Question 1

Soundesign Company entered into a lease of special equipment to LabCorp Company.The lease term was six years.The equipment cost Soundesign $40,000 and Soundesign plans to earn a $4,000 dealer profit.Soundesign's implicit rate on the lease is 12 percent.
As a result of this agreement,Soundesign will receive year-end lease payments of
A)$7,333.
B)$8,213.
C)$10,702.
D)$12,090.

Accepted Answer

To determine the annual lease payment, we can use the formula A = P * (r(1+r)^n)/((1+r)^n - 1), where A is the lease payment, P is the present value of the lease payments (which is the cost of the equipment plus the dealer profit), r is the implicit rate, and n is the number of payments (or the lease term in years).
So, in this case, P = $40,000 + $4,000 = $44,000, r = 12%, and n = 6.
Plugging those values into the formula, we get:
A = $44,000 * (0.12(1+0.12)^6)/((1+0.12)^6 - 1) = $10,702. Therefore, the correct answer is C.

Question 2

Governor Corporation entered into a direct financing lease (interest rate 12 percent)to lease Pleasant an asset that cost Governor $90,000.The lease specified annual year-end payments for seven years.The lease also specified that,along with the last payment,Pleasant could purchase the asset for $8,000 cash.Under this lease agreement,Pleasant will be required to pay annual payments of
A)$11,714.
B)$12,858.
C)$17,966.
D)$18,928.

Accepted Answer

The answer of Governor Corporation entered into a direct financing...

Question 3

Always Distributing entered into a leasing agreement with R & D Rental.The lease qualifies as a capital lease and calls for payments of $5,000 for 5 years with the first payment being made on January 1,2014,and subsequent payments being made on December 31 of each year.Always's incremental borrowing rate is 12 percent.
Prepare a schedule amortizing Always's lease obligation.

Accepted Answer

The answer of Always Distributing entered into a leasing agreement...

Question 4

On January 2,2014,the Clapton Studios leased six computers for use in the engineering department.The lease period is for 13 years and the estimated economic life of the leased property is 15 years.The lease does not contain automatic title transfer or a bargain purchase option.Lease payments are $11,000 per year,payable each December 31.The incremental borrowing rate for Clapton is 12 percent and the implicit interest rate (known by Clapton)is 10 percent.The company uses straight-line depreciation for this type of equipment.
Provide the necessary journal entries to record the transactions for Clapton for the period January 2,2014 through December 31,2015.

Accepted Answer

The answer of On January 2,2014,the Clapton Studios leased six...

Question 5

On July 1,2014,Biplane Aviation leased two company jets from SeeBee Aircraft for an initial period of 12 months with a provision for a continuation on a month-to-month basis.The lease is properly classified as an operating lease.Lease payments are to be made as follows:
  
After the first year,the rent continues at $6,000 per month.Provide the entries required to record the lease payments for the first year on the books of
(1)Biplane Aviation.
(2)SeeBee Aircraft.

Accepted Answer

The answer of On July 1,2014,Biplane Aviation leased two company...

Question 6

Keefer Inc.uses leases as a means of selling its equipment.On January 1,2014,the company leased a machine to Jeremy Manufacturing Inc.The cost of the machine to Keefer was $78,450.The fair market value (which was the sales price)was $101,184 at the time of the lease.Annual lease payments are $13,500 and are payable in advance for 12 years.At the end of the lease term,title to the machine will pass to Jeremy Manufacturing.
(1)Provide the entries required on Keefer's books to record the lease and the first payment.
(2)Compute the manufacturer's profit to be recognized by Keefer in the first year of the lease.
(3)Provide the entry required on Keefer's books to recognize interest revenue at the end of the first year.(Round computations to the nearest dollar.)

Accepted Answer

The answer of Keefer Inc.uses leases as a means of...

Question 7

Jefferson Financing,Inc.purchased a packing machine to lease to Puyallup Fruits.The lease qualifies as a direct financing lease and requires lease payments of $58,860 per year,payable in advance,over a ten-year period.There is no expected residual value.The fair market value of the packing machine is $330,000--the same amount paid by Jefferson to purchase the asset.The lease term begins on January 1,2014.
Provide the journal entries required on Jefferson's books to
(1)record the lease transaction and the first lease payment.
(2)recognize interest revenue at the end of the first year.Jefferson uses a calendar-year accounting period.(Round all computations to the nearest dollar.)

Accepted Answer

The answer of Jefferson Financing,Inc.purchased a packing machine to lease...

Question 8

Glenn Manufacturing entered into a noncancelable lease for an office building on January 1,2014.The lease calls for payments of $24,000 a year for eight years.The first payment is due on January 1,2014,with the other payments due on December 31 of each year.Glenn has an incremental borrowing rate of 8 percent.The building is amortized by Glenn over eight years using the straight-line method and assuming no salvage value.
Prepare a partial balance sheet for Glenn for the year ending December 31,2014,disclosing the asset and the liability related to the leased building.

Accepted Answer

The answer of Glenn Manufacturing entered into a noncancelable lease...

Question 9

Bill Hopen is the president of the Eastern Sutton Railroad Company.The Eastern Sutton is a bridge line that receives traffic from the Union Pacific Railroad and the Burlington Northern railroads at Charleston,West Virginia,and hauls the freight to Denver,Colorado,for connections with other lines to points east.Recently,traffic on the Eastern Sutton has increased dramatically and the railroad is in need of additional locomotives to haul its trains.Accordingly,Bill is considering leasing locomotives to meet the demands of this increase in traffic until new engines can be ordered if the surge subsides.As the controller of the railroad,Bill has asked you to advise him as to the disadvantages associated with leasing generally.

Accepted Answer

The answer of Bill Hopen is the president of the...

Question 10

Pralow,Inc.,leased an asset to Bender Corporation.The cost of the asset to Pralow was $8,000.Terms of the lease specify four-year life for the lease,an annual interest rate of 15 percent,and four year-end rental payments.The lease qualifies as a capital lease and is classified as a direct-financing lease.The asset reverts to Pralow after the fourth year,when its residual value is estimated to be $1,000.The amount of each rental payment is
A)$2,000.
B)$2,335.
C)$2,501.
D)$2,602.

Accepted Answer

The correct rental payment amount can be calculated using the present value of an annuity formula, considering the cost of the asset to Pralow ($8,000), the residual value ($1,000), the annual interest rate (15%), and the lease term (4 years). The calculation involves finding the annual payment that would amortize the net investment in the lease (cost minus residual value, adjusted for interest) over the lease term. The correct answer, $2,602, reflects the payment that satisfies these conditions.

Question 11

NPR leased a special crane to WLRN that cost NPR $40,000.The lease term was six years and the annual rentals were $10,000 per year,payable at the end of each year.The implicit interest rate was 10 percent.NPR recognized a gross margin of
A)$3,553.
B)$4,000.
C)$20,000.
D)$24,000.

Accepted Answer

The answer of NPR leased a special crane to WLRN...

Question 12

Daniels Company entered into a direct-financing lease with Old 7 Corporation,which called for seven annual rentals of $3,500 at an interest rate of 12 percent.The payments are to be paid at the end of each year.The lease also contained a bargain purchase option allowing Old 7 to purchase the asset for $2,500 after making the seventh annual rental payment.
What was the cost of the asset?
A)$17,104
B)$18,473
C)$25,631
D)$27,000

Accepted Answer

The answer of Daniels Company entered into a direct-financing lease...

Question 13

Which of the following is true regarding the deferral of sale profits on a sale-leaseback under IAS 17,"Accounting for Leases?
A)Any profit on a sale-leaseback resulting in an operating lease is deferred and recognized over the subsequent lease period, whereas any loss is recognized immediately.
B)Both profits and losses on a sale followed by an operating lease leaseback are recognized immediately if the transaction is established at fair value.
C)Profit from the sale should be deferred and amortized in proportion to the amortization of the leased asset if a capital lease results from the sale-leaseback.
D)Profit from the sale should be amortized in proportion to the rental payments it an operating lease results from the sale-leaseback.

Accepted Answer

The answer of Which of the following is true regarding...

Question 14

Neils Company leased an asset for use in its factory.The lease agreement specifies that Neils is to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct-financing lease since Neils was allowed to lease the asset at its cost of $14,000 (the present value of the lease payments).The lessor receives a 12 percent rate of return on the lease.The estimated residual value at the end of the lease term is zero.
If the lease was classified as a capital lease by Neils,how much annual depreciation would Neils record using the straight-line method?
A)$1,400
B)$1,310
C)$1,750
D)$2,818

Accepted Answer

The answer of Neils Company leased an asset for use...

Question 15

On January 1,2014,Benjamin Industries leased equipment on an eight-year term at $15,000 annual rental payments,paid in advance.There is a bargain purchase option on December 31,2021 (end of lease),of $24,000.The economic life of the equipment is estimated to be 15 years.The interest rate is 12 percent.
(1)Give the necessary entries for 2014 assuming all payments after the initial payment are made on December 31.
(2)Give the entry at December 31,2021,assuming the option is permitted to lapse and that there is no residual value because of obsolescence.Assume 2021 amortization entries have been made.

Accepted Answer

The answer of On January 1,2014,Benjamin Industries leased equipment on...

Question 16

Business leasing has become a large market.Banks,other lending institutions,and commercial leasing companies represent the largest share of the business leasing market with the remainder consisting of manufacturers,dealers,and distributors.
Identify the advantages and disadvantages to lessors of leasing rather than selling
property.

Accepted Answer

The answer of Business leasing has become a large market.Banks,other...

Question 17

Bayou Inc.leases equipment to its customers under noncancelable leases.On January 1,2014,Bayou leased equipment costing $400,000 to Rockwell Co.,for nine years.The rental cost was $44,000 payable in advance semiannually (January 1 and July 1),plus $2,000 semiannually for executory costs.The equipment had an estimated life of 15 years and sold for $533,025 with an estimated unguaranteed residual value of $80,000.The implicit interest rate is 12 percent.
Prepare all journal entries for 2014 on Bayou's and Rockwell's books.Round all calculations to the nearest dollar.Use straight-line depreciation.

Accepted Answer

The answer of Bayou Inc.leases equipment to its customers under...

Question 18

On January 1,2014,Logan Company leased a machine to Glasgow Company.The machine had an original cost of $60,000.The lease term was five years and the implicit interest was on the lease was 15 percent.The lease is properly classified as a direct-financing lease.The annual lease payments of $17,306 are made each December 31.The machine reverts to Logan at the end of the lease term,at which time the residual value of the machine will be $4,000.The residual value is not guaranteed.
At the inception of the lease,the balance of Logan's net receivable and Glasgow's liability would be

Accepted Answer

The answer of On January 1,2014,Logan Company leased a machine...

Question 19

If the lessee and the lessor use different interest rates to account for a capital lease,then
A)the lease will never be accounted for as a capital lease by the lessee.
B)total expenses (or revenues) will be equal for both lessee and lessor.
C)total expenses (or revenues) will be different for the lessee and the lessor.
D)GAAP has been violated since the lessor and the lessee are not allowed to use different interest rates in accounting for capital leases.

Accepted Answer

If the lessee and lessor use different interest rates to account for a capital lease, the total expenses or revenues will be different for the lessee and lessor. This is because the lessee will recognize interest expense based on their incremental borrowing rate, while the lessor will recognize interest revenue based on the rate implicit in the lease. This difference in recognition can lead to different overall costs for the lessee and lessor.

Question 20

Ollie Company entered into a lease agreement with Costello,Inc.,to lease an asset that cost Ollie $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.Ollie's implicit rate on the lease is 15 percent.
Ollie's dealer profit on this lease would be
A)$14,086 loss.
B)$14,086 gain.
C)$18,000 gain.
D)$80,000 gain.

Accepted Answer

First, we need to calculate the present value of the lease payments using the implicit rate of 15%.

PV of lease payments = $40,000 x [(1 - 1/(1+0.15)^5)/0.15] = $140,865.99

Next, we need to calculate the cost of the asset to Ollie Company after considering the present value of the lease payments:

Cost of asset = $120,000 - $140,865.99 = -$20,865.99 (loss)

Since the cost of the asset is negative, Ollie incurred a loss on the transaction. However, we need to consider the dealer profit to determine the overall outcome for Ollie.

Dealer profit = Cost of asset + PV of lease payments - Cost of asset = $140,865.99 - (-$20,865.99) = $161,731.98

Therefore, Ollie's dealer profit on this lease would be a gain of $14,086.

Quiz 15: Leases

NPR leased a special crane to WLRN that cost NPR $40,000.The lease term was six years and the annual rentals were $10,000 per year,payable at the end of each year.The implicit interest rate was 10 percent.NPR recognized a gross margin of

Which of the following is true regarding the deferral of sale profits on a sale-leaseback under IAS 17,"Accounting for Leases?

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

Ollie Company entered into a lease agreement with Costello,Inc.,to lease an asset that cost Ollie $120,000.The lease agreement requires five annual year-end rentals of $40,000 each.Ollie's implicit rate on the lease is 15 percent. Ollie's dealer profit on this lease would be