ACCT 202 - PRE-QUIZ #2 (Chapter 15) PROFESSOR FARINAStudent: ___________________________________________________________________________ 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 risks and rewards of ownership occur during the first 75% of an asset's life. True False 3. In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset. True False 4. In 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 realization principle. True False 5. When accounting for a nonoperating lease, the lessee records the leased asset at the present value of the minimum lease payments or the asset's fair value, whichever is lower. True False 6. If the lessee is expected to take ownership of a leased asset at the end of the lease term, the lessor must use an estimated residual value when calculating the lease payments necessary to achieve a desired rate of return. True False 7. A bargain purchase option is defined as the option of purchasing leased property at a price that is equal to the expected fair value of a leased asset. True False 8. On a sale-leaseback transaction, any gain on the "sale" portion of the transaction is recognized immediately. True False 9. From the perspective of the lessee, leases may be classified as either: A. Direct financing or sales-type. B. Capital or direct financing. C. Capital or operating. D. Direct financing or operating. 1 C. A sales type lease. The noncancelable lease term is 75% or more of the useful life of the leased asset.466. Any one of the four criteria specified by SFAS No. 13. the lease must meet: A. Any one of the six criteria specified by SFAS No. C. A capital lease. For #13 – 16: Technoid Inc. One of the four criteria for a capital lease specifies that the lease term be equal to or greater than: A. 13. C. no bargain purchase option • Economic life of equipment: 5 years • Implicit interest rate and lessee's incremental borrowing rate: 5% semi-annually • Fair value of the computers at January 1. 2009.10. Technoid would account for this as: A. A direct financing lease. D. D. 11. 2009: $20 million Collectability of the rental payments is reasonably assured. For the lessee to account for a lease as a capital lease.754 semiannually. D. The agreement specifies that ownership transfers at the end of the lease term. An operating lease. This non-cancelable lease had the following terms: • Lease payments: $2. remaining payments at June 30 and December 31 each year through June 30. 2013. Technoid leases computers to Lone Star Company on January 1. 13. 13. Any two of the criteria specified by SFAS No. • Lease term: 5 years (10 semi-annual payments) • No residual value. 12. 75% of the expected economic life of the leased property. The four criteria provided in FASB Statement No. 80% of the expected economic life of the leased property. B. The collectability of the lease payments must be reasonably predictable. B. The manufacturing cost of the computers was $12 million. 13 for distinguishing a capital lease from an operating lease do not include: A. and there are no lessor costs yet to be incurred. C. B. 2009. sells computer systems. 2 . first payment at January 1. D. All four of the criteria specified by SFAS No. 13. 50% of the expected economic life of the leased property. The agreement contains a bargain purchase option. 90% of the expected economic life of the leased property. B. 000.000 D.943. For #17 – 21: On December 31. An operating lease. $1. 2014. Reagan Inc. so the equipment will be returned to the lessor on December 31.154 B. A sales type lease. B. The lease payments are made by Reagan annually.673. There is no bargain purchase option. $15. D. $21. A capital lease. $876. Reagan's lease amortization schedule appears below: 3 . What is the interest revenue that Technoid would report on this lease in its 2009 income statement? A. signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. None of these is correct. $17.882 D. 15. None of these is correct.533. Title does not transfer to the lessee.820 C. $0 B. 16. What is the net carrying value of the lease liability in Lone Star's June 30. 2009 balance sheet? Round your answer to the nearest dollar.246 C.14. and Reagan guarantees a residual value to the lessor on termination of the lease. beginning at signing date. C. A. Lone Star Company would account for this as: A. 2008. A direct financing lease. The annual payments are (a) $20. C. Cannot be determined from the given information 22. C.530 C. $519. 4% B. $429. D. The lease term is 3 years. B.17. 6% C. A contra account to lease liability. and (c) $28. Is the lessee in a sales type lease.000 for year 2.531 B. $280.000 D. An asset. $20. D. Interest revenue.385 B.115 B. 18. Is the lessee in a capital lease.000 for year 1. 2009. $576. A direct financing lease is classified in the lessor's balance sheet as: A.000. 20. B. What is the carrying value of the lease liability on Reagan's December 31. $34.667. C.000. Is the lessor in a sales type lease. In this situation.280 D. $24. 8% D. $266.000 for year 3. What is the effective annual interest rate charged to Reagan on this lease? A. $ 6. Reagan: A. At what amount would Reagan record the leased asset at inception of the agreement? A. $540.000 19. 23. Is the lessor in a capital lease. $190. What is the amount of residual value guaranteed by Reagan to the lessor? A. entered into a lease agreement appropriately classified as an operating lease. $36.000. Custom Shirts Inc.115 C. $ 1. D. How much rent expense will Custom Shirts recognize for 2009? A. (b) $24. On September 1.615 C. 17%. 4 . 2010 balance sheet (after the third lease payment is made)? A. B.280 21.000 D. $356. $ 8. A liability. B. What is the effective annual interest rate? A. D. 27. 5 . 20%. C.920. A $2. Not including any indirect effects on earnings. C. 11%. The asset has an expected economic life of eight years. C. $6. D. $ 7. What is the total interest over the term of the lease? A. has a rate of return on assets of 10% and a debt / equity ratio of 2 to 1. 25. The five payments are made annually starting with the inception of the lease. $5. 24. the immediate impact of recording a capital lease on these ratios is a(an) A. $ 3. $42. assuming no residual value? A. S Corp. B. 9%.For #24 – 26: Refer to the following lease amortization schedule.400. $3. C. D.460. D. What would the lessee record as annual depreciation on the asset using the straight-line method. 26. $4. B.000 bargain purchase option is exercisable at the end of the five-year lease.320. B.325. 10%. $ 8.000.200.325. 000.000. $807.000. The implicit rate of 10% is known by the lessee. D. $824. Francisco leased equipment from Julio on December 31.020. Calloway Company leased a machine to Zone Corporation. The lessor uses a longer amortization period than on a direct financing lease. The lessor receives less interest than on a direct financing lease. The lease is a 10-year lease with annual payments of $150. The lease payments are due each January 1. The lease term is 8 years. The lease qualifies as a direct financing lease. 2009.400.28. 2009.509. 31. C. Packard Corporation leased equipment to Hewlitt Company. 30. what will be the balance reported as a liability by Hewlitt in the December 31. C. Remaining payments are made on December 31 each year. The lessor receives more interest than on a direct financing lease. D. Calloway paid $240. The lease is appropriately classified as a sales-type lease.959. 2009. D. C. D. C. $1. $1. On January 1. B. B. 2009.000 per year.000. Francisco's incremental borrowing rate is 12% for this type of lease. What should be the balance in Francisco lease liability at December 31. The present value of the lease (at a 10% implicit interest rate) is $1.704. The present value of the minimum lease payments is $240. $792. $1.000 for the machine and is leasing it to Zone for $34. $1. Assuming the interest rate for this lease is 10%. The present value of the minimum lease payments is $2.000 was made on January 1. What is the appropriate interest entry on December 31. $806. 2010.950.000. On January 1. The first payment of $450. 2010? A. The equipment cost Packard Corporation $2. The lessor receives a manufacturer's or dealer's profit.000.000.400. 6 . beginning with December 31. balance sheet? A.400. 2009? A.000. an amount that will return 10% to Calloway.000. 29. A sales-type lease differs from a direct financing lease in one respect: A. 2009.000 due on December 31 of each year. B. B.900.640. The annual lease payment. a sales-type lease. PROBLEM: Write the solution to the problem below on a separate piece of paper and attach it to the back of this pre-quiz. Napoli Inc.000. 2009. $20. 3.000. $23. 7 . B. The first payment was made on December 31.800. Initial direct costs are matched with the interest revenues they help generate in A. What is the effective rate of interest implicit in the agreement? 2. The lease term is 5 years. The normal cash price for this type of equipment is $125. $28. 34. Prepare the journal entry to record the second lease payment at December 31. The payments are due on December 31 of each year. 2009. The expected economic life of the asset is ten years. $40. D. B.500. Prepare the lessee’s entry at the inception of the lease. by what amount will Perry's pretax earnings increase from this lease? A. acquired a machine with a fair market value of $6. $11.000. C.900. At the beginning of 2009. Suppose the fair value of the machine and the lessor’s implicit rate were unknown at the time of the lease. ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease.000 at the end of each year.000. 2009. D. Prepare the journal entry to record the first lease payment at December 31. C.155. $12. $24. Using the straight-line method. a direct financing lease.468 by signing a four-year lease. C. Required: 1.000. Perry Corporation leased equipment to Admiral Company for a 5-year period.000 at the end of ten years. B. The cost of the asset is $120. $12.000.200. an operating lease. excluding executory costs is $40. The lease is payable in four annual payments of $1. 4. 35. True False 33. 2009.32. a capital lease. The lease contains a bargain purchase option that is effective at the end of the fifth year.000 while the cost to Perry was $105. For the year ended December 31. Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs.000. On December 31.600.000. 2010. The asset is expected to have a residual value of $2. Prepare the lessee’s journal entry at the inception of the lease.000. but that the lessee’s incremental borrowing rate of interest for notes of similar risk was 8%. D. When the lessee guarantees an estimated residual value of $75. The interest rate for this lease is 10%. 5. what would Best record as annual depreciation? A. the amount the lessee records as a leased asset and lease liability is increased by $75.