Bakersfield College

ACG 2021

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

1. 1. Asset and a liability.
   2. Asset and a different amount should be recorded as a liability.
   3. Liability and a different amount should be recorded as an asset.
   4. Expense.

 

 

 

 

2. Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be:
   1. The shorter of the physical life of the asset or the lease term.
   2. The physical life of the asset.
   3. The lease term.
   4. A time period determined by management.

 

 

 

 

3. A direct financing lease is classified in the lessor's balance sheet as:
   1. An asset.
   2. A liability.
   3. Interest revenue.
   4. A contra account to lease liability.

 

 

 

 

4. For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option, the depreciation period used by the lessee must be:
   1. The same period that was used by the lessor.
   2. The useful life to the lessee.

1. 3. The term of the lease regardless of the lease provisions.
   4. The remaining life of the asset at the time the lease agreement took effect.

 

 

 

 

5. If the lessor retains title to leased property under the terms of the lease:
   1. The amount to be recovered through periodic lease payments is reduced by the present value of the residual amount.
   2. The amount to be recovered through periodic lease payments is increased by the present value of the residual amount.
   3. The amount to be recovered will be the same as if there were no residual value.
   4. The lessor will record a greater amount of depreciation due to the residual value.

 

 

 

 

Use the following to answer questions:

 

Refer to the following lease amortization schedule. The five payments are made annually starting with the inception of the lease. A $2,000 bargain purchase option is exercisable at the end of the five-year lease.

The asset has an expected economic life of eight years.

 

Lease	Cash	Effective	Decrease in
Payment	Payment	Interest	Balance	Balance
				34,600
1	8,000	??	??	26,600
2	8,000	2,660	5,340	21,260
3	8,000	2,126	5,874	15,386
4	8,000	1,539	6,461	8,925
5	8,000	??	??	??
6	2,000	182	1,818	0

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

b.     10%.

c.     11%.

d.     20%.

 

 

 

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

a.     $3,325.

b.     $6,920.

c.     $4,325.

d.     $5,320.

 

 

 

 

8. What is the total interest paid over the term of the lease? a.         $42,000.

b.     $ 8,200.

c.     $ 7,400.

d.     $ 3,460.

 

 

 

 

9. What is the outstanding balance after payment 5? a.         $1,818.

b.     $2,000.

c.     $2,182.

d.     $3,818.

 

 

 

 

 

10. What would be the amount of interest expense recorded with payment 5? a.         $2,000.

b.     $ 893.

c.     $7,107.

d.     $1,107.

 

 

 

 

11. 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 leased asset should be recorded is the:
    1. Ordinary annuity table.
    2. Present value of $1 table.
    3. Present value of an annuity due table.
    4. Future value of an annuity due table.

 

 

 

 

12.    On October 1, 2016, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2017. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at: a. $2,500,000.

b.     $2,225,000.

c.     $1,847,950.

d.     $2,115,270.

 

 

 

13. Titanic Corporation leased executive limos under terms of $20,000 down 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:

a.     $13,200.

b.     $10,238.

c.     $33,200.

d.     $15,543.

 

 

 

14. When a capital lease is first recorded at the inception of the lease, the lessee typically debits:
    1. Leased asset.
    2. Rent expense.
    3. Lease expense.
    4. Lease receivable.

 

 

 

 

15. On January 1, 2016, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing 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 minimum lease payments is $240,000. The lease payments are due each January 1, beginning in 2016. What is the appropriate interest entry on December 31, 2016?

 

a.      Cash	24,000
Interest revenue		24,000
b.      Cash	20,600
Interest receivable		20,600
c.       Interest receivable	20,600
Interest revenue		20,600
d.      Interest receivable	24,000
Interest revenue		24,000

 

 

 

16. Francisco leased equipment from Julio on December 31, 2016. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2016. The present value of the lease is $1,020,000. 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, 2017?

a.     $824,400.

b.     $807,000.

c.     $806,400.

d.     $792,000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17. Additional lessor conditions for classification as a capital lease are consistent with the criteria of:
    1. Matching.
    2. Cause and effect.
    3. Materiality.
    4. Revenue recognition.

 

 

 

 

18. A sales-type lease differs from a direct financing lease in one respect:
    1. The lessor receives a manufacturer's or dealer's profit.
    2. The lessor receives more interest than on a direct financing lease.
    3. The lessor receives less interest than on a direct financing lease.
    4. The lessor uses a longer amortization period than on a direct financing lease.

 

 

 

 

19. Recording a sales-type lease is similar to recording:
    1. A purchase on account.
    2. An exchange of assets.