Multiple Choice 1. The present value of the minimum lease payments should be used by the lessee

Question:

Multiple Choice
1. The present value of the minimum lease payments should be used by the lessee in the determination of a (an)
Capital Operating
Lease Liability Lease Liability
a. Yes ......No
b. Yes ......Yes
c. No ......Yes
d. No ......No

2. East Company leased a new machine from North Company on May 1, 2007 under a lease with the following information:
Lease term .......................10 years
Annual rental payable at beginning of each lease year ......$40,000
Useful life of machine ....................12 years
Implicit interest rate .....................14%
Present value factor for an of 1
in advance for 10 periods at 14% ...............5.95
Present value factor for 1 for 10 periods at 14% ..........0.27
East has the option to purchase the machine on May 1, 2017 by paying $50,000, which approximates the expected fair value of the machine on the option exercise date. On May 1, 2007 East should record a capitalized lease asset of
a. $251,500
b. $238,000
c. $224,500
d. $198,000

3. For a lease that transfers ownership of the property to the lessee by the end of the lease term, the lessee should
a. Record the minimum lease payment as an expense
b. Amortize the capitalizable cost of the property using the interest method
c. Depreciate the capitalizable cost of the property in a manner consistent with the lessee’s normal depreciation policy for owned assets, except that the period of depreciation should be the lease term
d. Depreciate the capitalizable cost of the property in a manner consistent with the lessee’s normal depreciation policy for owned assets.
Items 4 and 5 are based on the following information:
Fox Company, a in machinery and equipment, leased equipment to Tiger, Inc. on July 1, 2007. The lease is appropriately accounted for as a sale by Fox and as a purchase by Tiger. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2017. The first of 10 equal annual payments of $500,000 was made on July 1, 2007. Fox had purchased the equipment for $2,675,000 on January 1, 2007 and established a list selling price of $3,375,000 on the equipment. Assume that the present value at July 1, 2007 of the rent payments over the lease term, discounted at 12% (the appropriate interest rate), was $3,165,000.

4. What is the amount of profit on the sale and the amount of interest income that Fox should record for the year ended December 31, 2007?
a. $0 and $159,900
b. $490,000 and $159,900
c. $490,000 and $189,900
d. $700,000 and $189,900

5. Assuming that Tiger uses straight-line depreciation, what is the amount of depreciation and interest expense that Tiger should record for the year ended December 31, 2007?
a. $158,250 and $159,900
b. $158,250 and $189,900
c. $168,750 and $159,900
d. $168,750 and $189,900

6. Rent received in advance by the lessor for an operating lease should be recognized as revenue
a. When received
b. At the lease’s inception
c. In the period specified by the lease
d. At the lease’s expiration

7. For a six-year capital lease, the portion of the minimum lease payment applicable in the third year to the reduction of the obligation should be
a. Less than in the second year
b. More than in the second year
c. The same as in the fourth year
d. More than in the fourth year

8. On January 2, 2007, Lafayette Machine Shops, Inc. signed a 10-year non-cancelable lease for a heavy-duty drill press, stipulating annual payments of $15,000 starting at the end of the first year, with title passing to Lafayette at the expiration of the lease. Lafayette treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no . Lafayette uses straight-line depreciation for all of its fixed assets. Aggregate lease payments were determined to have a present value of $92,170, based on implicit interest of 10%. For 2007 Lafayette should record
Interest Depreciation
Expense Expense
a. $ 0 ...$ 0
b. $7,717 ....$6,145
c. $9,217 ....$6,145
d. $9,217 ....$9,217

9. On August 1, 2007 Kern Company leased a machine to Day Company for a six-year period requiring payments of $10,000 at the beginning of each year. The machine cost $48,000, which is the fair value at the lease date, and has a useful life of eight years with no residual value. Kern’s implicit interest rate is 10% and present value factors are as follows:
Present value for an due of $1 at 10% for six periods .....4.791
Present value for an due of $1 at 10% for eight periods .....5.868
Kern appropriately recorded the lease as a direct financing lease. At the inception of the lease, the gross lease receivables account balance should be
a. $60,000
b. $58,680
c. $48,000
d. $47,910

10. At its inception, the lease term of Lease G is 65% of the estimated remaining economic life of the leased property. This lease contains a bargain purchase option. The lessee should record Lease G as
a. Neither an asset nor a liability
b. An asset but not a liability
c. An expense
d. An asset and a liability

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