Multiple-Choice Questions

1. Which of the following statements regarding leases is false?

a. Lease agreements are a popular form of financing the purchase of assets because leases do not require a large initial outlay of cash.

b. Accounting recognizes two types of leases-operating and capital leases.

c. If a lease is classified as an operating lease, the lessee records a lease liability on its balance sheet.

d. If a lease is classified as a capital lease, the lessee records a lease liability on its balance sheet.

2. Which of the following lease conditions would result in a capital lease to the lessee?

a. The lessee will return the property to the lessor at the end of the lease term.

b. The lessee can purchase the property for $1 at the end of the lease term.

c. The fair market value of the property at the inception of the lease is $18,000; the present value of the minimum lease payments is $15,977.

d. The lease term is 70 percent of the property's economic life.

3. On January 2, 2007, Sylvester Metals Co. leased a mining machine from EDH Leasing Corp. The lease qualifies as an operating lease. The annual payments are $4,000 paid at the end of each year, and the life of the lease is 10 years. What entry would Sylvester Metals Co. make when the machine is delivered by EDH Leasing Corp.?

a. Leased Asset 40,000

Lease Liability 40,000

b. Prepaid Rent 40,000

Lease Liability 40,000

c. Prepaid Rent 4,000

Lease Liability 4,000

d. No entry is necessary.

4. WVA Mining Company has leased a machine from Franklin Machinery Company. The annual payments are $6,000, and the life of the lease is 8 years. It is estimated that the useful life of the machine is 9 years. How would WVA Mining record the acquisition of the machine?

a. The machine would be recorded as an asset with a cost of $48,000.

b. The company would not record the machine as an asset but would record rent expense of $6,000 per year.

c. The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for eight years.

d. The machine would be recorded as an asset, at the present value of the annual cash payments, $6,000 for nine years.

5. Willow Corporation's balance sheet showed the following amounts: Current Liabilities, $5,000; Bonds Payable, $1,500; Lease Obligations, 2,300. Total stockholders' equity was $6,000. The debt-to-equity ratio is:

a. 0.63.

b. 0.83.

c. 1.42.

d. 1.47.

6. Kinsella Corporation's balance sheet showed the following amounts: Current Liabilities, $75,000; Total Liabilities, $100,000; Total Assets, $200,000. What is the long-term debt to equity ratio?

a. 0.75

b. 0.375

c. 0.25

d. 0.125

7. McLaughlin Corporation's balance sheet showed the following amounts: Current Liabilities, $75,000; Total Liabilities, $100,000; Total Assets, $200,000. What is the debt to total assets ratio?

a. 2

b. 1

c. 0.875

d. 0.5

8. The bond issue price is determined by calculating the:

a. Present value of the stream of interest payments and the future value of the maturity amount.

b. Future value of the stream of interest payments and the future value of the maturity amount.

c. Future value of the stream of interest payments and the present value of the maturity amount.

d. Present value of the stream of interest payments and the present value of the maturity amount.