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Exam 20: Accounting for Leases

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Question 61

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Anchorby Company, an equipment manufacturer, leases equipment for 10 years. The cost value of the equipment is $100,000. The lease requires an annual payment of $25,000 at the beginning of each year. The interest rate implicit in the lease is 10%. The lease also includes an option to pay $600 at the end of the tenth year to purchase the asset, which the lessee is certain to exercise. Calculate the gross profit or loss reported at the time of the transfer of the equipment.

A) +$69,206.92
B) −$70,903.30
C) +$68,975.55
D) −$56,254.37

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Question 62

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Depreciation expense will be recorded in the accounts of the

A) lessee for operating leases.
B) lessor for operating leases.
C) lessor for direct financing leases.
D) lessor for sales-type leases.

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Question 63

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The account Unearned Interest: Leases should be reported on the lessor's financial statements as

A lessor enters into a sales-type lease. Which of the following statements is true if the leased asset has an unguaranteed residual value?

Exhibit 20-1 On January 1, 2016, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2016. Pearson's incremental borrowing rate was 9% and the lessor's implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.48592 and 4.35526, respectively. -Refer to Exhibit 20-1. What would be the balance of the lease obligation on January 1, 2017, for financial reporting purposes after the lease payment? Round answers to the nearest dollar)

Exhibit 20-1 On January 1, 2016, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2016. Pearson's incremental borrowing rate was 9% and the lessor's implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.48592 and 4.35526, respectively. -Refer to Exhibit 20-1. What would be the balance of the lease obligation for financial reporting purposes on December 31, 2017, after the lease payment round answers to the nearest dollar) ?

Which of the following statements concerning direct financing leases is true?

From the lessee's point of view, leasing provides a method of making a sale while still maintaining the advantages of ownership, including security in the asset and tax benefits.

Exhibit 20-5 The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2016. Baltimore, the lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first payment will be made on January 1, 2016. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2020. The lessee pays all executory costs. The cost of the leased property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease. Present value factors for a 7% -Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, how should the lease be classified?

Executory costs

Exhibit 20-2 On January 1, 2016, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first payment will be made at December 31, 2016. In addition, Mary guarantees the residual value to be $8,000 at the end of the lease term. Mary correctly uses the lessor's implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows: -Refer to Exhibit 20-2. What would be the debit to Leased Equipment under Capital Leases on January 1, 2016? Round amounts to the nearest dollar.)

Which of the following statements regarding the calculation of the lessee's depreciation expense for a capital lease is true?

On January 1, 2016, Luke, Inc. leased equipment, signing a five-year lease that requires five payments of $40,000 due on January 1 of each year with the first payment due January 1, 2016. Luke accounted for the lease as a capital lease. Using a rate of 9%, Luke determined the present value on January 1, 2016, to be $169,589. What is the amount of the long-term lease obligation that Luke should report on its December 31, 2017 balance sheet?

In a direct-financing lease, the lessor:

On January 1, 2016, Mark Company leased equipment by signing a five-year lease that required five payments of $85,000 due on December 31 of each year. The equipment remains the property of the lessor at the end of the lease, and Mark does not guarantee any residual value. Using a rate of 11%, Mark capitalized the lease on January 1, 2016, in the amount of $314,152. What is the amount of the lease obligation on December 31, 2017?

Any initial direct costs incurred by the lessor for a sales-type lease should be