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GAAP requires that some lease agreements be accounted for as purchases. The theoretical justificationfor this treatment is that a lease of this type:

D. Conveys most of the risks and benefits of property ownership

From the perspective of the lessee, leases may be classified as either

C. Capital or operating

From the perspective of the lessor, leases may be classified as either:

D. Operating, direct financing, or sales-type

Distinguishing between operating and capital leases is due in large part to the accounting concept of:

C.Substance over form

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that:

B.The expenses of the capital lease and operating lease are equal.

The four criteria provided in GAAP for distinguishing a capital lease from an operating lease do not include:

B.The collectibility of the lease payments must be reasonably predictable

Of the four criteria for a capital lease, the one that most often is the decisive criteria is:

C.The 90% of fair value test

One of the four criteria for a capital lease specifies that the lease term be equal to or greater than:

A.75% of the expected economic life of the leased property

One of the four criteria for a capital lease specifies that the present value of the minimum leasepayments be equal to or greater than:

C.90% of the fair value of the asset.

For the lessee to account for a lease as a capital lease, the lease must meet

D.Any one of the four criteria specified by GAAP regarding accounting for leases

For the lessor to account for a lease as a capital lease, the lease must meet

A. Any one of first four classification criteria and both of the last two additional conditions specified byGAAP regarding accounting for leases

Which of the following is not among the criteria for classifying a lease as a capital lease?

C. The noncancelable lease term is equal to 90% or more of the expected economic life of the asset.

Of the four criteria for a capital lease, which two are not applied if the lease begins during the finalquarter of the asset's useful life?

B. The 90% test and the 75% test.

On February 1, 2011, Pearson Corporation became the lessee of equipment under a five-year,noncancelable lease. The estimated economic life of the equipment is 8 years. The fair value of theequipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargainpurchase option, transfer of title, or the lease term. However, Pearson must classify this as a capitallease if the present value of the minimum lease payments is at least

B. $540,000

Technoid would account for this as:

C. A sales-type lease

Lone Star Company would account for this as:

A. A capital lease

What is the net carrying value of the lease liability in Lone Star's June 30, 2011 balance sheet? Roundyour answer to the nearest dollar

A. $15,943,154

What is the interest revenue that Technoid would report on this lease in its 2011 income statement?

B. $1,673,820

In this situation, Reagan:

B. Is the lessee in a capital lease.

What is the carrying value of the lease liability on Reagan's December 31, 2012 balance sheet (after thethird lease payment is made)?

A. $280,531

At what amount would Reagan record the leased asset at inception of the agreement?

A. $519,115

What is the effective annual interest rate charged to Reagan on this lease?

A. 4%

What is the amount of residual value guaranteed by Reagan to the lessor?

C. $36,000

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

D.Zero, unless a prepayment or accrual is involved

Which of the following statements characterizes an operating lease?

B.The lessor records depreciation and lease revenue.

Crystal Corporation recorded a lease payment as follows:

A. Operating lease.

If the lessor records unearned rent at the beginning of a lease term, the lease must:

D.Be an operating lease.

Prepayments made on an operating lease are considered to be:

D. A prepayment of rent

On January 1, 2011, Gibson Corporation entered into a 4-year operating lease. The payments were asfollows: $20,000 for 2011, $18,000 for 2012, $16,000 for 2013, and $14,000 for 2014. What is thecorrect amount of lease expense for 2012?

C. $17,000

On January 1, 2011, Wellburn Corporation leased an asset from Tabitha Company. The asset originallycost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual paymentsbeginning on January 1, 2011, in the amount of $36,000. The other three remaining payments will bemade on January 1 of each subsequent year. Which of the following journal entries should Tabitharecord on January 1, 2011?

B.Option B ( cash, unearned revenue)

On September 1, 2011, Custom Shirts Inc. entered into a lease agreement appropriately classified as anoperating lease. The lease term is 3 years. The annual payments are (a) $20,000 for year 1, (b) $24,000for year 2, and (c) $28,000 for year 3. How much rent expense will Custom Shirts recognize for 2011?

D. $8,000

The lessee normally measures the lease liability to be recorded as the:

C. Present value of the minimum lease payments.

Leasehold improvements usually are classified in a balance sheet as:

A. Property, plant and equipment

What is the effective annual interest rate?

D. 12%.

What would the lessee record as annual depreciation on the asset using the straight-line method?

B. $6,328

What would be the outstanding balance after payment #10?

A. $0

What is the total effective interest paid over the term of the lease?

B.$36,718.

What is the outstanding balance after payment #9?

A. $8,929.

When a lease qualifies as a capital lease, what is the cost basis of the asset acquired?

A. The present value of the minimum lease payments, exclusive of executory costs.

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

A. Asset and a liability

Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over itsuseful life to the lessee, which will be

A.The shorter of the physical life of the asset or the lease term.

A direct financing lease is classified in the lessor's balance sheet as:

A. An asset

For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option, thedepreciation period used by the lessee must be:

B. The useful life to the lessee.

If the lessor retains title to leased property under the terms of the lease:

A.The amount to be recovered through periodic lease payments is reduced by the present value of theresidual amount

What is the effective annual interest rate?

B. 10%

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

C. $4,325.

What is the total interest paid over the term of the lease?

C. $7,400.

What is the outstanding balance after payment #5?

A. $1,818.

What would be the amount of interest expense recorded with payment #5?

B.$893.

Since the lease payments under a lease agreement are normally paid at the beginning of each period, theappropriate compound interest table to be used to determine the amount at which the leased asset shouldbe recorded is the:

C. Present value of an annuity due table.

When a capital lease is first recorded at the inception of the lease, the lessee typically debits:

A. Leased asset.

On January 1, 2011, Calloway Company leased a machine to Zone Corporation. The lease qualifies as adirect financing lease. Calloway paid $240,000 for the machine and is leasing it to Zone for $34,000 peryear, an amount that will return 10% to Calloway. The present value of the minimum lease paymentsis $240,000. The lease payments are due each January 1, beginning in 2011. What is the appropriateinterest entry on December 31, 2011?

C. Option C ( Interest receivable 20 600)

Francisco leased equipment from Julio on December 31, 2011. The lease is a 10-year lease with annualpayments of $150,000 due on December 31 of each year. 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 knownby the lessee. What should be the balance in Francisco lease liability at December 31, 2012?

B. $807,000

Additional lessor conditions for classification as a capital lease are consistent with the criteria of the:

D. Realization principle.

A sales-type lease differs from a direct financing lease in one respect:

A. The lessor receives a manufacturer's or dealer's profit.

Recording a sales-type lease is similar to recording:

D. A sale of merchandise on account.

On January 1, 2011, Princess Corporation leased equipment to King Company. The lease term is 8years. The first payment of $675,000 was made on January 1, 2011. The equipment cost PrincessCorporation $3,600,000. The present value of the minimum lease payments is $3,960,000. The lease isappropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how muchinterest revenue will Princess record in 2012 on this lease?

D. $293,850

On January 1, 2011, Packard Corporation leased equipment to Hewlitt Company. The lease term is 8years. The first payment of $450,000 was made on January 1, 2011. Remaining payments are made onDecember 31 each year, beginning with December 31, 2011. The equipment cost Packard Corporation$2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriatelyclassified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balancereported as a liability by Hewlitt in the December 31, 2012, balance sheet?

D. $1,704,900.

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset'sexpected fair value so that the exercise of the option appears reasonably assured is called a:

A. Bargain purchase option

A noncancelable lease contains a bargain purchase option. The fair value of the asset exceeds thelessor's cost of the asset. Collectibility of the lease payments is assured and there are no material costuncertainties surrounding the lease. Therefore, the lease will be accounted for by the lessor as a(n):

A.Sales-type lease.

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as acapital lease to West but not as a result of a bargain purchase option or a title transfer. The present valueof the asset is $600,000. The expected economic life of the asset is ten years. The lease term is 5 years.Using the straight-line method, what would West record as annual depreciation?

A. $120,000

A guaranteed residual value at the inception of a capital lease should be:

B. included as part of minimum lease payments at present value

If the lessee expects to obtain title to leased property due to a bargain purchase option or passage of titleat the end of the lease term:

B. The lessor ignores any residual value for the leased property.

Which of the following statements regarding guaranteed residual values is true for the lessee?

C.The asset and liability at the inception of the lease should be increased by the present value of theresidual value.

ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a directfinancing lease. The cost of the asset is $120,000. The lease contains a bargain purchase option that iseffective at the end of the fifth year. The expected economic life of the asset is ten years. The lease termis 5 years. The asset is expected to have a residual value of $2,000 at the end of ten years. Using thestraight-line method, what would Best record as annual depreciation?

D.$11,800

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the

D.Lessor is not obligated to compensate the lessee for the excess

What are the three types of expenses that a lessee experiences with a capital lease?

D.Depreciation expense, interest expense, executory costs.

Costs incurred by the lessor that are associated directly with originating a lease and are essential toacquire that lease are called initial direct costs. Initial direct costs are recorded as assets and amortizedover the term of the lease in

A. an operating lease.

Costs incurred by the lessor that are associated directly with originating a lease and are essential toacquire that lease are called initial direct costs. Initial direct costs are matched with the interest revenuesthey help generate in

C.a direct financing lease.

Costs incurred by the lessor that are associated directly with originating a lease and are essential toacquire that lease are called initial direct costs. Initial direct costs are expensed at the inception of thelease in

D. a sales-type lease

N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2011. Lease paymentsof $26,000, which includes real estate taxes of $1,000, are due annually, beginning on December 31,2012, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; N'sincremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at9% is 6.0. What amount should N report as capitalized lease liability at December 31, 2011?

A.$150,000

If the lessee and lessor use different interest rates to account for a capital lease, then:

A. Total expenses for the lessee will be different from the lessor's total revenues.

On December 31, 2011, Perry Corporation leased equipment to Admiral Company for a 5-year period.The annual lease payment, excluding executory costs, is $40,000. The interest rate for this lease is10%. The payments are due on December 31 of each year. The first payment was made on December31, 2011. The normal cash price for this type of equipment is $125,000 while the cost to Perry was$105,000. For the year ended December 31, 2011, by what amount will Perry's pretax earnings increasefrom this lease?

A. $20,000

S Corp. has a rate of return on assets of 10% and a debt / equity ratio of 2 to 1. Not including anyindirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an)

D.Option D

C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings, the rate of return on assets is immediately increased when C records

B.Option B

B Corp. has a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the debt/equityratio is increased when B records

C.Option C

L Corp. recorded a capital lease in February using an annuity due present value table. The company'sDecember 31 statement of cash flows using the indirect method will report

A. an addition to net income for depreciation.

M Corp. recorded a capital lease in February using an annuity due present value table. The company'sDecember 31 statement of cash flows using the direct method will report

B. a cash outflow from financing activities

P Corp. leased an asset to L Corp. using an operating lease in February. P Corp.'s December 31statement of cash flows will report

C. a cash inflow from operating activities

J Corp. entered into an operating lease in February. The company's December 31 statement of cashflows will report

C.a cash outflow from operating activities.

Which of the following statements characterizes a leveraged lease?

A.The lessor borrows part of the acquisition price of the leased asset from a third party lender.

In a sale-leaseback arrangement, the lessee is also:

D.The seller

On December 31, 2011, B Corp. sold a machine to Royal and simultaneously leased it back for oneyear. Pertinent information at this date follows:
In B's December 31, 2011, balance sheet, the deferred revenue from the sale of this machine should be

A.$0

Under both U.S. GAAP and IFRS, a lease is a capital lease (called a finance lease under IFRS) if substantially all risks and rewards of ownership are transferred. In making this determination, more judgment, and less specificity, is applied using

B.IFRS

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