Chapter 15 Quiz - Chapter 15 Quiz 1 One of the four general criteria for a capital lease is that the present value at the beginning of the lease

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Unformatted text preview: Chapter 15 Quiz 1. One of the four general criteria for a capital lease is that the present value at the beginning of the lease term of the minimum lease payments equals or exceeds a. the property's fair market value. b. 90 percent of the property's fair market value. c. 75 percent of the property's fair market value. d. 50 percent of the property's fair market value. 2. Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type a. effectively conveys all of the benefits and risks incident to the ownership of property. b. is an example of form over substance. c. provides the use of the leased asset to the lessee for a limited period of time. d. must be recorded in accordance with the concept of cause and effect. 3. Johnson Institute leased a new machine having an expected useful life of 12 years. The noncancelable lease term is 10 years, and Johnson may exercise a purchase option at the end of the noncancelable term. The machine should be capitalized by Johnson and the leased asset amortized over a. 9 years. b. 12 years. c. 10 years. d. 10 or 12 years at Johnson's option. 4. The lessee's balance sheet liability for a capital lease would be periodically reduced by the a. minimum lease payment. b. minimum lease payment plus the amortization of the related asset. c. minimum lease payment less the amortization of the related asset. d. minimum lease payment less the portion of the minimum lease payment allocable to interest. 5. Which of the following statements concerning guaranteed residual values is appropriate for the lessee? a. The asset and related liability should be increased by the amount of the residual value. b. The asset and related liability should be decreased by the amount of the residual value. c. The asset and related liability should be decreased by the present value of the residual value. d. The asset and related liability should be increased by the present value of the residual value. 6. State Repairs acquires equipment under a noncancelable lease at an annual rental of $45,000, payable in advance for five years. After five years, there is a bargain purchase option of $75,000. The appropriate interest rate is 12 percent. What is the total present value of the lease and the first year's interest expense? a. $224,234 and $21,508 b. $224,234 and $26,908 c. $204,771 and $21,508 d. $204,771 and $19,173 7. Baxter Company leased equipment to Fritz Inc. on January 1, 2011. The lease is for an eight‐year period expiring December 31, 2018. The first of eight equal annual payments of $900,000 was made on January 1, 2011. Baxter had purchased the equipment on December 29, 2010, for $4,800,000. The lease is appropriately accounted for as a sales‐type lease by Baxter. Assume that the present value at January 1, 2011, of all rent payments over the lease term discounted at a 10 percent interest rate was $5,280,000. What amount of interest revenue should Baxter record in 2012 (the second year of the lease period) as a result of the lease? a. $490,000 b. $480,000 c. $438,000 d. $391,800 8. On December 31, 2009, Ajax Inc. (lessee) leased production equipment from Comet (Lessor). The lease calls for 6 equal annual payments of $35,000 starting immediately. The implicit interest rate of the lease is 8% (which is known by Ajax). The lease also calls for a bargain purchase option of $20,000 at the end of the lease period. What should Ajax report on December 31, 2010 as the liability Obligations under Capital Lease after all adjustments and payments have been recorded? a. $128,565 b. $129,536 c. $187,348 d. $152,348 9. On December 31, 2009, Ajax Inc. (lessee) leased production equipment from Comet (Lessor). The lease calls for 6 equal annual payments of $35,000 starting immediately. The useful life of the equipment is 6 years and Comet expects a residual value of $40,000 (which is not guaranteed). The implicit interest rate of the lease is 8% (which is not known by Ajax). Ajax has an incremental interest rate of 9%. The equipment is carried in Comet’s inventory at a cost of $115,000. What amounts should Comet report as Sales and Cost of Goods Sold, respectively, for this transaction? a. $199,952 and $89,793 b. $174,745 and $89,793 c. $174,745 and $115,000 d. $199,952 and $115,000 10. Aerotech Inc., a dealer in machinery and equipment, leased equipment to Quality Products on July 1, 2011. The lease is appropriately accounted for as a sale by Aerotech and as a purchase by Quality. The lease is for a ten‐year period (the useful life of the asset) expiring June 30, 2021. The first of ten equal annual payments of $250,000 was made on July 1, 2011. Aerotech had purchased the equipment for $1,337,500 on January 1, 2011, and established a list selling price of $1,687,500 on the equipment. Assume that the present value at July 1, 2011, of the rent payments over the lease term discounted at 12 percent (the appropriate interest rate) was $1,582,500. What is the amount of profit on the sale and the amount of interest income that Aerotech should record for the year ended December 31, 2011? a. $245,000 and $94,950 b. $245,000 and $79,950 c. $350,000 and $79,950 d. $350,000 and $94,950 Answer Key: 1. B 2. A 3. B 4. D 5. D 6. A 7. D 8. B 9. B 10. B ...
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This note was uploaded on 04/06/2011 for the course ACCT 4050 taught by Professor Rodney during the Spring '11 term at University of Georgia Athens.

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