Bakersfield College

ACG 2021

1)Of the four criteria for a capital lease, which two are not applied if the lease begins during the final quarter of the asset's useful life?

1. 1. The 75% test and the bargain purchase option.
   2. The 90% test and the 75% test.
   3. The 90% test is the only one to which this applies.
   4. The bargain purchase and the passage of title criteria.

2. On February 1, 2016, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

a.     $600,000.

b.     $540,000.

c.     $450,000.

d.     $405,000.

Use the following to answer questions

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2016. 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, 2016; remaining payments at June 30 and December 31 each year through June 30, 2020.
• Lease term: five years (10 semiannual payments).
• No residual value; no bargain 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, 2016: $20 million.

Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.

3. Technoid would account for this as:
   1. A capital lease.
   2. A direct financing lease.
   3. A sales-type lease.
   4. An operating lease.

4. Lone Star Company would account for this as:
   1. A capital lease.
   2. A direct financing lease.
   3. A sales type lease.
   4. An operating lease.

5. What is the net book value of the lease liability in Lone Star's June 30, 2016, balance sheet? Round your answer to the nearest dollar.

a.     $15,943,154.

b.     $17,533,246.

c.     $21,000,000.

d.     None of these answer choices is correct.

6. What is the interest revenue that Technoid would report on this lease in its 2016 income statement?

a.     $0.

b.     $1,673,820.

c.     $876,662.

d.     None of these answer choices is correct.

Use the following to answer questions :

On December 31, 2015, Reagan Inc. signed a lease for some equipment having a nine-year useful life with Silver Leasing Co. 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, 2021. There is no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan's lease amortization schedule appears below:

7. In this situation, Reagan:
   1. is the lessee in a sales-type lease.
   2. is the lessee in a capital lease.
   3. is the lessor in a capital lease.
   4. is the lessor in a sales-type lease.

8. What is the book value of the lease liability on Reagan's December 31, 2017, balance sheet (after the third lease payment is made)?

a.     $280,531.

b.     $190,530.

c.     $266,280.

d.     $356,280.

9. At what amount would Reagan record the leased asset at inception of the agreement? a.         $519,115.

b.     $429,115.

c.     $540,000.

d.     $576,000.

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

a.     4%.

b.     6%.

c.     8%.

d. 17%.

11. 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.

12. The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:
    1. Present value of the minimum lease payments.
    2. Sum of the minimum lease payments.
    3. Fair value of the asset at the inception of the lease.
    4. Zero, unless a prepayment or accrual is involved.

13. Which of the following statements characterizes an operating lease?
    1. The lessee records depreciation and interest.
    2. The lessor records depreciation and lease revenue.
    3. The lessor transfers title at the end of the lease term.
    4. The lessee records a leased asset.

14. Crystal Corporation recorded a lease payment as follows: Rent expense                                                                               2,000

Cash                                                                                                2,000

Crystal must have a(n):

1. 1. Operating lease.
   2. Leveraged lease.
   3. Capital lease.
   4. Direct financing lease.

15. If the lessor records deferred rent revenue at the beginning of a lease term, the lease must:
    1. Be a direct financing lease.
    2. Be a sales-type lease.
    3. Contain a bargain renewal option.
    4. Be an operating lease.

16. Prepayments made by the lessee on an operating lease are considered to be:
    1. A lease expense.
    2. A depreciable asset.
    3. Deferred revenue.
    4. A prepayment of rent expense.

17. On January 1, 2016, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $20,000 for 2016, $18,000 for 2017, $16,000 for 2018, and $14,000 for 2019. What is the correct amount of lease expense for 2017?

a.     $20,500.

b.     $19,000.

c.     $17,000.

d.     $18,000.

18. On January 1, 2016, 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, 2016, 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, 2016?

19. On September 1, 2016, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much rent expense will Custom Shirts recognize for 2016?

a.     $ 6,667.

b.     $24,000.

c.     $20,000.

d.     $ 8,000.

20. The lessee normally measures the lease liability to be recorded as the:
    1. Future value of the minimum lease payments.
    2. Sum of the cash payments over the term of the lease.
    3. Present value of the minimum lease payments.
    4. Fair market value of the leased asset.

21. Leasehold improvements usually are classified in a balance sheet as:
    1. Property, plant, and equipment.
    2. Other long-term assets.
    3. Investments.
    4. Expenses.

Use the following to answer questions :

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

22. What is the effective annual interest rate? a.    9%.

b.     10%.

c.     11%.

d.     12%.

23. What would the lessee record as annual depreciation on the asset using the straight-line method?

a.     $ 5,328.

b.     $ 6,328.

c.     $ 6,392.

d.     $10,000.