ACCT 202 - PRE-QUIZ #2 (Chapter 15) PROFESSOR FARINA

Student: ___________________________________________________________________________ 1. Capital leases are agreements that are formulated outwardly as leases, but are installment purchases in substance. True False 2. The criterion of 75% of economic life for classifying a lease as a capital lease is consistent with the basic premise that most of the ris s and rewards of ownership occur during the first 75% of an asset!s life. True False ". #n accounting for operating leases, the lessor, rather than the lessee, will recogni$e depreciation on the leased asset. True False %. #n addition to the criteria that must be met by the lessee, the lessor must meet additional conditions for classification as a nonoperating lease to satisfy the reali$ation principle. True False 5. &hen accounting for a nonoperating lease, the lessee records the leased asset at the present 'alue of the minimum lease payments or the asset!s fair 'alue, whiche'er is lower. True False (. #f the lessee is e)pected to ta e ownership of a leased asset at the end of the lease term, the lessor must use an estimated residual 'alue when calculating the lease payments necessary to achie'e a desired rate of return. True False 7. * bargain purchase option is defined as the option of purchasing leased property at a price that is e+ual to the e)pected fair 'alue of a leased asset. True False ,. -n a sale.leasebac transaction, any gain on the /sale/ portion of the transaction is recogni$ed immediately. True False

0. From the perspecti'e of the lessee, leases may be classified as either1 *. 2irect financing or sales.type. 3. Capital or direct financing. C. Capital or operating. 2. 2irect financing or operating. 14. The four criteria pro'ided in F*53 5tatement 6o. 1" for distinguishing a capital lease from an operating lease do not include1 *. The agreement specifies that ownership transfers at the end of the lease term. 3. The collectability of the lease payments must be reasonably predictable. C. The agreement contains a bargain purchase option. 2. The noncancelable lease term is 75% or more of the useful life of the leased asset. 11. -ne of the four criteria for a capital lease specifies that the lease term be e+ual to or greater than1 *. 75% of the e)pected economic life of the leased property. 3. 04% of the e)pected economic life of the leased property. C. ,4% of the e)pected economic life of the leased property. 2. 54% of the e)pected economic life of the leased property. 12. For the lessee to account for a lease as a capital lease, the lease must meet1 *. *ll four of the criteria specified by 5F*5 6o. 1". 3. *ny one of the si) criteria specified by 5F*5 6o. 1". C. *ny two of the criteria specified by 5F*5 6o. 1". 2. *ny one of the four criteria specified by 5F*5 6o. 1". For 71" 8 1(1 Technoid #nc. sells computer systems. Technoid leases computers to 9one 5tar Company on :anuary 1, 2440. The manufacturing cost of the computers was ;12 million. This non.cancelable lease had the following terms1 9ease payments1 ;2,%((,75% semiannually< first payment at :anuary 1, 2440< remaining payments at :une "4 and 2ecember "1 each year through :une "4, 241". 9ease term1 5 years =14 semi.annual payments> 6o residual 'alue< no bargain purchase option ?conomic life of e+uipment1 5 years #mplicit interest rate and lessee!s incremental borrowing rate1 5% semi.annually Fair 'alue of the computers at :anuary 1, 24401 ;24 million Collectability of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.

1". Technoid would account for this as1 *. * capital lease. 3. * direct financing lease. C. * sales type lease. 2. *n operating lease.

1%. 9one 5tar Company would account for this as1 *. * capital lease. 3. * direct financing lease. C. * sales type lease. 2. *n operating lease. 15. &hat is the net carrying 'alue of the lease liability in 9one 5tar!s :une "4, 2440 balance sheet@ Aound your answer to the nearest dollar. *. ;15,0%",15% 3. ;17,5"",2%( C. ;21,444,444 2. 6one of these is correct. 1(. &hat is the interest re'enue that Technoid would report on this lease in its 2440 income statement@ *. ;4 3. ;1,(7",,24 C. ;,7(,,,2 2. 6one of these is correct. For 717 8 211 -n 2ecember "1, 244,, Aeagan #nc. signed a lease for some e+uipment ha'ing a 0.year useful life with 5il'er 9easing Co. The lease payments are made by Aeagan annually, beginning at signing date. Title does not transfer to the lessee, so the e+uipment will be returned to the lessor on 2ecember "1, 241%. There is no bargain purchase option, and Aeagan guarantees a residual 'alue to the lessor on termination of the lease. Aeagan!s lease amorti$ation schedule appears below1

17. #n this situation, Aeagan1 *. #s the lessee in a sales type lease. 3. #s the lessee in a capital lease. C. #s the lessor in a capital lease. 2. #s the lessor in a sales type lease. 1,. *t what amount would Aeagan record the leased asset at inception of the agreement@ *. ;510,115 3. ;%20,115 C. ;5%4,444 2. ;57(,444 10. &hat is the effecti'e annual interest rate charged to Aeagan on this lease@ *. %% 3. (% C. ,% 2. 17%. 24. &hat is the carrying 'alue of the lease liability on Aeagan!s 2ecember "1, 2414 balance sheet =after the third lease payment is made>@ *. ;2,4,5"1 3. ;104,5"4 C. ;2((,2,4 2. ;"5(,2,4 21. &hat is the amount of residual 'alue guaranteed by Aeagan to the lessor@ *. ; 1,",5 3. ;"%,(15 C. ;"(,444 2. Cannot be determined from the gi'en information 22. -n 5eptember 1, 2440, Custom 5hirts #nc. entered into a lease agreement appropriately classified as an operating lease. The lease term is " years. The annual payments are =a> ;24,444 for year 1, =b> ;2%,444 for year 2, and =c> ;2,,444 for year ". Bow much rent e)pense will Custom 5hirts recogni$e for 2440@ *. ; (,((7. 3. ;2%,444. C. ;24,444. 2. ; ,,444. 2". * direct financing lease is classified in the lessor!s balance sheet as1 *. *n asset. 3. * liability. C. #nterest re'enue. 2. * contra account to lease liability.

For 72% 8 2(1 Aefer to the following lease amorti$ation schedule. The fi'e payments are made annually starting with the inception of the lease. * ;2,444 bargain purchase option is e)ercisable at the end of the fi'e.year lease. The asset has an e)pected economic life of eight years.

2%. &hat is the effecti'e annual interest rate@ *. 0%. 3. 14%. C. 11%. 2. 24%. 25. &hat is the total interest o'er the term of the lease@ *. ;%2,444. 3. ; ,,244. C. ; 7,%44. 2. ; ",%(4. 2(. &hat would the lessee record as annual depreciation on the asset using the straight.line method, assuming no residual 'alue@ *. ;","25. 3. ;(,024. C. ;%,"25. 2. ;5,"24. 27. 5 Corp. has a rate of return on assets of 14% and a debt C e+uity ratio of 2 to 1. 6ot including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a=an>

*. 3. C. 2.

2,. -n :anuary 1, 2440, Calloway Company leased a machine to Done Corporation. The lease +ualifies as a direct financing lease. Calloway paid ;2%4,444 for the machine and is leasing it to Done for ;"%,444 per year, an amount that will return 14% to Calloway. The present 'alue of the minimum lease payments is ;2%4,444. The lease payments are due each :anuary 1. &hat is the appropriate interest entry on 2ecember "1, 2440@ *.

3.

C. 2. 20. Francisco leased e+uipment from :ulio on 2ecember "1, 2440. The lease is a 14.year lease with annual payments of ;154,444 due on 2ecember "1 of each year. The present 'alue of the lease =at a 14% implicit interest rate> is ;1,424,444. Francisco!s incremental borrowing rate is 12% for this type of lease. The implicit rate of 14% is nown by the lessee. &hat should be the balance in Francisco lease liability at 2ecember "1, 2414@ *. ;,2%,%44. 3. ;,47,444. C. ;,4(,%44. 2. ;702,444. "4. * sales.type lease differs from a direct financing lease in one respect1 *. The lessor recei'es a manufacturer!s or dealer!s profit. 3. The lessor recei'es more interest than on a direct financing lease. C. The lessor recei'es less interest than on a direct financing lease. 2. The lessor uses a longer amorti$ation period than on a direct financing lease. "1. -n :anuary 1, 2440, Eac ard Corporation leased e+uipment to Bewlitt Company. The lease term is , years. The first payment of ;%54,444 was made on :anuary 1, 2440. Aemaining payments are made on 2ecember "1 each year, beginning with 2ecember "1, 2440. The e+uipment cost Eac ard Corporation ;2,%44,444. The present 'alue of the minimum lease payments is ;2,(%4,444. The lease is appropriately classified as a sales.type lease. *ssuming the interest rate for this lease is 14%, what will be the balance reported as a liability by Bewlitt in the 2ecember "1, 2414, balance sheet@ *. ;1,054,444. 3. ;1,540,444. C. ;1,050,444. 2. ;1,74%,044.

"2. &hen the lessee guarantees an estimated residual 'alue of ;75,444, the amount the lessee records as a leased asset and lease liability is increased by ;75,444. True False "". *3C Company leased e+uipment to 3est Corporation under a lease agreement that +ualifies as a direct financing lease. The cost of the asset is ;124,444. The lease contains a bargain purchase option that is effecti'e at the end of the fifth year. The e)pected economic life of the asset is ten years. The lease term is 5 years. The asset is e)pected to ha'e a residual 'alue of ;2,444 at the end of ten years. Fsing the straight.line method, what would 3est record as annual depreciation@ *. ;2",(44. 3. ;12,244. C. ;12,444. 2. ;11,,44. "%. Costs incurred by the lessor that are associated directly with originating a lease and are essential to ac+uire that lease are called initial direct costs. #nitial direct costs are matched with the interest re'enues they help generate in *. an operating lease. 3. a capital lease. C. a direct financing lease. 2. a sales.type lease. "5. -n 2ecember "1, 2440, Eerry Corporation leased e+uipment to *dmiral Company for a 5.year period. The annual lease payment, e)cluding e)ecutory costs is ;%4,444. The interest rate for this lease is 14%. The payments are due on 2ecember "1 of each year. The first payment was made on 2ecember "1, 2440. The normal cash price for this type of e+uipment is ;125,444 while the cost to Eerry was ;145,444. For the year ended 2ecember "1, 2440, by what amount will Eerry!s preta) earnings increase from this lease@ *. ;24,444. 3. ;2%,444. C. ;2,,544. 2. ;%4,444. PROBLE ! &rite the solution to the problem below on a separate piece of paper and attach it to the bac of this pre.+ui$.
At the beginning of 2009, Napoli Inc. acquired a machine with a fair market value of $ ,!"",# $ b% &igning a four'%ear lea&e. (he lea&e i& pa%able in four annual pa%ment& of $!,900,000 at the end of each %ear. Required: !. )hat i& the effective rate of intere&t implicit in the agreement* 2. +repare the le&&ee,& -ournal entr% at the inception of the lea&e. .. +repare the -ournal entr% to record the fir&t lea&e pa%ment at /ecember .!, 2009. #. +repare the -ournal entr% to record the &econd lea&e pa%ment at /ecember .!, 20!0. ". 0uppo&e the fair value of the machine and the le&&or,& implicit rate were unknown at the time of the lea&e, but that the le&&ee,& incremental borrowing rate of intere&t for note& of &imilar ri&k wa& $1. +repare the le&&ee,& entr% at the inception of the lea&e.