end of the lease term.
Mary 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
61. Refer to Exhibit 20-2. What is the amount of interest expense associated with the leased equipment for the year ending
December 31, 2016?
a.
$2,400
b.
$8,651
c.
$9,196
d.
$20,000
c
1
Moderate
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62. Refer to Exhibit 20-2. What would be the debit to Leased Equipment under Capital Leases on January 1, 2016?
(Round amounts to the nearest dollar.)
a.
$72,096
b.
$76,635
c.
$100,000
d.
$110,000
b
1
Moderate
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63. Refer to Exhibit 20-2. If the Mary Company uses the straight-line method of depreciation for its assets, what is the
amount of depreciation expense for the leased equipment for the year ending December 31, 2016?
a.
$15,554
b.
$14,419
c.
$13,727
d.
$12,419
c
1
Moderate
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Bloom’s: Analyzing
64. Refer to Exhibit 20-2. What is the interest expense associated with the lease obligation for the year ending December
31, 2017? (Round answers to the nearest dollar.)
a.
$20,000
b.
$10,804
c.
$7,900
d.
$7,290
c
1
Moderate
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65. Which of the following statements regarding the calculation of the lessee’s depreciation expense for a capital lease is
true?
a.
The bargain purchase option price is deducted from the original cost capitalized, and the difference is allocated
over the estimated economic life of the asset.
b.
The guaranteed residual value is deducted from the original cost capitalized, and the difference is allocated
over the estimated economic life of the asset.
c.
The unguaranteed residual value is deducted from the original cost capitalized, and the difference is allocated
over the term of the lease.
d.
The guaranteed residual value is deducted from the original cost capitalized, and the difference is allocated
over the term of the lease.
d
1
Moderate
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Bloom’s: Understanding
66. Which of the following items would not be included in the calculation of the capital lease obligation?
a.
bargain purchase option
b.
guaranteed residual value
c.
executory costs
d.
any payments required for failure to renew or extend the lease
c
1
Moderate
ACCT.WHAL.16.20.3 – LO: 20.3
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Bloom’s: Understanding
67. Jennifer, Inc. entered into a five-year capital lease on December 31, 2016. This lease requires five minimum annual
lease payments due on December 31 of each year. The first minimum payment was paid on December 31, 2016. This
payment included which of the following?
Interest Expense
Lease Obligation
I.
No
Yes
II.
Yes
No
III.
Yes
Yes
IV.
No
No
a.
I
b.
II
c.
III
d.
IV
a
1
Moderate
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Bloom’s: Understanding
68. On January 1, 2016, Stacie signed a lease agreement with Amy. Amy will use the equipment and make ten annual
payments of $25,000 beginning December 31, 2016. The lease is considered to be a capital lease. When reading the
Amy income statement, you would expect to find which of the following accounts?
a.
Rent Revenue
b.
Interest Revenue
c.
Rental Expense
d.
Interest Expense
d
1
Moderate
ACCT.WHAL.16.20.3 – LO: 20.3
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Bloom’s: Understanding
69. On January 1, 2016, Luke, 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, 2016. Luke accounted for the lease as a capital lease.
Using a rate of 9%, Luke determined the present value on January 1, 2016, to be $169,589. What is the amount of the
long-term lease obligation that Luke should report on its December 31, 2017 balance sheet?
a.
$70,364
b.
$101,252
c.
$112,915
d.
$129,589
b
1
Challenging
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70. The Roger Company leased a machine at the beginning of 2016. The machine was properly capitalized by Roger at
$73,735. 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 2021, the machine will be returned to the lessor. Both
Roger and the lessor use the straight-line method of depreciation. What amount of depreciation expense should Roger
record in 2016 for the machine (round calculations up to the nearest dollar)?
a.
$14,600
b.
$14,747
c.
$16,563
d.
$17,000
b
1
Challenging
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71. On January 3, 2016, the Walters Corporation signed a 10-year non-cancelable 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
Walters Corporation’s incremental borrowing rate
10%
Lessor’s implicit interest rate (known to Walters)
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
Walters should
a.
capitalize the equipment at $550,000.
b.
capitalize the equipment at $491,565.
c.
capitalize the equipment at $452,018.
d.
not capitalize the equipment.
d
1
Challenging
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72. Which of the following is not a required disclosure by a lessee of an operating lease?
a.
rental expense for the period
b.
total contingent rentals
c.
the amount of any sublease rentals
d.
the gross amount of assets under operating leases
d
1
Easy
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Bloom’s: Remembering
73. The lessee’s 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. What is the required number of years?
a.
10
b.
8
c.
7
d.
5
d
1
Easy
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Bloom’s: Remembering
74. The lessee should report capital lease obligations on the balance sheet as
a.
a current liability.
b.
a long-term liability.
c.
a current liability for the current portion and a long-term liability for the remaining amount.
d.
a note to the financial statements only.
c
1
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Bloom’s: Understanding
75. Which of the following is a required disclosure by a lessee for both capital leases and operating lease?
a.
rental expense for each period
b.
lease assets, accumulated amortization, amortization expense, and liabilities
c.
amount of imputed interest required to reduce the net minimum payments to present value
d.
dividend and debt restrictions imposed by lease agreements
d
1
Easy
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76. When is it appropriate for the lessee to use the lessor’s implicit rate to discount the minimum lease payments?
a.
whenever the lessee knows what the lessor’s rate is
b.
when the lessor’s rate is higher than the lessee’s incremental borrowing rate
c.
when the lessee’s incremental borrowing rate is lower than the lessor’s rate
d.
when the lessor’s implicit rate is lower than the lessee’s incremental borrowing rate
d
1
Easy
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Bloom’s: Remembering
77. On January 1, 2016, Stacie signed a lease agreement with Amy. Amy will use the equipment and make ten annual
payments of $15,000 beginning December 31, 2016. The lease is considered to be a sales-type lease. When reading
the Stacie income statement, you would expect to find which of the following accounts?
a.
Rent Revenue
b.
Interest Revenue
c.
Rental Expense
d.
Interest Expense
b
1
Moderate
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Bloom’s: Understanding
78. A lease must be treated as a direct financing lease by the lessor when at least one of the four basic criteria is met,
collectability of the minimum lease payments is reasonably assured, no uncertainties surround the amount of the
unreimbursable costs, and
a.
the lessor is a financial institution.
b.
the interest revenue element is determined in such a manner as to produce a constant rate of return on the net
investment of the lease.
c.
the lessor does not have a dealer profit or loss.
d.
the lease agreement contains a provision for unguaranteed residual value.
c
1
Easy
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Bloom’s: Remembering
79. For a sales-type lease, cost of asset leased is valued by the lessor at
a.
the recorded cost assigned to the inventory less the present value of the guaranteed residual value of the leased
property accruing to the benefit of the lessor.
b.
the recorded cost assigned to the inventory less the undiscounted value of the unguaranteed residual value of
the leased property accruing to the benefit of the lessor.
c.
the recorded cost assigned to the inventory less the present value of the unguaranteed residual value of the
leased property accruing to the benefit of the lessor.
d.
the recorded cost assigned to the inventory less the undiscounted value of the guaranteed residual value of the
leased property accruing to the benefit of the lessor.
c
1
Moderate
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Bloom’s: Understanding
80. Depreciation expense will be recorded in the accounts of the
a.
lessee for operating leases.
b.
lessor for operating leases.
c.
lessor for direct financing leases.
d.
lessor for sales-type leases.
b
1
Easy
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Bloom’s: Remembering
81. Which of the following statements is true about initial direct costs?
a.
Initial direct costs should always be debited against income by the lessor in the period of the inception of the
lease.
b.
Initial direct costs are ownership-type costs such as insurance, maintenance, and taxes.
c.
Initial direct costs of an operating lease should be recorded by the lessor as a prepaid asset.
d.
Initial direct costs of a sales-type lease should be expensed as incurred, and an equal amount of the unearned
income should be recognized as income in the same period.
c
1
Easy
ACCT.WHAL.16.20.5 – LO: 20.5
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Bloom’s: Remembering
82. Which of the following facts would require a lessor to classify a lease as an operating lease?
a.
Important uncertainties exist about unreimbursable costs yet to be incurred by the lessor.
b.
No bargain purchase option is provided for by the lease agreement.
c.
The lease term is 65% of the estimated economic life of the leased property.
d.
The sum of the minimum lease payments is 90% of the fair value of the leased property to the lessor.
a
1
Easy
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Bloom’s: Remembering
83. A direct financing lease differs from a sales-type lease in that
a.
the direct financing lease does not have a dealer profit, although it could have a dealer loss.
b.
the direct financing lease provisions do not include a bargain purchase option.
c.
the sales-type lease does not have unearned interest income at the inception of the lease.
d.
the direct financing lease does not have a dealer profit or loss.
d
1
Easy
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Bloom’s: Remembering
84. Davis 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 Davis?
a.
$8,571.43
b.
$9,115.25
c.
$10,139.72
d.
$11,516.78
c
1
Moderate
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Bloom’s: Analyzing
85. On January 1, 2016, Stephen Corp., a lessor, signed a direct financing lease. Stephen was to receive annual year-end
payments of $10,000 for ten years, after which there was a guaranteed residual value of $8,000. The implicit interest
rate was 8%. Actuarial information for 8%, ten periods follows (round to the nearest whole dollar):
Present value of ordinary annuity of $1
6.71008
Present value of amount of $1
0.46319
On January 1, 2016, what amount should Stephen record as a debit to Lease Receivable?
a.
$67,100
b.
$70,814
c.
$100,000
d.
$108,000
d
1
Moderate
ACCT.WHAL.16.20.6 – LO: 20.6
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Bloom’s: Analyzing
86. When a lessor receives cash on an operating lease, which of the following accounts is increased?
a.
Interest Revenue: Leases
b.
Lease Rental Revenue
c.
Lease Payable
d.
Unearned Interest: Leases
b
1
Easy
ACCT.WHAL.16.20.5 – LO: 20.5
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United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
87. In a sales-type lease
a.
sales revenue ignores the present value of the guaranteed residual value.
b.
sales revenue includes the present value of unguaranteed residual value.
c.
cost of goods sold is reduced by the amount of unguaranteed residual value.
d.
both sales and cost of goods sold are decreased by the present value of any unguaranteed residual values.
d
1
Easy
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Bloom’s: Remembering
88. A lessor enters into a sales-type lease. Which of the following statements is true if the leased asset has an
unguaranteed residual value?
a.
The gross profit recognized is less than it would be if the residual was guaranteed.
b.
The gross profit recognized is more than it would be if the residual was guaranteed.
c.
The lessor should decrease the cost of goods sold by the amount of the unguaranteed residual value.
d.
The gross profit is the same as it would be if the residual was guaranteed.
d
1
Moderate
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Bloom’s: Understanding
89. Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be
a.
expensed in the same period that the expenditure is made.
b.
recorded as a prepaid asset and allocated to expense over the lease term.
c.
deferred and recognized as a reduction in the interest rate implicit in the lease.
d.
directly charged (debited) to Retained Earnings.
b
1
Easy
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90. 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 $2,800 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?
a.
$10,000
b.
$13,500
c.
$15,000
d.
$16,800
c
1
Moderate
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Bloom’s: Understanding
91. 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
a.
I
b.
II
c.
III
d.
IV
d
1
Moderate
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Bloom’s: Understanding
92. One of the distinguishing characteristics of a direct financing lease is that
a.
the lessor is normally a dealer or manufacturer.
b.
the net investment in the lease is equal to the cost of the asset or carrying value of the asset.
c.
the lease has two sources of earnings: interest revenue and profit or loss from the asset exchange.
d.
b
1
Moderate
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Bloom’s: Understanding
the property related to the lease remains on the lessor’s balance sheet during the term of the lease.
Exhibit 20-3
On January 1, 2016, Quinn 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, 2016. The
lease includes a bargain purchase price of $10,000. Quinn requires a 10% rate of return. The cost to Quinn 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
93. Refer to Exhibit 20-3. What is the amount of the annual lease payment Quinn would require (round the answer to the
nearest dollar)?
a.
$35,972
b.
$39,570
c.
$34,483
d.
$37,931
c
1
Moderate
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Bloom’s: Analyzing
94. Refer to Exhibit 20-3. What is the amount of sales revenue to be recognized by Quinn on January 1, 2016,?
a.
$143,791
b.
$150,000
c.
$50,000
d.
b
1
Moderate
ACCT.WHAL.16.20.6 – LO: 20.6
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
$0
Exhibit 20-4
On January 1, 2016, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company.
The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first
payment due on January 1, 2016. The leased property has an estimated residual value of $10,000, which Lenny does
not guarantee. The property remains the property of Average at the end of the lease term. Average 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
95. Refer to Exhibit 20-4. What is the cost of the leased property to Average (round the answer to the nearest dollar)?
a.
$308,475
b.
$302,801
c.
$276,032
d.
$270,358
a
1
Challenging
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
96. Refer to Exhibit 20-4. What is the amount of the credit to Unearned Interest: Leases to be recorded by Average
Leasing on January 1, 2016 (round the answer to the nearest dollar)?
a.
$82,199
b.
$66,525
c.
$72,199
d.
$76,525
d
1
Moderate
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
Bloom’s: Analyzing
97. Refer to Exhibit 20-4. What is the amount of interest revenue that Average should recognize on the lease for the year
ended December 31, 2016 (round the answer to the nearest dollar)?
a.
$37,017
b.
$28,017
c.
$36,336
d.
$27,336
b
1
Moderate
ACCT.WHAL.16.20.6 – LO: 20.6
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
98. Refer to Exhibit 20-4. Given the structure of the lease, the payments, and the residual value information, what is
General’s net investment in the lease during 2017 (round the answer to the nearest dollar)?
a.
$248,475
b.
$158,475
c.
$186,492
d.
$264,137
c
1
Moderate
ACCT.WHAL.16.20.5 – LO: 20.5
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement