Finance and sales-type leases: classification and accounting

1. 1Which of the following best describes current practice in accounting for leases?

   1. Aa. Leases are not capitalized.
   2. Bb. Leases similar to installment purchases are capitalized.
   3. Cc. All long-term leases are capitalized.
   4. Dd. All leases are capitalized.
2. 2While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that
   

   1. Aa. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
   2. Bb. at the end of the lease the property usually can be purchased by the lessee.
   3. Cc. a lease reflects the purchase or sale of a quantifiable right to the use of property.
   4. Dd. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.
3. 3What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?
   

   1. Aa. No impact as the option does not enter into the transaction until the end of the lease term.
   2. Bb. The lessee must increase the present value of the minimum lease payments by the present value of the option price.
   3. Cc. The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
   4. Dd. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.
4. 4In computing the present value of the minimum lease payments, the lessee should
   

   1. Aa. use its incremental borrowing rate in all cases.
   2. Bb. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
   3. Cc. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
   4. Dd. none of these.
5. 5In the earlier years of a lease, from the lessee's perspective, the use of the
   

   1. Aa. capital method will enable the lessee to report higher income, compared to the operating method.
   2. Bb. capital method will cause debt to increase, compared to the operating method.
   3. Cc. operating method will cause income to decrease, compared to the capital method.
   4. Dd. operating method will cause debt to increase, compared to the capital method.
6. 6A lessee with a finance lease containing a bargain purchase option should amortize the leased asset (or its ROU) over the:
   

   1. Aa. asset's remaining economic life.
   2. Bb. term of the lease.
   3. Cc. life of the asset or the term of the lease, whichever is shorter.
   4. Dd. life of the asset or the term of the lease, whichever is longer.
7. 7Which of the following would not be included in the Lease Receivable account?
   

   1. Aa. Guaranteed residual value
   2. Bb. Unguaranteed residual value
   3. Cc. A bargain purchase option
   4. Dd. All would be included
8. 8For a sales-type lease,
   

   1. Aa. the sales price includes the present value of the unguaranteed residual value.
   2. Bb. the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
   3. Cc. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
   4. Dd. none of these.
9. 9The Lease Liability account should be disclosed as
   

   1. Aa. all current liabilities.
   2. Bb. all noncurrent liabilities.
   3. Cc. current portions in current liabilities and the remainder in noncurrent liabilities.
   4. Dd. deferred credits.
10. 10Which of the following is not one of the lease classification tests?
    

    1. ACollectibility
    2. BLease term
    3. CPurchase option
    4. DTransfer of ownership

11. 11On January 1, 2013, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $200,000 at the end of each year for ten years with title to pass to Dean at the end of this period.
    The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets.
    Dean accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%.
    
    With respect to this capitalized lease, Dean should record for 2013
    

    1. Aa. lease expense of $200,000.
    2. Bb. interest expense of $89,468 and amortization expense of $76,136.
    3. Cc. interest expense of $107,361 and amortization expense of $89,468.
    4. Dd. interest expense of $91,362 and amortization expense of $134,202.
12. 12On January 1, 2013, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
    The agreement requires equal rental payments at the end of each year.
    The fair value of the building on January 1, 2013 is $4,000,000; however, the book value to Holt is $3,300,000.
    The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
    At the termination of the lease, the title to the building will be transferred to the lessee.
    Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
    The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
    
    What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)

    1. A$250,981
    2. B$640,981
    3. C$650,981
    4. D$660,981
13. 13On January 1, 2013, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
    The agreement requires equal rental payments at the end of each year.
    The fair value of the building on January 1, 2013 is $4,000,000; however, the book value to Holt is $3,300,000.
    The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
    At the termination of the lease, the title to the building will be transferred to the lessee.
    Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
    The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
    
    What is the amount of the total annual lease payment?

    1. A$250,981
    2. B$640,981
    3. C$650,981
    4. D$660,981
14. 14On January 1, 2013, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
    The agreement requires equal rental payments at the end of each year.
    The fair value of the building on January 1, 2013 is $4,000,000; however, the book value to Holt is $3,300,000.
    The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
    At the termination of the lease, the title to the building will be transferred to the lessee.
    Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
    The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
    From the lessee's viewpoint, what type of lease exists in this case?
    

    1. ASales-type lease
    2. BSale-leaseback
    3. CFinance lease
    4. DOperating lease
15. 15On January 1, 2013, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
    The agreement requires equal rental payments at the end of each year.
    The fair value of the building on January 1, 2013 is $4,000,000; however, the book value to Holt is $3,300,000.
    The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
    At the termination of the lease, the title to the building will be transferred to the lessee.
    Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
    The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
    
    From the lessor's viewpoint, what type of lease is involved?

    1. A. Sales-type lease
    2. BSale-leaseback
    3. CDirect-financing lease
    4. DOperating lease

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Quiz on Untitled, created by Orfa Cartagena on 17/05/2022.

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Orfa Cartagena

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