1.

Question : Student Answer:

(TCO D) Lease methods of accounting are operating and sales leaseback methods. operating and capital lease methods. leveraged and operating lease methods. None of the above

Instructor Explanation:

See Chapter 21.

5 of 5

Points Received: Comments:

2.

Question :

(TCO D) A major purpose(s) in starting an equipment leasing company is (are) tax incentives. interest revenue. high residual value. All of the above

Student Answer:

Instructor Explanation:

See Chapter 21.

0 of 5

Points Received: Comments:

3.

Question :

(TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $425,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the assets life? PV Annuity Due PV Ordinary Annuity 3.5771 3.31213 3.48685 3.16986

8%, 4 periods 10%, 4 periods

Student Answer:

$121,621

$0 $112,612 $87,621
Instructor Explanation:

See Chapter 21. ((425000 * 3.5771) - 425000) * 0.08

Points Received: Comments:

5 of 5

4.

Question :

(TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry's Leasing Company with five equal annual payments of $240000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the $20000 residual value of the asset at the end of the lease term. Bentleys incremental borrowing rate is 10%, however it knows that Harrys implicit interest rate is 8%. What journal entry would Harry's Leasing Company make at January 2, 2013 assuming this is a direct financing lease? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 0.68058 10%, 5 periods 4.16986 3.79079 0.62092 Lease Receivable Equipment Lease Receivable Equipment Lease Receivable Equipment Lease Receivable Loss Equipment $971,862 $971,862 $922,208 $922,208 $1,220,000 $1,220,000 $958,250 $261,750 $1,220,000

Student Answer:

Instructor Explanation:

See Chapter 21. (240000 * 3.99271) + (20000 * 0.68058)

5 of 5

Points Received: Comments:

5.

Question :

(TCO D) Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased

property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases?
Student Answer:

(Lease A) Capital lease (Lease A) Operating lease (Lease A) Operating lease (Lease A) Capital lease
Instructor Explanation:

(Lease B) Capital lease (Lease B) Operating lease (Lease B) Capital lease (Lease B) Operating lease

See Chapter 21.

5 of 5

Points Received: Comments:

6.

Question :

(TCO D) Carl Leasing, Inc. agrees to lease medical equipment to Sally, Inc. on January 1, 2012. They agree on the following terms. 1) The normal selling price of the medical equipment is $370,000 and the cost of the asset to Carl Leasing, Inc. was $310,000. 2) Sally, Inc. will pay all maintenance, insurance, and tax costs directly and annual payments of $50,000 on January 1 each year. 3) The lease begins on January 1, 2012 and payments will be in equal annual installments. 4) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life). 5) At the end of the lease, the medical equipment will revert to Carl Leasing, Inc. and have an unguaranteed residual value of $30,000. Their implicit interest rate is 10%. 6) Carl Leasing, Inc. incurred costs of $10,500 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable. Required: a) Determine what type of lease this would be for the lessee and calculate the initial obligation. b) Prepare Sally, Inc.'s amortization schedule for the lease terms. c) Prepare all the journal entries for Sally, Inc. for 2012. Assume a calendar year fiscal year.

Student Answer:

a) Lease is a capital lease because: (1) the lease term exceeds 75% of the assets economic life and (2) the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset. Initial Obligation Under Capital Leases: Minimum lease payments ($50,000) X PV of an annuity due for 10 periods at 10% (6.75902) $337,951 Estimated Residual Value $30,000 Present Value Factor for 10 periods at 10% 0.38554 Present Value of Estimated Residual Value [30,000 x 0.38554] $11,566 Total Lease Receivable: [337,951 + 11,566] $349,517 Sales Price Present Value of 10 Lease Payments $337,951 Cost of Sales Cost Of Asset Less PV

of Residual Value [310,000 - 11,566] $298,434 Lease Receivable Recovery Balance of Lease Receivable 1/1/2012 $349,517 1/1/2012 $50,000 $0 $50,000 $299,517 1/1/2013 $50,000 $29,952 $20,048 $279,469 1/1/2014 $50,000 $27,947 $22,053 $257,416 1/1/2015 $50,000 $25,742 $24,258 $233,158 1/1/2016 $50,000 $23,316 $26,684 $206,474 1/1/2017 $50,000 $20,648 $29,352 $177,122 1/1/2018 $50,000 $17,712 $32,288 $144,834 1/1/2019 $50,000 $14,483 $35,517 $109,317 1/1/2020 $50,000 $10,932 $39,068 $70,249 1/1/2021 $50,000 $7,025 $42,975 $27,274 12/31/2021 $30,000 $2,727 $27,274 $0 b) Lessees journal entries: Leased Equipment $337,951 Lease Liability $337,951 (To record the lease of computer equipment using capital lease method) Lease Liability $50,000 Cash $50,000 (To record the first rental payment) 31-Dec-12 Interest Expense $31,675 Interest Payable $31,675 (To record accrual of annual interest on lease obligation) Depreciation Expense $33,780 Accum Depr Capital Leases $33,780 (To record depreciation expense for first year) Instructor Explanation:

a) The lease is a capital lease because: (1) the lease term exceeds 75% of the assets economic life and (2) the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset. Initial Obligation Under Capital Leases: Minimum lease payments ($50,000) X PV of an annuity due for 10 periods at 10% (6.75902) $337,951 b) Lessees journal entries: Leased Equipment $337,951 Lease Liability $337,951 (To record the lease of computer equipment using capital lease method) Lease Liability $50,000 Cash $50,000 (To record the first rental payment) 31-Dec-12 Interest Expense $28,795 Interest Payable $28,795 (To record accrual of annual interest on lease obligation) Depreciation Expense $33,795 Accum DeprCapital Leases $33,795 (To record depreciation expense for first year)

Points Received: Comments:

14 of 15