ACCT 311 Homework Assignment 7
ACCT 311 Homework Assignment 7
1.
On December 31, Year
One, Ace signs a lease to use a truck for four years. The truck has a current
value of $58,600. Four annual payments of $10,000 are to be paid with the first
made on December 31, Year One. After that time, the truck (with an expected
life of eight years) will be returned to the lessor. Ace has an incremental
borrowing rate of 6 percent. The lessor has an implicit annual interest rate of
8 percent built into the contract. Ace is aware of this implicit rate. The
present value of a four-year annuity due of $10,000 at a 6 percent annual rate
is $36,700. The present value of a four-year annuity due of $10,000 at an 8
percent annual rate is $35,770. What liability should Ace report on its
December 31, Year One, balance sheet?
1. $0
2. $10,000
3. $25,770
4. $26,700
2.
A company leases a
machine on January 1, Year One for five years which call for annual payments of
$4,000 for the first year and then $10,000 per year after that. The present
value of these payments based on a reasonable interest rate of 10 percent is
assumed to be $38,000. This lease is an operating lease. How much expense will
the company recognize for Year One?
1. $4,000
2. $7,600
3. $8,800
4. $11,400
3.
On January 1, Year
One, Owens buys a large warehouse for $700,000 which it immediately sells to
National Financing for $800,000. The warehouse has an expected life of 10
years. Owens immediately signs a contract to lease the warehouse back for its
own use. This lease is for 10 years with payments of $120,000 per year. The
first payment is made immediately. Assume that these payments were computed using
a 10 percent annual interest rate. Which of the following statements is true?
1. The $100,000 gain on the original sale must be
recognized by Owens immediately.
2. The $100,000 gain on the original sale will be
recorded by Owens as other comprehensive income.
3. The $100,000 gain on the original sale will be
deferred until the end of the lease and then recognized as a gain.
4. The $100,000 gain on the original sale will be
deferred and then written off each year as a reduction in the depreciation
expense on the leased warehouse.
4.
The Turpen Company
buys a machine for $30,000. Normally, the machine would be sold to a customer
for $42,000. However, in hopes of expanding the number of available customers,
Turpen leases the machine for 4 years to the Royal Corporation. The accountants
for the Turpen Company are currently studying how this lease should be recorded
for financial reporting purposes. Which of the following statements is true?
1. Because this property is normally sold, the
lease contract must be recorded as a capital lease by Turpen.
2. Because this property is normally sold, the
lessee (Royal) must report it as a sales-type lease.
3. If the machine has an expected life of five
years, then both parties must report the transaction as a capital lease.
4. If the lease contract gives Royal the option
to buy the machine at the end of four years, then both parties must report the
transaction as a capital lease
5. On January 1, Year One, Green Company leases a
machine for four years. Because Green is a relatively new business and is
struggling with its cash flows, the lessor sets the payments as $10,000 per
year for the first two years and $20,000 for the last two years. These payments
were computed based on an implicit interest rate of 10 percent per year. The
contract does not meet any of the four criteria to be reported as a capital
lease. What amount of expense should Green recognize in Year Two?
1. $5,000
2. $6,000
3. $10,000
4. $15,000
6.
Boeing builds a plane
for $10 million that it normally sells for $15 million. However, on January 1,
Year One, Boeing leases this plane to Delta for $3 million per year for 7 years
(the entire expected life of the plane). Which of the following answers is
correct?
1. To Boeing, this lease qualifies as a direct
financing lease.
2. To Delta, this lease qualifies as a sales type
lease.
3. Boeing will recognize a $5 million profit when
the lease is signed.
4. Delta recognizes rent expense of $3 million in
Year One.
7. A lessor leases property to a lessee. This
contract meets the requirements for being recorded as a capital lease. The
lessor is trying to determine whether this lease should be accounted for as a
direct financing lease or a sales-type lease. Which of the following statements
is not true?
1. The total amount of profit will be more if it
is a sales-type lease than if it is a direct financing lease.
2. If the lessor is either a manufacturer or a
dealer in this particular item, the lease is recorded as a sales-type lease.
3. In a direct financing lease, all profit is
recognized as interest revenue over the life of the lease.
4. In a sales-type lease, a normal amount of
profit is recognized at the time that the contract begins.
8.
The Jones Company only
buys and then leases assets. It is neither a manufacturer nor a dealer of any
items. On January 1, Year One, Jones buys equipment for $34,000 in cash. This
asset is immediately leased for 8 years, its entire life. Annual payments are
$5,800 to be made each January 1 beginning on January 1, Year One. Assume that
the implicit interest rate profit built into the contract by Jones was 10
percent. However, the lessee’s incremental borrowing rate was only 8 percent
per year. What amount of income should Jones recognize for Year One?
1. $2,256
2. $2,820
3. $3,400
4. $4,060
9. Danville Corporation buys a truck for $52,000
and leases it to Viceroy for 8 years. At the end of that time, Viceroy can buy
the truck for $7,000 in cash. Which of the following is not true?
1. If this purchase option is viewed as a
bargain, Danville should record the $7,000 as a future cash flow in accounting
for the lease even though it is not guaranteed.
2. Unless the purchase option is viewed as a
bargain, Danville cannot account for this lease as a capital lease.
3. The purchase option cannot be viewed as a
bargain unless it is significantly below the expected fair value of the truck on
that date.
4. If this purchase option is viewed as a
bargain, Danville’s profit to be recognized in the first year will be
increased.
10. On January 1, Year One, AnnaLee Company buys a
warehouse for $800,000 and is in the process of leasing it to Ziton Company for
four out of its five year life. AnnaLee normally has an implicit rate of 10
percent whereas Ziton has an incremental borrowing rate of 8 percent. Assume
the payment amounts have been computed appropriately. For these computations
assume that the present value of $1 in four years at 8 percent annual interest
is .72 and at 10 percent is .66. Assume that the present value of an ordinary
annuity of $1 for four years at 8 percent annual interest is 3.27 and at 10
percent is 3.10. Assume that the present value of annuity due of $1 for four
years at 8 percent annual interest is 3.55 and at 10 percent is 3.46. Payments
are set to be $210,000 per year with the payments to begin immediately. The
lessee has an option to buy the asset at the end of the lease for $70,000 which
is viewed as a bargain. It is a direct financing lease. What is the total
increase in net income that AnnaLee will report in Year One?
1. $59,000
2. $62,000
3. $67,000
4. $70,000
11. The Ace Company buys cars and sells them at 20
percent above cost. On January 1, Year One, the company buys a car for $40,000
and immediately leases it for its entire six year life. Assume that annual
payments for this lease will be $10,000 per year starting on January 1, Year
One. This payment amount was based on an implicit interest rate of 10 percent.
How much interest revenue will Ace recognize for Year One?
1. $3,000
2. $3,800
3. $4,000
4. $4,800
12. On December 31, Year One, the Reinhardt
Company owns a tractor and leases it to the Smith Company. The tractor
has a life of five years but the lease is only for four years. Which of
the following statements is NOT true for the Reinhardt Company?
1. If this is a sales-type lease, profit will be
recognized immediately with interest revenue then recognized over the next four
years.
2. If this is a direct financing lease, no profit
is recognized immediately but interest revenue is recognized over the next four
years.
3. Based on the information, this might be an
operating lease or it might be a capital lease.
4. Reinhardt must base the computation of interest
revenue on the imputed interest rate built into the contract.
13. Jones buys widgets and marks them up 20
percent and sells them. On January 1, Year One, Jones buys a widget for
$30,000 but this time Jones leases the item to another company for its entire
10 year life. Jones sets the annual payments (which begin immediately)
at $5,300 in order to earn an annual interest rate of 10 percent. How
much will net income increase for Jones during Year One because of this lease?
1. $2,470
2. $3,000
3. $6,000
4. $9,070
14. On December 31, Year One, a company leases
equipment for 8 years, its entire life. Payments are $10,000 per year on
December 31 with the first one made immediately. The present value of these
payments at the lessee’s incremental borrowing rate of 10 percent per year is
assumed to be $58,000. On the December 31, Year One balance sheet, what should
this lessee report as its current liability for this lease?
1. $0
2. $5,200
3. $6,000
4. $10,000
15. On January 1, Year One, a company leases
equipment for 8 years although the equipment has a life of 10 years. At the end
of that time, title to this property will be conveyed to the lessee. Payments
are $10,000 per year on January 1 with the first one made immediately. The
present value of these payments at the lessee’s incremental borrowing rate of
10 percent per year is assumed to be $58,000. What amount of depreciation
expense should the lessee recognize for Year One?
1. $0
2. $5,800
3. $6,000
4. $7,250
16. On January 1, Year One, the Lenoir Company
leases equipment from Burke Corporation for eight years which is the entire
life of the asset. It will be discarded at the end of that period. For Burke,
this transaction is a direct financing leases using an implicit interest rate
of 10 percent. Based on that rate, the annual payments are $12,000 beginning
immediately. Lenoir is unaware of Burke’s implicit but has an incremental
borrowing rate of 8 percent. Assume that the present value of an ordinary
annuity for eight years at an annual interest rate of 8 percent is 5.75 and at
10 percent is 5.33 whereas the present value of an annuity due for eight years
at an annual interest rate of 8 percent is 6.21 and at 10 percent is 5.87. If
the effective rate method is applied, what amount of interest expense should
Lenoir report for Year Two? (Round to the nearest dollar.)
1. $4,089
2. $4,442
3. $4,516
4. $5,070
17. On January 1, Year One, Alexander Company buys
a warehouse for $800,000 and is in the process of leasing it to Zebra Company
for four out of its five year life. It has no expected residual value after
five years. Alexander normally has an implicit rate of 10 percent whereas Zebra
has an incremental borrowing rate of 8 percent. Assume the payment amounts have
been computed appropriately. For these computations assume that the present
value of $1 in four years at 8 percent annual interest is .72 and at 10 percent
is .66. Assume that the present value of an ordinary annuity of $1 for four
years at 8 percent annual interest is 3.27 and at 10 percent is 3.10. Assume
that the present value of annuity due of $1 for four years at 8 percent annual
interest is 3.55 and at 10 percent is 3.46. Payments are set to be $300,000 per
year with the payments to begin immediately. No residual value is assumed at
the end of the lease and there is no option to buy the warehouse. It is a sales
type lease. What is the total decrease in net income that Zebra will report in
Year One?
1. $287,510
2. $296,570
3. $315,620
4. $327,450
18. The Wasala Corporation leases an airplane on
January 1, Year One for eight years for payments of $20,000 per year beginning
immediately. The plane has an expected life of 10 years. The prime
rate of interest is 6 percent but Wasala has an incremental borrowing rate of 8
percent. The present value of an ordinary annuity of $1 at 6 percent for
8 years is 6.22 and the present value of an ordinary annuity of $1 at 8 percent
for 8 years is 5.75. The present value of an annuity due of $1 at 6
percent for 8 years is 6.58 and the present value of an annuity due of $1 at 8
percent for 8 years is 6.19. At the end of 8 years, title to the airplane
will be conveyed to Wasala. How much expense should Wasala recognize in
Year Two? (round to the nearest dollar)
1. $17,880
2. $18,108
3. $19,058
4. $19,748
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