71. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Pisa, Inc. uses the straight-line method to depreciate similar assets. What is the amount of depreciation expense recorded by Pisa, Inc. in the first year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. $0 because the asset is depreciated by Tower Company.
b. $284,968
c. $307,767
d. $300,000
72. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. Silver Point’s incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2018?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. $70,200
b. $56,160
c. $62,400
d. $78,000
73. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it
leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $219,777 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point’s incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2018?
a. $780,000
b. $624,000
c. $468,000
d. $499,200
74. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. If the selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, what are the equal annual payments?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. $175,820
b. $162,795
c. $181,972
d. $195,356
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
75. What type of lease is this from Alt Corporation’s viewpoint?
a. Operating lease
b. Capital lease
c. Sales-type lease
d. Direct-financing lease
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
76. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2018?
a. Depreciation Expense
b. Rent Expense
c. Interest Expense
d. Depreciation Expense and Interest Expense
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
77. If the present value of the future lease payments is $1,600,000 at January 1, 2018, what is the amount of the reduction in the lease liability for Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.)
a. $414,852
b. $446,852
c. $472,350
d. $456,350
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
78. From the viewpoint of Yates, what type of lease agreement exists?
a. Operating lease
b. Capital lease
c. Sales-type lease
d. Direct-financing lease
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
79. If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease?
a. $574,864
b. $1,572,564
c. $1,600,000
d. $1,724,592
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
80. Which of the following lease-related revenue and expense items would be recorded by Yates if the lease is accounted for as an operating lease?
a. Rent Revenue only
b. Interest Revenue only
c. Depreciation Expense only
d. Rent Revenue and Depreciation Expense
81. Hook Company leased equipment to Emley Company on July 1, 2017, for a one-year period expiring June 30, 2018, for $80,000 a month. On July 1, 2018, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2021, for $100,000 a month. The original cost of the equipment was $6,400,000. The equipment, which has been continually on lease since July 1, 2013, is being depreciated on a straight-line basis over an eight-year period with no salvage value. Assuming that both the lease to Emley and the lease to Terry are appropriately recorded as operating leases for accounting purposes, what is the amount of income (expense) before income taxes that each would record as a result of the above facts for the year ended December 31, 2018?
Hook Emley Terry
a. $280,000 $(480,000) $(600,000)
b. $280,000 $(480,000) $(1,000,000)
c. $1,080,000 $(80,000) $(200,000)
d. $1,080,000 $(880,000) $(600,000)
Hull Co. leased equipment to Riggs Company on May 1, 2018. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2019. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull’s accounting records showed a book value for the equipment on May 1, 2018, of $4,900,000. Hull’s depreciation on the equipment in 2018 was $630,000. During 2018, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2018. After the lease with Riggs expires, Hull will lease the equipment to another company for two years.
82. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2018, should be
a. $518,000.
b. $630,000.
c. $1,148,000.
d. $1,260,000.
Hull Co. leased equipment to Riggs Company on May 1, 2018. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2019. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull’s accounting records showed a book value for the equipment on May 1, 2018, of $4,900,000. Hull’s depreciation on the equipment in 2018 was $630,000. During 2018, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2018. After the lease with Riggs expires, Hull will lease the equipment to another company for two years.
83. The income before income taxes derived by Hull from this lease for the year ended December 31, 2018, should be
a. $518,000.
b. $630,000.
c. $1,148,000.
d. $1,260,000.
84. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2018 assuming this is a direct–financing lease?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Cash 160,000
Lease Receivable 740,000
Equipment 900,000
b. Cash 160,000
Lease Receivable 529,940
Loss 210,060
Equipment 900,000
c. Cash 160,000
Lease Receivable 569,270
Equipment 729,270
d. Cash 160,000
Lease Receivable 598,449
Equipment 758,449
85. Mays Company has a machine with a cost of $750,000 which also is its fair value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $75,000. If the lessor’s interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be
a. $162,874.
b. $154,623.
c. $146,587.
d. $125,000.
86. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2018 to record the lease?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Lease Equipment 598,449
Lease Liability 598,449
b. Leased Equipment 758,449
Cash 160,000
Lease Liability 598,449
c. Leased Equipment 689,940
Cash 160,000
Lease Liability 529,940
d. Leased Equipment 707,342
Cash 160,000
Lease Liability 547,342
87. On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s implicit interest rate is 8%. What journal entry would Brick Co. make at January 1, 2019 to record the second lease payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Lease Liability 160,000
Cash 160,000
b. Lease Liability 117,604
Interest Payable 42,396
Cash 160,000
c. Lease Liability 112,124
Interest Payable 47,876
Cash 160,000
d. Lease Liability 116,212
Interest Payable 43,788
Cash 160,000
88. Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Geary gets to recognize all the profits. At the end of the lease term, before the lessee transfers the asset to the lessor, the leased asset and obligation accounts have the following balances:
Leased equipment $400,000
Less accumulated depreciation--capital lease 384,000
$ 16,000
Interest payable $ 1,520
Lease liability 14,480
$16,000
If, at the end of the lease, the fair value of the residual value is $11,800, what gain or loss should Geary record?
a. $2,680 gain
b. $6,280 loss
c. $4,200 loss
d. $11,800 gain
89. Harter Company leased machinery to Stine Company on July 1, 2018, for a ten-year period expiring June 30, 2028. Equal annual payments under the lease are $250,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest used by Harter and Stine is 9%. The cash selling price of the machinery is $1,750,000 and the cost of the machinery on Harter’s accounting records was $1,550,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2018?
a. $157,500
b. $135,000
c. $67,500
d. $0
90. Pye Company leased equipment to the Polan Company on July 1, 2018, for a ten-year period expiring June 30, 2028. Equal annual payments under the lease are $240,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment is $1,680,000 and the cost of the equipment on Pye’s accounting records was $1,488,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Pye, what is the amount of profit on the sale and the interest revenue that Pye would record for the year ended December 31, 2018?
a. $192,000 and $151,200
b. $192,000 and $129,600
c. $192,000 and $64,800
d. $0 and $0
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2018. The lease is appropriately accounted for as a sales-type lease by Metro and as a capital lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2028. The first of 10 equal annual payments of $828,000 was made on July 1, 2018. Metro had purchased the equipment for $5,250,000 on January 1, 2018, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2018, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000.
91. Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2018?
a. $300,000 and $206,880
b. $300,000 and $240,000
c. $3,600,000 and $206,880
d. $3,600,000 and $160,000
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2018. The lease is appropriately accounted for as a sales-type lease by Metro and as a capital lease by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2028. The first of 10 equal annual payments of $828,000 was made on July 1, 2018. Metro had purchased the equipment for $5,250,000 on January 1, 2018, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2018, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000.
92. What is the amount of profit on the sale and the amount of interest revenue that Metro should record for the year ended December 31, 2018?
a. $0 and $137,920
b. $750,000 and $206,880
c. $750,000 and $240,000
d. $1,200,000 and $480,000
93. Roman Company leased equipment from Koenig Company on July 1, 2018, for an eight-year period expiring June 30, 2026. Equal annual payments under the lease are $800,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest contemplated by Roman and Koenig is 8%. The cash selling price of the equipment is $4,965,000 and the cost of the equipment on Koenig’s accounting records was $4,400,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Koenig would record for the year ended December 31, 2018?
a. $0 and $0
b. $0 and $166,600
c. $565,000 and $166,600
d. $565,000 and $198,600
Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2018 $600,000.00
Dec. 31, 2018 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2019 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2020 97,646.71 52,094.19 45,552.52 475,389.39
94. From the viewpoint of the lessor, what type of lease is involved above?
a. Sales-type lease
b. Sale-leaseback
c. Direct-financing lease
d. Operating lease
Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2018 $600,000.00
Dec. 31, 2018 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2019 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2020 97,646.71 52,094.19 45,552.52 475,389.39
95. What is the discount rate implicit in the amortization schedule presented above?
a. 12%
b. 10%
c. 8%
d. 6%
Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2018 $600,000.00
Dec. 31, 2018 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2019 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2020 97,646.71 52,094.19 45,552.52 475,389.39
96. The total lease-related expenses recognized by the lessee during 2019 is
a. $96,000.
b. $97,647.
c. $110,235.
d. $92,235.
Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2018 $600,000.00
Dec. 31, 2018 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2019 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2020 97,646.71 52,094.19 45,552.52 475,389.39
97. What is the amount of the lessee’s liability to the lessor after the December 31, 2020 payment?
a. $600,000
b. $562,353
c. $520,942
d. $475,389
Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2018 $600,000.00
Dec. 31, 2018 $97,646.71 $60,000.00 $37,646.71 562,353.29
Dec. 31, 2019 97,646.71 56,235.33 41,411.38 520,941.91
Dec. 31, 2020 97,646.71 52,094.19 45,552.52 475,389.39
*98. The total lease-related income recognized by the lessee during 2019 is which of the following?
a. $ -0-
b. $4,000
c. $6,000
d. $60,000
*99. On June 30, 2018, Falk Co. sold equipment to an unaffiliated company for $2,000,000. The equipment had a book value of $1,080,000 and a remaining useful life of 10 years. That same day, Falk leased back the equipment at $12,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Falk’s rent expense for this equipment for the year ended December 31, 2018, should be
a. $288,000.
b. $72,000.
c. $120,000.
d. $96,000.
MULTIPLE CHOICE—CPA Adapted
100. Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease A Lease B
a. Operating lease Capital lease
b. Operating lease Operating lease
c. Capital lease Capital lease
d. Capital lease Operating lease
