Accounting for Leases
21 – 21
75. What type of lease is this from Alt Corporation’s viewpoint?
a. Operating lease
b. Capital lease
c. Sales-type lease
d. Direct-financing lease
76. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a
consequence of the lease during the fiscal year ended December 31, 2018?
a. Depreciation Expense
b. Rent Expense
c. Interest Expense
d. Depreciation Expense and Interest Expense
Test Bank for Intermediate Accounting, Sixteenth Edition
21 – 22
77. If the present value of the future lease payments is $1,600,000 at January 1, 2018, what is
the amount of the reduction in the lease liability for Alt Corp. in the second full year of the
lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest
dollar.)
a. $414,852
b. $446,852
c. $472,350
d. $456,350
78. From the viewpoint of Yates, what type of lease agreement exists?
a. Operating lease
b. Capital lease
c. Sales-type lease
d. Direct-financing lease
Accounting for Leases
21 – 23
79. 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. $1,572,564
c. $1,600,000
d. $1,724,592
80. 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. Rent Revenue only
b. Interest Revenue only
c. Depreciation Expense only
d. Rent Revenue and Depreciation Expense
Test Bank for Intermediate Accounting, Sixteenth Edition
21 – 24
81. Hook Company leased equipment to Emley Company on July 1, 2017, for a one-year
period expiring June 30, 2018, for $80,000 a month. On July 1, 2018, Hook leased this
piece of equipment to Terry Company for a three-year period expiring June 30, 2021, 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, 2013, 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, 2018?
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)
82. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the
year ended December 31, 2018, should be
a. $518,000.
b. $630,000.
c. $1,148,000.
d. $1,260,000.
83. The income before income taxes derived by Hull from this lease for the year ended
December 31, 2018, 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, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co.
agrees to guarantee the $100,000 residual value of the asset at the end of the lease term.
Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s implicit
interest rate is 8%. What journal entry would Gold Star make at January 2, 2018 assuming
this is a direct–financing 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. Cash 160,000
Lease Receivable 740,000
Equipment 900,000
b. Cash 160,000
Lease Receivable 529,940
Loss 210,060
Equipment 900,000
c. Cash 160,000
Lease Receivable 569,270
Equipment 729,270
d. Cash 160,000
Lease Receivable 598,449
Equipment 758,449
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, Sixteenth Edition
21 – 26
86. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co.
agrees to guarantee the $100,000 residual value of the asset at the end of the lease term.
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, 2018 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. Lease Equipment 598,449
Lease Liability 598,449
b. Leased Equipment 758,449
Cash 160,000
Lease Liability 598,449
c. Leased Equipment 689,940
Cash 160,000
Lease Liability 529,940
d. Leased Equipment 707,342
Cash 160,000
Lease Liability 547,342
87. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co.
agrees to guarantee the $100,000 residual value of the asset at the end of the lease term.
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, 2019 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 160,000
Cash 160,000
b. Lease Liability 117,604
Interest Payable 42,396
Cash 160,000
c. Lease Liability 112,124
Interest Payable 47,876
Cash 160,000
d. Lease Liability 116,212
Interest Payable 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 obligation accounts have the following balances:
Leased equipment $400,000
Less accumulated depreciation—capital 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 Geary 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, 2018, for a ten-year
period expiring June 30, 2028. 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, 2018. The rate of
interest used by Harter and Stine is 9%. The cash selling price of the machinery 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, 2018?
a. $157,500
b. $135,000
c. $67,500
d. $0
90. Pye Company leased equipment to the Polan Company on July 1, 2018, for a ten-year
period expiring June 30, 2028. 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, 2018. The rate of
interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment 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, 2018?
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, Sixteenth Edition
21 – 28
91. 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,
2018?
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. 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, 2018?
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, 2018, for an eight-
year period expiring June 30, 2026. 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, 2018. The rate
of interest contemplated by Roman and Koenig is 8%. The cash selling price of the
equipment 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, 2018?
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. 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. What is the discount rate implicit in the amortization schedule presented above?
a. 12%
b. 10%
c. 8%
d. 6%
Test Bank for Intermediate Accounting, Sixteenth Edition
21 – 30
96. The total lease-related expenses recognized by the lessee during 2019 is
a. $96,000.
b. $97,647.
c. $110,235.
d. $92,235.
97. What is the amount of the lessee’s liability to the lessor after the December 31, 2020
payment?
a. $600,000
b. $562,353
c. $520,942
d. $475,389
Accounting for Leases
21 – 31
*98. The total lease-related income recognized by the lessee during 2019 is which of the
following?
a. $ -0-
b. $4,000
c. $6,000
d. $60,000
*99. On June 30, 2018, 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 rent expense for this
equipment for the year ended December 31, 2018, should be
a. $288,000.
b. $72,000.
c. $120,000.
d. $96,000.
Multiple Choice Answers—Computational
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Test Bank for Intermediate Accounting, Sixteenth 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
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 Capital lease
b. Operating lease Operating lease
c. Capital lease Capital lease
d. Capital lease Operating lease
101. On December 31, 2018, 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, 2018. The lease is appropriately
accounted for by Burton as a capital 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.
Accounting for Leases
21 – 33
In its December 31, 2018 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, 2018, 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, 2018, and the second payment was made on December 31, 2019. The
five lease payments are discounted at 10% over the lease term. The present value of
minimum lease payments at the inception of the lease and before the first annual payment
was $8,340,000. The lease is appropriately accounted for as a capital lease by Harris. In
its December 31, 2019 balance sheet, Harris should report a lease liability of
a. $6,340,000.
b. $6,240,000.
c. $5,706,000.
d. $4,974,000.
103. A lessee had a ten-year capital 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.
104. In its 2018 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
Test Bank for Intermediate Accounting, Sixteenth Edition
21 – 34
105. In its 2018 income statement, what amount of depreciation 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, 2018, Torrey
leased equipment to Dalton for a five-year period ending December 31, 2023, 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, 2018. Collectibility of the
remaining lease payments is reasonably assured, and Torrey has no material cost
uncertainties. The normal sales price of the equipment is $3,850,000, and cost is
$3,000,000. For the year ended December 31, 2018, what amount of income should
Torrey realize from the lease transaction?
a. $850,000
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 capital lease. At the time of the sale, the gain
should be reported as
a. operating income.
b. comprehensive income net of income tax.
c. a separate component of stockholders’ equity.
d. a deferred gain.
Accounting for Leases
21 – 35
*109. On December 31, 2018, Haden Corp. sold a machine to Ryan and simultaneously leased
it back for one year. Pertinent information at this date follows:
Sales price $1,080,000
Carrying amount 990,000
Present value of reasonable lease rentals
($9,000 for 12 months @ 12%) 102,000
Estimated remaining useful life 12 years
In Haden’s December 31, 2018 balance sheet, the deferred profit from the sale of this
machine should be
a. $102,000.
b. $90,000.
c. $12,000.
d. $0.
Multiple Choice Answers—CPA Adapted
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DERIVATIONS — Computational
No. Answer Derivation
Test Bank for Intermediate Accounting, Sixteenth Edition
21 – 36
DERIVATIONS — Computational (cont.)
No. Answer Derivation