Question 1

A lease is a contract whereby an owner grants the use of property to a second party in exchange for rental payments.

Accepted Answer

This is the definition of a lease agreement.

Question 2

A capital lease is a lease that transfers most of the risks and benefits of ownership to the lessee.

Accepted Answer

In a capital lease, the lessee is typically responsible for maintenance, insurance, and taxes, which are typical responsibilities of an owner. Additionally, the lessee usually has the option to purchase the asset at the end of the lease term, which further reinforces the transfer of ownership benefits. Therefore, a capital lease is designed to transfer most of the risks and benefits of ownership to the lessee.

Question 3

There are two types of leases: capital leases and financial leases.

Accepted Answer

There are two primary types of leases: operating leases and finance leases (previously known as capital leases).

Question 4

All of the following would qualify as a capital lease except:
A)The lease term is 80% of the asset's estimated useful life.
B)The lease agreement contains a bargain purchase option.
C)The present value of the lease payments equals 70% of the fair value of the leased asset.
D)Title to the leased asset transfers to the lessee at the end of the lease term.
E)The lease term equals 90% of the asset's estimated useful life.

Accepted Answer

A lease qualifies as a capital lease if it meets any of the following criteria: the lease term is equal to or greater than 75% of the asset's estimated useful life, there is a transfer of ownership by the end of the lease term, there is a bargain purchase option, or the present value of the lease payments equals or exceeds 90% of the fair value of the leased asset. Option C does not meet these criteria because it states the present value of the lease payments equals 70% of the fair value, which is below the 90% threshold.

Question 5

Parmlee Inc.has several assets and liabilities on its balance sheet.For each of the items below,decide whether it is a current asset (CA),current liability (CL),long-term asset (LTA),long-term liability(LTL),or contra-liability (COL).
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text{ CA/CL/LTA/LTL/COL }$ 
a. 15 year lease obli gation$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $ $ \quad $ $ \quad $ $ \quad $a.-----------

b. Discount on bonds payable $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $ $ \quad $  b.-----------

c. Amcunts owed to the utility company $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $c.-----------

d. A leased asset $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ d.-----------

e. Current portion of longy-term debt $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $  e. -----------

f. An asset witha lease term of $75 \%$ of the $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $ f.-----------

Accepted Answer

The answer of Parmlee Inc.has several assets and liabilities on...

Question 6

Gambet Labs entered into a lease agreement on January 1,20X3,to use an x-ray machine.The machine has a useful life of 6 years.Gambet Labs will make annual lease payments of $13,000 for 6 years,beginning on December 31,20X3.Assume a 14% interest rate.Using the present value tables,what journal entry will Gambet Labs make on January 1,20X3? 
A)$\begin{array} { c c c } 
\text {  Machine Leasehold } & 50,553 & \
\text { Eapital Lease Liability } & & 50,553 \
\end{array}$

B)$\begin{array}{lccc}
\text {  Machine Leasehold } & 7,000 & \
\text { Capital Lease Liability } & & 78,000 \
\end{array}$

C)$\begin{array}{lccc}
\text {  Machine Leasehold } & 50,553 & \
\text { Deferred Interest Expense } & 27,447 & \
\text { Capital Lease Obligation } & & 78,008 \
\end{array}$

D)$\begin{array}{lccc}
\text {  Machine Leasehold } & 7,000 & \
\text { Interest Iayzble } & & 27,447 \
\text { Capital Lease Liability } & & 50,553
\end{array}$
E)No journal entry is necessary.

Accepted Answer

The correct journal entry for the lease agreement on January 1, 20X3, involves recognizing the present value of the lease payments as both an asset (Machine Leasehold) and a liability (Capital Lease Liability). The present value of the lease payments, calculated using the given interest rate and payment terms, is correctly reflected in option A.

Question 7

The party who has the right to use leased property and makes lease payments to the lessor is called a lessee.

Accepted Answer

The statement is true.

Question 8

Which of the following is not one of the conditions for a capital lease?
A)The lease term exceeds 90% of the estimated economic life of the property.
B)The lease term equals or exceeds 75% of the estimated economic life of the property.
C)Title is transferred to the lessee by the end of the lease.
D)The present value of the lease payments is at least 90% of the leased asset's fair value at the start of the lease term.
E)The lease contains a bargain purchase option.

Accepted Answer

The correct condition for a capital lease regarding the lease term and the estimated economic life of the property is that the lease term equals or exceeds 75% of the estimated economic life of the property, not 90%.

Question 9

Accounting for postretirement benefits requires
A)no liability on the balance sheet.
B)no journal entries because the benefits are to be paid in the future.
C)the recognition of a liability equal to the present value of the expected payments for other postretirement benefits.
D)the recognition of a liability equal to the future value of the expected payments for other postretirement benefits.
E)none of the above

Accepted Answer

Accounting for postretirement benefits requires the recognition of a liability equal to the present value of the expected payments for other postretirement benefits. This is because these benefits will be paid in the future and the company has an obligation to make these future payments, which creates a liability on the balance sheet.

Question 10

A lease that should be accounted for by the lessee as ordinary rent expense is
A)a financing lease.
B)a capital lease.
C)an operating lease.
D)an accounting lease.
E)a sale-leaseback.

Accepted Answer

An operating lease is a lease where the lessee does not acquire ownership of the leased asset and is not required to treat the lease liability as debt on its financial statements. Instead, the payments made under the operating lease are treated as rent expense and deducted in the period incurred. In contrast, a financing or capital lease requires the lessee to recognize the leased asset and lease liability on its balance sheet, and depreciation and interest expenses are recognized on its income statement. An accounting lease and a sale-leaseback are not recognized accounting concepts.

Question 11

Dental Solutions leased a building for 2 years,effective May 1,20X3.The lease was considered an operating lease.The lease required that Dental Solutions make payments of $6,000 every 3 months,beginning on May 1,20X3.The first payment covers the period of May 1,20X3 through July 31,20X3.Assume an interest rate of 12%.What is the journal entry to be made by Dental Solutions on May 31,20X3?

A) $\begin{array}{lcc}
\text { Rent Expense } & 2,000 & \
\text { Prepaid Rent } & & 2,000 \
\end{array}$

B)$\begin{array}{lccc}
\text {  Rent Expense } & 2,000 & \
\quad \text { Cash } & & 2,000 \
\end{array}$

C)$\begin{array}{lccc}
\text {  Rent Expense } & 4,000 & \
\text { Prepaid Rent } & & 4,000 \
\end{array}$

D)$\begin{array}{lccc}
\text {  Prepaid Rent } & 2,000 & \
\quad \text { Rent Expense } & & 2,000 \
\end{array}$

E) $\begin{array}{lccc}
\text { Prepaid Rent } & 4,000 & \
\text { Rent Expense } & & 4,000
\end{array}$

Accepted Answer

The payment of $6,000 covers a 3-month period, so the monthly rent expense is $2,000 ($6,000 / 3 months). On May 31, 20X3, one month has passed, so $2,000 is recognized as Rent Expense for May, and $4,000 ($6,000 - $2,000) remains as Prepaid Rent for the future months (June and July).

Question 12

Brandy Bottling signs an agreement on January 1,20X4,to lease office equipment for a 5-year period.The estimated useful life of the office equipment is 8 years.The market value of the office equipment is $235,000.The lease agreement calls for lease payments of $55,040.The first payment is due on December 31,20X4,all subsequent payments are made each December 31 thereafter.The interest rate stated in the lease agreement is 8%.The present value of the lease payments is $219,758.At the end of the lease term,the equipment reverts back to the lessor.
Prepare journal entries to record
a.the lease agreement on January 1,20X4.
b.the first lease payment on December 31,20X4.
c.the amortization of the leased asset on December 31,20X4.

Accepted Answer

The answer of Brandy Bottling signs an agreement on January...

Question 13

Decide whether each of the following lease agreements should be recorded as a capital lease or an operating lease:
a)The present value of the lease payments is 75% of the fair value of the leased asset at the start of the lease.The lease term is for 6 years; the estimated useful life of the leased asset is 10 years.There is a bargain purchase agreement for the lessee to purchase the leased asset at well below fair value at the end of the lease term.
b)The present value of the lease payments is 90% of the fair value of the leased asset at the start of the lease.The lease term is for 2 years; the estimated useful life of the leased asset is 10 years.The leased asset reverts back to the lessor at the end of the lease.
c)The lease transfers ownership of the leased asset to the lessee at the end of the lease.The present value of the lease payments is 75% of the fair value of the leased asset at the start of the lease.The lease term is for 3 years; the estimated useful life of the leased asset is 10 years.
d)The lease agreement doesn't contain a bargain purchase agreement.The leased asset reverts back to the lessor at the end of the lease agreement.The present value of the lease payments is 85% of the fair value of the leased asset at the start of the lease.The lease term is for 10 years; the estimated useful life of the leased asset is 15 years.

Accepted Answer

The answer of Decide whether each of the following lease...

Question 14

Gambet Labs entered into a lease agreement on January 1,20X3,to use an x-ray machine.The machine has a useful life of 6 years.Gambet Labs will make annual lease payments of $13,000 for 6 years,beginning on December 31,20X3.Assume a 14% interest rate.Using the present value tables,what is the journal entry to be made by Gambet Labs on December 31,20X3,to record the annual lease payment?

A)$\begin{array} { l l l } 
\text {  Rent Expenco } & 13,000 & \
\text { Cash } & & 13,000 \
\end{array}$

B)$\begin{array}{lccc}
\text {  Capital Lease Obligation } & 13,000 & \
\text { Eash } & & 13,000 \
\end{array}$

C)$\begin{array}{lccc}
\text {  Capital Lease Obligation } & 2,080 & \
\text { Interest Expense } & 10,920 & \
\text { Cash } & & 13,000 \
\end{array}$

D)$\begin{array}{lccc}
\text {  Capital Lease Obligation } & 5,923 & \
\text { Interest Expense } & 7,077 & \
\text { Cash } & & 13,000 \
\end{array}$

E)$\begin{array}{lccc}
\text {  Capital Lease Obligation } & 11,180 & \
\text { Interest Expense } & 1,820 & \
\text { Cash } & & 13,000
\end{array}$

Accepted Answer

The interest expense is calculated on the outstanding lease obligation at the beginning of the year. The remaining amount of the lease payment reduces the lease obligation. The correct split between interest and principal is shown in option D.

Question 15

In a defined contribution pension plan,
A)the government pays employees a fixed pension amount upon retirement.
B)the government pays employees a variable pension amount upon retirement.
C)the employer makes annual contributions into a fund belonging to employees and the retirement benefit depends on the amount in the fund at retirement.
D)the employer guarantees the employee a specific amount of retirement pay based on the pay earned during the final years of employment and the numbers of years of service.
E)the SEC pays employees a fixed pension amount upon retirement.

Accepted Answer

In a defined contribution pension plan, the employer makes annual contributions into a fund belonging to employees, and the retirement benefit depends on the amount in the fund at the time of retirement. This means that the employee bears the investment risk, and the pension amount is uncertain until retirement.

Question 16

A operating lease is a lease that should be accounted for by the lessee as ordinary rent expenses.

Accepted Answer

An operating lease is a lease where the lessee does not take ownership of the leased asset and should be accounted for by the lessee as ordinary rent expenses rather than as a capital expenditure.

Question 17

Which of the following statements is FALSE?
A)The lessee will always record the liability associated with future cash payments but never an asset associated with the property being leased.
B)Leases can take the form of a capital lease or an operating lease.
C)Some leases are substantially equivalent to purchases.
D)A lease contract creates property rights and financial obligations.
E)Almost any asset could be leased.

Accepted Answer

The statement that the lessee will always record the liability associated with future cash payments but never an asset associated with the property being leased is false. In a capital lease, the lessee records both the liability for future cash payments and the asset being leased on their balance sheet.

Question 18

A lessee may have a leased item on his balance sheet as an asset,even though the lessee does not have the legal title of ownership to the leased item.

Accepted Answer

This is true. If the lease meets certain criteria outlined in accounting standards, it may be classified as a finance lease and the lessee may recognize the leased item as an asset on their balance sheet, even though they do not have legal ownership.

Question 19

Gambet Labs entered into a lease agreement on January 1,20X3,to use an x-ray machine.The machine has a useful life of 6 years.Gambet Labs will make annual lease payments of $13,000 for 6 years,beginning on December 31,20X3.Assume a 14% interest rate.Using the present value tables,what is the journal entry to be made by Gambet Labs on December 31,20X4,to amortize the leased asset,assuming straight-line amortization is used?
A)No journal entry is necessary. 
B)$\begin{array} { l l l } 
\text {  Leasehold Amertization Expense } & 4,575 & \
\text { Machine Leasehold } & & 4,575 \
\end{array}$

C)$\begin{array}{lccc}
\text {  Leasehold Amortization Expense } & \text { 8,426 } & \
\text { Machine Leasehold } & & \text { 1,426 } \
\end{array}$

D)$\begin{array}{lccc}
\text {  Leasehold Amortization Expense } & 13,000 & \
\quad \text { Machine Leasehold } & & 13,000 \
\end{array}$

E)$\begin{array}{lccc}
\text {  Leasehold Amortization Expense } & 13,000 & \
\text { Capital Lease Liability } & & 13,000
\end{array}$

Accepted Answer

To calculate the leasehold amortization expense, we need to first calculate the present value of the lease payments as of January 1, 20X3. 
PV of lease payments = $13,000 x present value of an annuity due, n=6, i=14%
= $13,000 x 4.506
= $58,578

The leasehold asset is amortized over the lease term of 6 years using the straight-line method. 
Annual amortization expense = $58,578 / 6
= $9,763

For the year ended December 31, 20X4, the leasehold amortization expense would be $9,763. Therefore, the journal entry would be:
Leasehold Amortization Expense            8,426
  Machine Leasehold                                 1,337
  (To record annual depreciation on leased x-ray machine)

Question 20

If the fair value of pension plan assets exceeds the present value of the pension obligation,a company reports
A)a net pension liability on the balance sheet.
B)a net pension asset on the balance sheet.
C)nothing on the balance sheet.
D)a long footnote only.
E)both B and D

Accepted Answer

When the fair value of pension plan assets exceeds the present value of the pension obligation, a company reports a net pension asset on the balance sheet. Additionally, details about the pension plan, including its status and the accounting policies applied, are disclosed in the footnotes to the financial statements.

Quiz 9: Liabilities and Interest

A lease is a contract whereby an owner grants the use of property to a second party in exchange for rental payments.

A capital lease is a lease that transfers most of the risks and benefits of ownership to the lessee.

There are two types of leases: capital leases and financial leases.

All of the following would qualify as a capital lease except:

The party who has the right to use leased property and makes lease payments to the lessor is called a lessee.

Which of the following is not one of the conditions for a capital lease?

Accounting for postretirement benefits requires

A lease that should be accounted for by the lessee as ordinary rent expense is

In a defined contribution pension plan,

A operating lease is a lease that should be accounted for by the lessee as ordinary rent expenses.

Which of the following statements is FALSE?

A lessee may have a leased item on his balance sheet as an asset,even though the lessee does not have the legal title of ownership to the leased item.

If the fair value of pension plan assets exceeds the present value of the pension obligation,a company reports