Leases Chapter.15 Test Bank Answers 10th Edition

Intermediate Accounting, 10e (Spiceland)

Chapter 15 Leases

1) At the beginning of a lease agreement, a lessee's debt to equity ratio and rate of return on assets are both affected regardless of whether the lease is classified as a finance lease or as an operating lease.

Difficulty: 2 Medium

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis; BB Critical Thinking / Keyboard Navigation

2) Finance leases are agreements that are formulated outwardly as leases, but are installment purchases in substance.

Difficulty: 1 Easy

Topic: Finance lease compared to installment note

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis; BB Critical Thinking / Keyboard Navigation

3) If the lease begins "at or near the end" of an asset's economic life, the criterion of the lease term being for the major part of the economic life does not apply when classifying the type of lease. This is consistent with the basic premise of this criterion that most of the risks and rewards of ownership occur prior to that time.

Difficulty: 2 Medium

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

4) If the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term, then it must be considered to be an operating lease.

Difficulty: 1 Easy

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

5) A bargain purchase option is defined as the option of purchasing leased property at a price that is equal to the expected fair value of a leased asset.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

6) In accounting for operating leases, the lessee will recognize lease expense on a straight-line basis.

Difficulty: 1 Easy

Topic: Lessee‒Operating lease‒Total lease expense

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

7) When the lessee guarantees an estimated residual value of $75,000, the amount the lessee records as a right-of-use asset and as a lease liability is increased by $75,000.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Journal entries; Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

8) If the lessee is expected to take ownership of a leased asset at the end of the lease term, the lessor must use an estimated residual value when calculating the lease payments necessary to achieve a desired rate of return.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

9) On a transaction that qualifies for sale-leaseback accounting (not a financing arrangement), any gain on the "sale" portion of the transaction is recognized immediately.

Difficulty: 2 Medium

Topic: Sale-leaseback transactions

Learning Objective: Appendix 15: Sale-Leaseback Arrangements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

10) GAAP requires that some lease agreements be accounted for as purchases of assets. The theoretical justification for this treatment is that a lease of this type:

A) Complies with the concept of form over substance.

B) Reflects the relationship of cause and effect.

C) Satisfies the concept of historical cost.

D) Conveys most of the benefits of property ownership.

Difficulty: 1 Easy

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

11) From the perspective of the lessee, leases may be classified as either:

A) Sales-type without selling profit or sales-type with selling profit.

B) Finance or sales-type without selling profit.

C) Finance or operating.

D) Sales-type or operating.

Difficulty: 1 Easy

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

12) From the perspective of the lessor, two possible lease classifications are:

A) Financing or sales-type.

B) Operating or financing.

C) Sales-type or indirect financing.

D) Operating or sales-type.

Difficulty: 1 Easy

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

13) Distinguishing between operating and finance leases is due in large part to the accounting concept of:

A) Conservatism.

B) Materiality.

C) Substance over form.

D) Historical cost.

Difficulty: 2 Medium

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

14) Cook the Books is the lessee in a lease agreement. From the perspective of the lessee, the lease may be classified as:

A) operating, sales-type, indirect financing.

B) operating or finance.

C) operating or sales-type.

D) operating, finance, or sales-type.

Difficulty: 1 Easy

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement; BB Resource Management / Keyboard Navigation

15) ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease may be classified as:

A) operating, sales-type, indirect financing.

B) operating or finance.

C) operating or sales-type.

D) operating, finance, or sales-type.

Difficulty: 1 Easy

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement; BB Resource Management / Keyboard Navigation

16) Minnetonka Company leases an asset. Information regarding the lease:

• Fair value of the asset: $400,000.

• Useful life of the asset: 6 years with no salvage value.

• Lease term is 5 years.

• Annual lease payments are $60,000

• Implicit interest rate: 11%.

• Minnetonka can purchase the asset at the end of the lease period for $50,000.

What type of lease is this?

A) Operating.

B) Finance.

C) Short term.

D) Long term.

Difficulty: 2 Medium

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

17) Leasing has become the number one method of external financing by U.S. companies. Reasons include each of the following except:

A) tax advantages.

B) extended use of the asset.

C) protection against obsolescence.

D) lower upfront cash needed to use an asset.

Difficulty: 2 Medium

Topic: Advantages of leasing

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

18) The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do not include:

A) The agreement specifies that ownership transfers at the end of the lease term.

B) The collectibility of the lease payments must be reasonably predictable.

C) The agreement grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

D) The noncancelable lease term is for the major part of the remaining economic life of the underlying asset.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

19) One of the five criteria for a finance lease specifies that the lease term be equal to or greater than:

A) the major part of the remaining economic life of the leased property.

B) the entire amount of the remaining economic life of the leased property.

C) a meaningful part of the remaining economic life of the leased property.

D) a non-insignificant part of the remaining economic life of the leased property.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

20) One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than:

A) substantially all of the cost of the asset.

B) the major part of the fair value of the asset.

C) substantially all of the fair value of the asset.

D) the major part of the cost of the asset.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

21) For the lessee to account for a lease as a finance lease, the lease must meet:

A) All five of the criteria specified by GAAP regarding accounting for leases.

B) Any one of the six criteria specified by GAAP regarding accounting for leases.

C) Any two of the criteria specified by GAAP regarding accounting for leases.

D) Any one of the five criteria specified by GAAP regarding accounting for leases.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

22) For the lessor to account for a lease as a sales-type lease, the lease must meet:

A) Any one of first five classification criteria and both of the last two additional conditions specified by GAAP regarding accounting for leases.

B) More than one of the five criteria specified by GAAP regarding accounting for leases.

C) All five of the criteria specified by GAAP regarding accounting for leases.

D) Any one of the five criteria specified by GAAP regarding accounting for leases.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

23) Which of the following is not among the criteria for classifying a lease as a finance lease?

A) The agreement specifies that ownership of the asset transfers to the lessee.

B) The agreement contains an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

C) The lease term is for substantially all of the remaining economic life of the underlying asset.

D) The present value of the sum of the lease payments and any residual value guaranteed by the lessee that isn't already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

24) Of the five criteria for a finance lease, which one is not applied if the lease begins "at or near the end" of the economic life of the underlying asset?

A) A purchase option is reasonably certain to be exercised.

B) The economic life test.

C) The present value of lease payments greater or equal to substantially all of fair value test.

D) The passage of title criteria.

Difficulty: 2 Medium

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

25) We classify a lease as a finance lease if:

A) the present value of lease payments is less than the asset's book value.

B) the present value of lease payments is less than the asset's fair value.

C) the lessee obtains control of the use of the asset.

D) the usual risks and rewards are retained by the lessor.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

26) Star Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1 before entering into an operating lease. Not including any indirect effects on earnings, when Star Corp. records the operating lease, the immediate impact on these ratios is a(an):

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 1 Easy

Topic: Advantages of leasing

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Remember

AACSB: Analytical Thinking

AICPA/Accessibility: FN Risk Analysis; BB Resource Management / Keyboard Navigation

27) S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. The immediate impact of recording a finance lease on these ratios is a(n):

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Advantages of leasing

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Risk Analysis; BB Resource Management / Keyboard Navigation

28) C Corp., a lessee, has a rate of return on assets of 10%. The rate of return on assets is immediately increased when C records:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Advantages of leasing

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Risk Analysis; BB Resource Management / Keyboard Navigation

29) B Corp. is a lessee and has a debt/equity ratio of 2 to 1. The debt/equity ratio is increased when B records:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Advantages of leasing

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Risk Analysis; BB Resource Management / Keyboard Navigation

30) Interest expense is not calculated as the effective interest rate times the amount of the debt outstanding during the interest period for:

A) bonds payable.

B) notes payable.

C) lease payable.

D) lease receivable.

Difficulty: 1 Easy

Topic: Lessee‒Finance lease‒Interest expense

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

31) Jagadison Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease and the leases do not contain purchase options. Jagadison desires a return of 8% interest on a five-year lease of equipment with a fair value of $970,425. The present value of an annuity due of $1 at 8% for five years is 4.313. What is the total amount of interest revenue that Jagadison will earn over the life of the lease?

A) $154,575

B) $225,000

C) $388,080

D) $418,350

Difficulty: 2 Medium

Topic: Lessor‒Sales-type lease‒No selling profit

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

32) In a finance lease, the amortization of the right-of-use asset in the third year is:

A) the same as in the fourth year.

B) zero.

C) less than in the fourth year.

D) more than in the fourth year.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

33) Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

• Lease payments: $2,466,754 semiannually; first payment at January 1, 2021;

remaining payments at June 30 and December 31 each year through June 30, 2025.

• Lease term: five years (10 semiannual payments).

• No residual value; no purchase option.

• Economic life of equipment: five years.

• Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.

• Fair value of the computers at January 1, 2021: $20 million.

Technoid would account for this as:

A) A finance lease.

B) A sales-type lease without selling profit.

C) A sales-type lease with selling profit.

D) An operating lease.

Difficulty: 2 Medium

Topic: Lease classification‒Finance-Sales-type-Operating; Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

34) Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

• Lease payments: $2,466,754 semiannually; first payment at January 1, 2021;

remaining payments at June 30 and December 31 each year through June 30, 2025.

• Lease term: five years (10 semiannual payments).

• No residual value; no purchase option.

• Economic life of equipment: five years.

• Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.

• Fair value of the computers at January 1, 2021: $20 million.

Lone Star Company would account for this as:

A) A finance lease.

B) A sales type lease without selling profit.

C) A sales type lease with selling profit.

D) An operating lease.

Difficulty: 2 Medium

Topic: Lease classification‒Finance-Sales-type-Operating

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

35) Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

• Lease payments: $2,466,754 semiannually; first payment at January 1, 2021;

remaining payments at June 30 and December 31 each year through June 30, 2025.

• Lease term: five years (10 semiannual payments).

• No residual value; no purchase option.

• Economic life of equipment: five years.

• Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.

• Fair value of the computers at January 1, 2021: $20 million.

What is the outstanding balance of the lease liability in Lone Star's June 30, 2021, balance sheet? (Round your answer to the nearest whole dollar.)

A) $15,943,154.

B) $17,533,246.

C) $21,000,000.

D) None of these answer choices is correct.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Interpret amortization schedule; Lessee or Lessor‒Outstanding balance

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

36) Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

• Lease payments: $2,466,754 semiannually; first payment at January 1, 2021; remaining payments at June 30 and December 31 each year through June 30, 2025.

• Lease term: five years (10 semiannual payments).

• No residual value; no purchase option.

• Economic life of equipment: five years.

• Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.

• Fair value of the computers at January 1, 2021: $20 million.

What is the interest revenue that Technoid would report for this lease in its 2021 income statement?

A) $0.

B) $1,673,820.

C) $876,662.

D) None of these answer choices is correct.

Difficulty: 3 Hard

Topic: Lessor‒Sales-type lease‒With selling profit; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

37) Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

What is the effective annual interest rate?

A) 9%.

B) 10%.

C) 11%.

D) 12%.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

38) Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

What amount would the lessee record as annual amortization on the right-of-use asset using the straight-line method?

A) $5,328.

B) $6,328.

C) $6,392.

D) $10,000.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Amortize ROU asset; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

39) Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

What would be the outstanding balance after payment 10?

A) $0.

B) $2,028.

C) $8,929.

D) $10,000.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

40) Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

What is the total effective interest paid over the term of the lease?

A) $100,000.

B) $36,718.

C) $53,282.

D) $63,282.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

41) Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

What is the outstanding balance after payment 9?

A) $8,929.

B) $13,463.

C) $5,000.

D) $5,537.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

42) Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

What is the effective annual interest rate?

A) 9%.

B) 10%.

C) 11%.

D) 20%.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

43) Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

What amount would the lessee record as annual amortization on the asset using the straight-line method, assuming no residual value?

A) $3,325.

B) $6,920.

C) $4,325.

D) $5,320.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Amortize ROU asset; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

44) Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

What is the total interest paid over the term of the lease?

A) $42,000.

B) $8,200.

C) $7,400.

D) $3,460.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

45) Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

What is the outstanding balance after payment 5?

A) $1,818.

B) $2,000.

C) $2,182.

D) $3,818.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

46) Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

What would be the amount of interest expense recorded with payment 5?

A) $2,000.

B) $893.

C) $7,107.

D) $1,107.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

47) In a ten-year finance lease agreement, the portion of the periodic lease payment that represents interest in the third year is:

A) the same as in the fourth year.

B) the same as in the first year.

C) less than in the fourth year.

D) more than in the fourth year.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

48) M & O Company is preparing an Excel spreadsheet for a 5-year finance lease. The implicit interest rate in the lease is 6%. The beginning of the lease is January 1. Lease payments are made each December 31. A portion of the spreadsheet appears as follows:

What formula should M & O use in cell E8 to calculate the carrying value of the lease payable after the second lease payment?

A) = E7 − D8

B) = E7 + D8

C) = E8 + D8

D) = PV(C2,C3,0,C1,type)

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Technology

AICPA/Accessibility: BB Leveraging Technology; FN Leveraging Technology / Keyboard Navigation

49) M & O Company is preparing an Excel spreadsheet for a 5-year finance lease. The implicit interest rate in the lease is 6%. The beginning of the lease is January 1. Lease payments are made each December 31. A portion of the spreadsheet appears as follows:

What formula should M & O use in cell C8?

A) = B8 + D7

B) = B8 + D8

C) = E7 * C1

D) = E8 * C1

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Technology

AICPA/Accessibility: BB Leveraging Technology; FN Leveraging Technology / Keyboard Navigation

50) The lessee normally measures the lease liability to be recorded as the:

A) Future value of the lease payments.

B) Sum of the cash payments over the term of the lease.

C) Present value of the lease payments.

D) Book value of the leased asset.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

51) Damon is the lessee in connection with a finance lease. Damon will not record:

A) Depreciation expense.

B) Amortization expense.

C) Interest expense.

D) A right-of-use asset.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries; Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

52) Barr Corp. is the lessee in a finance lease. Barr would record:

A) Depreciation expense.

B) A right-of-use asset.

C) Lease expense.

D) Interest revenue.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Journal entries; Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

53) On October 1, 2021, Sonoma Company leased equipment from Napa Inc. in lease payable in five equal annual payments of $500,000, beginning Oct. 1, 2022. Similar transactions have carried an 11% interest rate. The right-of-use asset would be recorded at: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $0.

B) $1,847,950.

C) $2,115,270.

D) $2,500,000.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

54) When a finance lease is first recorded at the beginning of the lease, the lessee typically debits:

A) Right-of-use asset.

B) Rent expense.

C) Lease expense.

D) Lease receivable.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

55) In a finance lease:

A) the lessee records an asset and a liability for the present value of lease payments.

B) the lessor records an asset and a liability for the present value of lease payments.

C) the lessee records an asset and a liability for the total of the lease payments.

D) the lessor records an asset and a liability for the total of the lease payments.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

56) On January 1, 2021, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type lease. Calloway paid $240,000 for the machine and is leasing it to Zone for $34,000 per year, an amount that will return 10% to Calloway. The present value of the lease payments is $240,000. The lease payments are due each January 1, beginning in 2021. What is the appropriate interest entry on December 31, 2021?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

57) The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

A) Present value of the lease payments.

B) Sum of the lease payments.

C) The lessor's book value of the asset at the beginning of the lease.

D) Zero, unless a prepayment or accrual is involved.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Outstanding balance

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

58) Francisco leased equipment from Julio on December 31, 2021. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2021. The present value of the lease payments is $1,013,854. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2022?

A) $824,400.

B) $800,239.

C) $863,854.

D) $792,000.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Outstanding balance

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

59) On January 1, 2021, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight years. The first payment of $450,000 was made on January 1, 2021. Remaining payments are made on December 31 each year, beginning with December 31, 2021. The equipment cost Packard Corporation $2,400,000. The present value of the lease payments is $2,640,788. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2022, balance sheet?

A) $1,950,867.

B) $1,509,854.

C) $1,959,867.

D) $1,705,854.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Outstanding balance

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

60) Red Co. recorded a right-of-use asset of $100,000 in a 10-year finance lease. Payments of $16,275 are made annually at the end of each year. The interest rate charged by the lessor and known by Red was 10%. The balance in the lease payable after two years will be:

A) $80,000.

B) $86,823.

C) $116,309.

D) $121,000.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Outstanding balance

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

61) On January 1, 2021, Rastall Co. signed a long-term finance lease for an office building. The terms of the lease required Rastall to pay $30,000 annually, beginning December 31, 2021, and continuing each year for 30 years. On January 1, 2021, the present value of the lease payments is $337,734 discounted at the 8% interest rate implicit in the lease. In Rastall's December 31, 2021, balance sheet, the lease payable should be:

A) $307,734

B) $334,753

C) $337,734

D) $870,000

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Outstanding balance

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

62) In connection with a lease of more than 12 months, the lessee always will record each of the following except:

A) an asset.

B) interest revenue.

C) an expense.

D) a liability.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

63) In connection with a lease transaction, the lessor would not record:

A) an asset.

B) depreciation.

C) interest revenue.

D) a liability.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

64) Lessee Company enters into a lease on January 1, 2021, that is accounted for as a finance lease. The lease calls for quarterly payments of $15,000, beginning on January 1, 2021, and continuing for 5 years. The last payment is due on October 1, 2025. The lease has an implicit annual interest rate of 8%. The present value of an annuity due at 8% per period for 5 periods is 4.312; the present value of an annuity due at 2% per period for 20 periods is 16.678. What amount will Lessee report as a lease payable (not including accrued interest) in its financial statements dated December 31, 2021?

A) $198,720

B) $200,000

C) $203,658

D) $208,968

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Interpret amortization schedule; Lessee or Lessor‒Outstanding balance

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

65) BBB Leasing purchased a machine for $250,000 and leased it to Jack Tupp Auto Repair on January 1, 2021.

What is the balance in the lease payable account after the April 1, 2021, lease payment? 

A) $224,381.

B) $233,685.

C) $232,569.

D) $241,185.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Outstanding balance

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

66) For a finance lease, an amount equal to the present value of the lease payments should be recorded by the lessee as a(n):

A) Asset and a liability.

B) Asset and a different amount should be recorded as a liability.

C) Liability and a different amount should be recorded as an asset.

D) Expense.

Difficulty: 1 Easy

Topic: Finance lease compared to installment note; Lessee or Lessor–Journal entries

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

67) A sales-type lease is reported in the lessor's balance sheet as:

A) An asset.

B) A liability.

C) Interest revenue.

D) A contra account to lease liability.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries; Lessor‒Sales-type lease‒No selling profit; Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

68) Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the right-of-use asset should be recorded is the:

A) Ordinary annuity table.

B) Present value of $1 table.

C) Present value of an annuity due table.

D) Future value of an annuity due table.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Interest expense; Lessee‒Operating lease‒Interest

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

69) Titanic Corporation leased executive limos under terms of a $20,000 first payment upon signing the lease and four equal annual payments of $30,000 on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year's interest expense would be: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $13,200.

B) $10,238.

C) $33,200.

D) $15,543.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Interest expense; Lessee‒Operating lease‒Interest

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

70) Durney Co. recorded a right-of-use asset of $800,000 in a ten-year finance lease. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:

A) $648,000

B) $640,000

C) $880,000

D) $968,000

Difficulty: 1 Easy

Topic: Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

71) On January 1, 2021, Princess Corporation leased equipment to King Company. The lease term is eight years. The first payment of $675,000 was made on January 1, 2021. The equipment cost Princess Corporation $3,600,000. The present value of the lease payments is $3,961,183. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2022 on this lease?

A) $261,000.

B) $328,615.

C) $325,350.

D) $293,980.

Difficulty: 3 Hard

Topic: Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.; 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

72) XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the lease payments is $600,000. The expected economic life of the asset is seven years. The lease term is five years. Using the straight-line method, what would West record as annual amortization?

A) $120,000.

B) $61,000.

C) $60,000.

D) $0.

Difficulty: 1 Easy

Topic: Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

73) ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a finance lease. The cost of the asset is $120,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $2,000 at the end of 10 years. Using the straight-line method, what would Best record as annual amortization?

A) $23,600.

B) $12,200.

C) $12,000.

D) $11,800.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

74) If the lessee and lessor use different interest rates to account for a finance/sales-type lease, then:

A) The lessee is unaware of the lessor's implicit rate.

B) Total expenses for the lessee will equal the lessor's total revenues.

C) GAAP has been violated by at least one party.

D) The lessee will report more net income for the year.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Interest expense; Lessee‒Operating lease‒Interest

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

75) J Corp. is a lessee that entered into an operating lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

A) A cash outflow from investing activities.

B) A cash outflow from financing activities.

C) A cash outflow from operating activities.

D) No cash outflow.

Difficulty: 1 Easy

Topic: Lease effect on statement of cash flows

Learning Objective: 15-08 Describe the impact of leases on the statement of cash flows and disclosure requirements pertaining to leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

76) In an eight-year finance lease, the portion of the annual lease payment that represents interest in the lease's third year payment is:

A) The same as in the fourth year.

B) The same as in the first year.

C) Less than in the second year.

D) More than in the second year

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Interest expense

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

77) Mann Co. is the lessor in a six-year lease that the lessor classifies as a sales-type lease. The lease payments begin December 31, 2021. The agreement specifies that Woo Corp. make equal annual lease payments on December 31 of each year. In its 2022 income statement:

A) Woo will report interest expense and amortization expense.

B) Woo will report interest expense and lease expense.

C) Mann will report interest revenue and depreciation expense.

D) Mann will report interest revenue and amortization expense.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Interest expense; Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

78) Warren Co. recorded a right-of-use asset of $800,000 in a 10-year finance lease. The interest rate charged by the lessor was 8%. The balance in the right-of-use asset after two years will be:

A) $648,000.

B) $640,000.

C) $804,000.

D) $968,000.

Difficulty: 2 Medium

Topic: Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

79) Karla Salons leased equipment from Smith Co. on July 1, 2021, in a finance lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due each year beginning July 1, 2021. Smith Co. had constructed the equipment recently for $66,000, and its retail fair value was $81,100.

The total decrease in earnings (pretax) in Karla's December 31, 2021, income statement would be (ignore taxes):

A) $5,000.

B) $7,510.

C) $8,400.

D) $9,000.

Difficulty: 3 Hard

Topic: Lessee‒Finance lease‒Interest expense; Lessee‒Finance lease‒Amortize ROU asset

Learning Objective: 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

80) Recording a sales-type lease with a selling profit is similar to recording:

A) A purchase on account.

B) An exchange of assets.

C) A sale of a fixed asset.

D) A sale of merchandise on account.

Difficulty: 1 Easy

Topic: Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Evaluate

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

81) A noncancelable lease contains an option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain. The fair value of the asset exceeds the lessor's cost of the asset. Therefore, the lease will be accounted for by the lessor as a(n):

A) Sales-type lease.

B) Financing lease.

C) Operating lease.

D) Guaranteed lease.

Difficulty: 2 Medium

Topic: Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

82) On December 31, 2021, Perry Corporation leased equipment to Admiral Company for a five-year period. The annual lease payment, excluding nonlease components, is $40,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2021. The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2021, by what amount will Perry's earnings increase due to this lease (ignore taxes)?

A) $20,000.

B) $24,000.

C) $28,500.

D) $0.

Difficulty: 3 Hard

Topic: Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

83) Karla Salons leased equipment from Smith Co. on July 1, 2021, in a finance lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due each year beginning July 1, 2021. Smith Co. had constructed the equipment recently for $66,000, and its retail fair value was $81,100.

What amount of interest revenue from the lease should Smith Co. report in its December 31, 2021, income statement?

A) $12,000.

B) $4,055.

C) $3,455.

D) $8,110.

Difficulty: 2 Medium

Topic: Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

84) Karla Salons leased equipment from Smith Co. on July 1, 2021, in a finance lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due each year beginning July 1, 2021. Smith Co. had constructed the equipment recently for $66,000, and its retail fair value was $81,100.

What amount did Smith Co. record in its income statement for the reporting year ending December 31, 2021, in connection with the lease? (ignore taxes.)

A) $3,455.

B) $15,100.

C) $18,555.

D) $22,010.

Difficulty: 3 Hard

Topic: Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

85) Abhijit Co. leased equipment from Barua Corp. on July 1, 2021, for an 8-year period expiring June 30, 2029. Equal annual payments on July 1 of each year are $120,000. The first payment was made on July 1, 2021. The rate of interest contemplated by Abhijit and Barua is 10%. The cash selling price of the equipment is $704,000, and the cost of the equipment on Barua's accounting records is $560,000. The lease is appropriately recorded as a sales-type lease. What is the amount of selling profit on the sale and interest revenue that Barua will record for the year ended December 31, 2021?

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Lessor‒Sales-type lease‒With selling profit

Learning Objective: 15-03 Describe and demonstrate how the lessor accounts for a sales-type lease with a selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

86) Andres Company is the lessee in an operating lease in which the asset's economic life and lease term are different. Andres will:

A) amortize the leased asset over the term of the lease at a straight-line amount.

B) amortize the leased asset at an amount that increases each period.

C) amortize the leased asset at an amount that decreases each period.

D) amortize the asset over its economic life.

Difficulty: 2 Medium

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

87) Blue Co. recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments of $16,275 are made annually at the end of each year. The interest rate charged by the lessor was 10% and was known by Blue. The balance in the right-of-use asset after two years will be:

A) $80,000.

B) $86,823.

C) $100,000.

D) $121,000.

Difficulty: 3 Hard

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

88) On January 1, 2021, Green Co. recorded a right-of-use asset of $270,360 in an operating lease. The lease calls for ten annual payments of $40,000 at the beginning of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2021, will be:

A) $270,360.

B) $253,396.

C) $243,324.

D) $230,360.

Difficulty: 2 Medium

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

89) Cady Salons leased equipment from Smith Co. on January 1, 2021, in an operating lease. The present value of the lease payments discounted at 10% was $81,100. Ten annual lease payments of $12,000 are due at each January 1 beginning January 1, 2021. The amortization of the right-of-use asset for the reporting year ending December 31, 2021, would be:

A) $5,090.

B) $3,455.

C) $8,110.

D) $12,000.

Difficulty: 2 Medium

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

90) When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that:

A) The expenses of a finance lease are greater than the expenses of the operating lease.

B) The expenses of the finance lease and operating lease are equal.

C) The expenses of an operating lease are greater than the expenses of a finance lease.

D) No meaningful comparison can be made.

Difficulty: 2 Medium

Topic: Lessee‒Operating lease‒Total lease expense

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

91) In an operating lease, the amortization of the right-of-use asset in the third year is:

A) the same as in the fourth year.

B) zero.

C) less than in the fourth year.

D) more than in the fourth year.

Difficulty: 3 Hard

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

92) On January 1, 2021, PokemonGo Company leased equipment to Waldo Corporation under a lease agreement that qualifies as an operating lease to Waldo. The present value of the end-of-year lease payments of $138,585 discounted at 5% is $600,000. The expected economic life of the asset is seven years. The lease term is five years. What would Waldo record as amortization in 2021?

A) $90,000.

B) $108,585.

C) $120,000.

D) $0.

Difficulty: 2 Medium

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

93) I. Lasch Co. recorded a right-of-use asset of $200,000 in a 10-year operating lease. Payments of $32,550 are made annually at the end of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after the first year will be:

A) $180,000.

B) $187,450

C) $188,450.

D) $200,000.

Difficulty: 2 Medium

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

94) I.D. Clair Co. recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments of $14,795 are made annually at January 1 of each year beginning January 1, 2021. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2021, will be: (Round your answer to the nearest whole dollar amount.)

A) $85,205.

B) $91,478.

C) $93,726.

D) $100,000.

Difficulty: 3 Hard

Topic: Lessee‒Operating lease‒Amortization

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

95) In an operating lease:

A) the lessee records an asset and a liability for the present value of lease payments.

B) the lessor records a receivable for the present value of lease payments.

C) the lessee records an asset and a liability for the total of the lease payments.

D) the lessor records interest revenue.

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Journal entries

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

96) Which of the following statements characterizes an operating lease?

A) The lessee reports cash outflows as financing activities.

B) The lessor records depreciation and lease revenue.

C) The lessor transfers title at the end of the lease term.

D) The lessee has an option to purchase the leased assets and is reasonably sure to exercise the option.

Difficulty: 2 Medium

Topic: Lessor‒Operating lease‒Revenue and depreciation

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

97) If the lessor records deferred lease revenue at the beginning of a lease term, the lease must:

A) Be a financing lease.

B) Be a sales-type lease.

C) Contain a bargain renewal option.

D) Be an operating lease.

Difficulty: 2 Medium

Topic: Lessor‒Operating lease‒Revenue and depreciation

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

98) On January 1, 2021, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2021, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2021?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Lessee or Lessor‒Journal entries; Lessor‒Operating lease‒Revenue and depreciation

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

99) Matt Co. is the lessor in connection with an operating lease. Matt Co. would record:

A) Depreciation expense.

B) A right-of-use asset.

C) Amortization expense.

D) Interest revenue.

Difficulty: 1 Easy

Topic: Lessee or Lessor‒Journal entries; Lessor‒Operating lease‒Revenue and depreciation

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

100) Crystal Corporation makes $2,000 payments every month for leasing office equipment. Crystal recorded a lease payment as follows:

Crystal must have a(n):

A) Operating lease.

B) Leveraged lease.

C) Finance lease.

D) Sales-type lease without selling profit.

Difficulty: 2 Medium

Topic: Lessee‒Operating lease‒Total lease expense; Lessee or Lessor‒Journal entries

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

101) On January 1, 2021, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $20,000 for 2021, $18,000 for 2022, $16,000 for 2023, and $14,000 for 2024. What is the correct amount of total lease expense for 2022?

A) $20,500.

B) $19,000.

C) $17,000.

D) $18,000.

Difficulty: 3 Hard

Topic: Lessee‒Operating lease‒Total lease expense

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

102) On September 1, 2021, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments by Custom Shirts are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much total lease expense will Custom Shirts recognize for 2021?

A) $6,667.

B) $24,000.

C) $20,000.

D) $8,000.

Difficulty: 3 Hard

Topic: Lessee‒Operating lease‒Total lease expense

Learning Objective: 15-04 Describe and demonstrate how the lessor and lessee account for all transactions associated with operating leases.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

103) Jacobs Eatery leased restaurant equipment from Gamma Leasing. Gamma earns interest under such arrangements at a 6% annual rate. The lease term is eight months with monthly payments of $20,000 due at the end of each month. Jacobs Eatery elected the short-term lease option. What is the effect of the lease on Jacobs Eatery's earnings during the eight-month term (ignore taxes)?

A) An initial expense of $160,000.

B) An expense of $20,000 initially and $20,000 at the end of 7 months.

C) An expense of $20,000 at the end of each of the 8 months.

D) No expense within the 8-month period.

Difficulty: 1 Easy

Topic: Lessee‒Short-term lease

Learning Objective: 15-05 Explain when and how a lessee accounts for a lease by the shortcut method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

104) Pita Pub leased a specialty machine for a five-year non-cancelable term. At the end of the five-year term, Pita Pub has four consecutive one-year renewal options. A replacement machine can be acquired, but due to an expensive installation process and Pita Pub's lease term for its mall location, Pita Pub expects to lease the machine for seven years. What is the lease term?

A) 5 years

B) 6 years

C) 7 years

D) 9 years

Difficulty: 2 Medium

Topic: Uncertainty‒Payments-Term-Termination penalty

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

105) Trussel Creations leased kitchen equipment under a five-year lease with an option to renew for three years at the end of five years and an option to renew for an additional three years at the end of eight years. The first three-year renewal option can be exercised for one-half the original and usual rate. What is the length of the lease term that Trussel Creations should assume in recording the transactions related to the lease?

A) 5 years

B) 8 years

C) 11 years

D) cannot be determined

Difficulty: 2 Medium

Topic: Uncertainty‒Payments-Term-Termination penalty

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

106) On January 1, Sepe Vineyard Supply leased a truck for a five-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $11,000 due on December 31 of each year, calculated by the lessor using a 4% discount rate. If Sepe's revenues exceed a specified amount during the lease term, Sepe will pay an additional $3,000 lease payment at the end of the lease. Sepe estimates a 70% probability of meeting the target revenue amount. What amount, if any, should be added to the right-of-use asset and lease liability under the contingent rental agreement?

A) 0

B) $3,000

C) present value of $3,000

D) present value of $14,000

Difficulty: 2 Medium

Topic: Uncertainty‒Payments-Term-Termination penalty

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

107) Omega leased a machine for a ten-year non-cancelable term. At the end of the ten-year term, Omega has five consecutive one-year renewal options. A replacement machine can be acquired at the end of the term for the leased machine, but due to an expensive installation process and Omega's lease term for its store, Omega expects to lease the machine for 12 years. What is the lease term?

A) 10 years

B) 11 years

C) 12 years

D) 15 years

Difficulty: 2 Medium

Topic: Uncertainty‒Payments-Term-Termination penalty

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

108) On January 1, Porter Moving and Storage leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $30,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. If Porter's revenues exceed a specified amount during the lease term, Porter will pay an additional $12,000 lease payment at the end of the lease. Porter estimates a 60% probability of meeting the target revenue amount. What amount, if any, should be added to the right-of-use asset and lease payable under the contingent rent agreement?

A) No additional amount should be added.

B) An additional $6,000 should be added.

C) An additional $7,200 should be added.

D) An additional $12,000 should be added.

Difficulty: 2 Medium

Topic: Uncertainty‒Payments-Term-Termination penalty

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

109) A lessee will reassess variable lease payments that depend on an index or a rate:

A) Only when the lessee remeasures the right-of-use asset and lease liability for other reasons.

B) Only when the lessor also reassesses the variable lease payments.

C) Whenever there is a change in the cash flows resulting from a change in the reference index or rate.

D) Never.

Difficulty: 2 Medium

Topic: Uncertainty‒Payments-Term-Termination penalty

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

110) Sometimes lease payments are scheduled to be increased (or decreased) at some future date during the lease term, depending on whether or not some specified event occurs. Papaya Republic leases space in premium mall locations anticipating higher revenue. If the mall attracts a sufficiently higher number of shoppers, Papaya Republic pays the lessor part of the resulting higher profits, but if not, the Papaya Republic makes only the normal lease payments. Management's policy is to include the variable lease payments as part of the lease payments used to calculate the lessee's lease liability and right-of-use asset if the payments are probable. Which of the following is an accurate statement regarding the company's policy?

A) The policy is inappropriate because the variable lease payments should be included as part of the lease payments used to calculate the lessee's lease liability and right-of-use asset only if the payments are "reasonably certain."

B) The policy is inappropriate because the amounts of future lease payments are uncertain and often avoidable and thus should not be considered as part of the lease payments.

C) This approach is inappropriate because the variable lease payments should be included as part of the lease payments only if and when the lessee remeasures the lease liability.

D) This approach is conceptually correct because the arrangement also provides the lessor an incentive to attract shoppers to the mall, which is in the lessee's best interest.

Difficulty: 2 Medium

Topic: Uncertainty‒Payments-Term-Termination penalty

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

111) If it is "reasonably certain" that the lessee will exercise a purchase option:

A) The lease is classified as a finance/sales-type lease.

B) Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment.

C) It's assumed that the lease term ends on the date that the option is expected to be exercised.

D) All of these answer choices are correct.

Difficulty: 2 Medium

Topic: Uncertainty‒Purchase option

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

112) For a right-of-use asset under a lease that qualifies as a finance lease because the lease contains a purchase option and the option is reasonably certain to be exercised, the amortization period used by the lessee must be:

A) The same period that was used by the lessor.

B) The economic life of the asset at the time the lease agreement took effect.

C) The term of the lease.

D) The term of the lease or the economic life of the asset, whichever is shorter.

Difficulty: 2 Medium

Topic: Uncertainty‒Purchase option

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

113) The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain sometimes is called a:

A) Bargain purchase option.

B) Lessee buy-out option.

C) Lessor sell-out option.

D) Guaranteed purchase option.

Difficulty: 1 Easy

Topic: Lease classification‒Criteria; Uncertainty‒Purchase option

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.; 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

114) If the lessee expects to obtain title to leased property due to a purchase option that is reasonably certain to be exercised or the passage of title at the end of the lease term:

A) The lessee ignores any residual value for the leased property.

B) The lessor ignores any residual value for the leased property.

C) The lessee adds the present value of the residual value to the amount recorded for the lease.

D) The lessor will always charge a higher annual lease rate.

Difficulty: 2 Medium

Topic: Uncertainty‒Purchase option

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

115) On January 2, 2021, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a finance lease for $240,000, which includes a $10,000 purchase option at the end of the lease. Nori is reasonably certain to exercise the purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. For the year ended December 31, 2021, what amount should Nori recognize as amortization expense on the right-of-use asset?

A) $27,500

B) $30,000

C) $48,000

D) $46,000

Difficulty: 2 Medium

Topic: Uncertainty‒Purchase option

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

116) Gamma Leasing acquires equipment and leases it to customers under long-term sales-type leases. Gamma earns interest under these arrangements at a 6% annual rate. Gamma purchased a machine and then leased it for $300,000 under an arrangement that specified annual payments to be received for five years, beginning at the commencement of the lease. The lessee had the option to purchase the machine at the end of the lease term for $50,000 when it was expected to have a residual value of $80,000. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar amount.)

The present value of $1: n = 5, i = 6% is 0.74726.

The present value of an ordinary annuity of $1: n = 5, i = 6% is 4.21236.

The present value of an annuity due of $1: n = 5, i = 6% is 4.46511.

A) $62,349

B) $58,820

C) $67,188

D) $78,385

Difficulty: 3 Hard

Topic: Uncertainty‒Purchase option

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

117) Which of the following might shorten the term of the lease?

A) Initial direct costs.

B) Contingent rentals.

C) A renewal option.

D) A purchase option.

Difficulty: 2 Medium

Topic: Uncertainty‒Purchase option

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

118) On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan's lease amortization schedule appears below:

In this situation, Reagan:

A) is the lessee in a sales-type lease.

B) is the lessee in a finance lease.

C) is the lessor in a finance lease.

D) is the lessor in a sales-type lease.

Difficulty: 1 Easy

Topic: Lease classification‒Finance-Sales-type-Operating; Uncertainty‒Residual value; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-01 Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.; 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

119) On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan's lease amortization schedule appears below:

What is the balance of the lease liability on Reagan's December 31, 2022, balance sheet (after the third lease payment is made)?

A) $280,531.

B) $190,530.

C) $266,280.

D) $356,280.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

120) On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. 

Reagan's lease amortization schedule appears below:

At what amount would Reagan record the right-of-use asset at the beginning of the agreement?

A) $519,115.

B) $429,115.

C) $540,000.

D) $576,000.

Difficulty: 1 Easy

Topic: Uncertainty‒Residual value; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

121) On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan's lease amortization schedule appears below:

What is the effective annual interest rate charged to Reagan on this lease?

A) 4%.

B) 6%.

C) 8%.

D) 17%.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value; Lessee‒Finance lease‒Interest expense; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.; 15-02 Describe and demonstrate how the lessee accounts for a finance lease and the lessor accounts for a sales-type lease with no selling profit.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

122) On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan's lease amortization schedule appears below:

What is the amount of residual value guaranteed by Reagan to the lessor?

A) $1,385.

B) $34,615.

C) $36,000.

D) Cannot be determined from the given information.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value; Lessee or Lessor‒Interpret amortization schedule

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

123) If the lessor retains title to leased property under the terms of the lease:

A) The amount to be recovered through periodic lease payments is reduced by the present value of any residual amount.

B) The amount to be recovered through periodic lease payments is increased by the present value of the residual amount.

C) The amount to be recovered will be the same as if there were no residual value.

D) The lessor will record a greater amount of depreciation due to the residual value.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

124) By the lessee, a lessee-guaranteed residual value at the beginning of a finance lease should be:

A) Excluded from lease payments.

B) Included as part of lease payments at present value.

C) Included as part of lease payments at future value.

D) Included as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

125) Which of the following statements regarding lessee-guaranteed residual values is true for the lessee?

A) The asset and liability at the beginning of the lease should be increased by the amount of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value.

B) The asset and liability at the beginning of the lease should be decreased by the amount of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value.

C) The asset and liability at the beginning of the lease should be increased by the present value of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value.

D) The asset and liability at the beginning of the lease should be decreased by the present value of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

126) If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the:

A) Lessor must compensate the lessee for the excess.

B) Lessee must pay the lessor the amount of the excess.

C) Lessee will reduce the last year's depreciation.

D) Lessor is not obligated to compensate the lessee for the excess.

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

127) At the beginning of a finance lease, a guaranteed residual value should be:

A) Included as part of lease payments at present value.

B) Included as part of lease payments at future value.

C) Included as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

D) Excluded from lease payments.

Difficulty: 1 Easy

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

128) By the lessor, a lessee-guaranteed residual value at the beginning of a finance lease should be:

A) Excluded from lease payments.

B) Included as part of lease payments at present value.

C) Included as part of lease payments at future value.

D) Included as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

Difficulty: 1 Easy

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

129) Which of the following statements regarding a lessee-guaranteed residual value is true?

A) The lessor's lease receivable should be increased by the amount of the residual value.

B) The lessor's lease receivable should be increased by the amount of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value.

C) The lessee's right-of-use asset and lease payable at the beginning of the lease should be increased by the present value of the residual value.

D) The lessee's right-of-use asset and lease payable at the beginning of the lease should be decreased by the present value of the residual value to the extent that guaranteed residual value is expected to exceed estimated residual value.

Difficulty: 3 Hard

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

130) On January 1, Smith Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to Smith. The equipment cost Smith $350,000 and has an expected useful life of six years. Its normal sales price is $350,000. The residual value after four years is $50,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 5%. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar amount.)

The present value of $1: n = 4, i = 5% is 0.82270.

The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595.

The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.

A) $87,104

B) $82,955

C) $98,704

D) $77,337

Difficulty: 3 Hard

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

131) On January 1, Ramirez Supply leased a car for a four-year period, at which time possession of the car will revert back to the lessor. Annual lease payments are $20,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. Negotiations led to Ramirez guaranteeing the lessor a $72,000 residual value at the end of the lease term although Ramirez estimates that the residual value after four years will be $70,000. What is the amount to be added to the right-of-use asset and lease payable under the residual value guarantee? (Round your answer to the nearest whole dollar amount.)

The present value of $1: n = 4, i = 5% is 0.82270.

The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595.

The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.

A) $823

B) $1,216

C) $1,645

D) $2,061

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

132) What makes up a lessor's net investment? 

A) Lease payments plus residual value

B) Present value of lease payments plus present value of residual value

C) Present value of lease payments minus present value of residual value

D) Lease payments plus non-lease payments

Difficulty: 2 Medium

Topic: Uncertainty‒Residual value

Learning Objective: 15-06 Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

133) When a lease qualifies as a finance lease, what amount is recorded as the cost of the right-of-use asset?

A) The present value of the lease payments, exclusive of nonlease components.

B) The present value of the lease payments plus nonlease components.

C) The sum of the gross lease payments.

D) The present value of the lease payments plus the present value of nonlease components.

Difficulty: 2 Medium

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

134) What are the three types of expenses that a lessee experiences with a finance lease?

A) Lease expense, payments for nonlease components, interest expense.

B) Amortization expense, lease expense, interest expense.

C) Payments for nonlease components, lease expense, amortization expense.

D) Amortization expense, interest expense, payments for nonlease components.

Difficulty: 1 Easy

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

135) The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessee are:

A) added to the right-of-use asset and expensed over an amortization period.

B) recorded as an expense at the beginning of the lease.

C) deferred in an operating lease until the asset is returned to the lessor.

D) a reduction to the lease liability at the beginning of the lease.

Difficulty: 1 Easy

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

136) The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessor are deferred and expensed over the lease term:

A) Only in an operating lease.

B) Only in a sales-type lease with selling profit.

C) Only in a sales-type lease with no selling profit.

D) In both an operating lease and a sales-type lease with no selling profit.

Difficulty: 1 Easy

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

137) The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs are expensed at the beginning of the lease in:

A) An operating lease.

B) A sales-type lease with selling profit.

C) A sales-type lease with no selling profit.

D) Both an operating lease and a sales-type lease with no selling profit.

Difficulty: 1 Easy

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

138) N Corp. entered into a nine-year finance lease on a warehouse on December 31, 2021. Lease payments of $26,000, which includes maintenance services of $1,000, are due annually, beginning on December 31, 2022, and every December 31 thereafter. N does not know the interest rate implicit in the lease; N's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 5.9952. What amount should N report as recorded lease liability at December 31, 2021?

A) $149,880.

B) $155,875.

C) $225,000.

D) $234,000.

Difficulty: 2 Medium

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

139) Ira Bates Corp. entered into a 9-year finance lease on a warehouse on December 31, 2021. Lease payments of $39,000, which includes maintenance service of $1,500, are due annually, beginning on December 31, 2022, and every December 31 thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Bates record as the lease payable at December 31, 2021?

A) $225,000

B) $234,000

C) $337,500

D) $351,000

Difficulty: 2 Medium

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

140) The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as:

A) Initial direct costs.

B) Consummating expenses.

C) Lease acquisition expenses.

D) Nonlease components.

Difficulty: 1 Easy

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

141) The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs are expensed at the beginning of the lease in:

A) A sales-type lease with a selling profit.

B) A sales-type lease without a selling profit.

C) Any sales-type lease.

D) An operating lease.

Difficulty: 1 Easy

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

142) The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease and (c) would not have been incurred had the lease agreement not occurred are referred to as initial direct costs. Initial direct costs are added to the Lease Receivable in:

A) A sales-type lease with a selling profit.

B) A sales-type lease without a selling profit.

C) Any sales-type lease.

D) An operating lease.

Difficulty: 2 Medium

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

143) The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease and (c) would not have been incurred had the lease agreement not occurred are referred to as initial direct costs. Initial direct costs are deferred and expensed over the lease term, generally on a straight-line basis in:

A) A sales-type lease with a selling profit.

B) A sales-type lease without a selling profit.

C) Any sales-type lease.

D) An operating lease.

Difficulty: 2 Medium

Topic: Other costs‒Nonlease-Initial direct

Learning Objective: 15-07 Determine whether a contract contains a lease and explain the impact on lease accounting of other payments, including nonlease payments, initial direct costs, and leasehold improvements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

144) Bird leased equipment that had a retail cash selling price of $1,200,000 and a useful life of five years with no residual value. The lessor paid $1,060,000 to acquire the equipment and used an implicit rate of 8% when calculating annual lease payments of $278,284 beginning January 1, at the beginning of the lease. Incremental costs of negotiating and consummating the completed lease transaction incurred by the lessor were $30,000. What is the increase in the lessor's earnings during the first year as a result of the lease (ignore taxes)? (Round your answer to the nearest whole dollar amount.)

A) Decrease in earnings by $164,839

B) Increase in earnings by $171,242

C) Decrease in earnings by $178,625

D) Increase in earnings by $183,737