Q&A Hero

Q: Interperiod tax allocation refers to the allocation of income tax expense across periods when book and taxable income differ.

Q: The allocation of the tax provision across various components of book income within a given period is called interperiod tax allocation.

Q: Book income does not correspond with taxable income because of different underlying objectives with respect to income measurement.

Q: Taxable income is governed by the doctrine of constructive receipt or ability to pay.

Q: When accounting for an operating lease, depreciation expense is recorded by the lessee.

Q: When a company has an operating lease for its primary premises it would record a lease asset on the balance sheet.

Q: Describe the criteria that the lessor must utilize when determining whether a lease is to be treated as a capital lease or as an operating lease according to current GAAP.

Q: Describe three capital lease disclosures that are required of the lessee according to current GAAP.

Q: On July 1, 2012, Colby Company sold equipment to Cheddar Corporation and simultaneously leased it back for five years. The equipment's fair market value on July 1, 2012 was $875,000 and its book value was $700,000. Colby and Cheddar agreed to an 8% interest rate with respect to the lease transaction. The equipment has a remaining life of five years and an estimated salvage value of zero after five years. Colby is required to make annual payments of $202,916 beginning July 1, 2012. Required: Prepare the necessary journal entries for Colby Company to record the sale-leaseback for the year ended December 31, 2012. Assume that the lease qualifies as a capital lease from Colby's perspective.

Q: On January 1, 2012, Avalanche Company entered into an agreement to lease equipment for a ten-year period. The lease requires Avalanche to pay $220,000 on January first of each year, with the first payment required at the lease inception. Included within the $220,000 annual payment are executory costs totaling $15,000. Avalanche has the option to purchase the equipment at the end of the lease term for $55,000; the fair value of the equipment at the end of the lease term is estimated to be $120,000. The equipment's useful life is estimated to be 12 years and the salvage value after 12 years is estimated to be $10,000. Avalanche's incremental borrowing rate is 8% and the implicit rate known by Avalanche is 7%. Required: 1. Determine the lease liability immediately after the January 1, 2013 payment was made. 2. Determine the book value of the leased asset as of December 31, 2013. 3. Determine the total expenses to be reported on the income statement for the year ended December 31, 2012.

Q: Flat Iron Corporation, a lessor, entered into a lease agreement on November 1, 2011. The lease was for 6 years and required the lessee to make annual payments of $187,800 on November 1st of each year; the first payment was received by Flat Iron on November 1, 2011. The leased asset cost Flat Iron $600,000, the implicit interest rate was 9%, and the asset's useful life was 6 years. There were not any uncertainties regarding the collection of the lease payments and Flat Iron's performance was considered to be complete as of November 1, 2011. Required: 1. Determine the amount of income that will be reported by Flat Iron for the year ended December 31, 2011. 2. Prepare the necessary journal entries for the year ended December 31, 2011.

Q: On January 1, 2012, Cole Corporation entered into a ten-year lease agreement. The following summarizes the agreement: Payments of $30,000 are due at the beginning of each year; the first payment was made on January 1, 2012. The leased asset has an estimated useful life of 15 years. Title to the leased asset is transferred to Cole at the end of the lease term. The implicit interest rate known by Cole is 10%. Cole's incremental borrowing rate is 12%. Cole uses the straight-line depreciation method. The asset's estimated salvage value is $50,000 after 10 years and is $15,000 after 15 years. Required: 1. Determine the interest expense associated with the lease for the year ended December 31, 2012. 2. Determine the depreciation expense for the year ended December 31, 2012.

Q: Conroy Company leased equipment on January 1, 2012. Information pertinent to the lease is as follows: The lease term is 6 years. Annual payments of $60,000 are due on January 1 of each year; the first payment was made at the inception of the lease. Conroy's incremental borrowing rate is 12%. The implicit interest rate is 10%; Conroy knew the implicit interest rate. The unguaranteed residual value is $50,000. The useful life of the equipment is 10 years. Conroy uses the straight-line depreciation method. The fair value of the equipment is $325,000. The lease agreement did not contain either a bargain purchase option or a transfer of title. Required: Prepare all the necessary journal entries for the year ended December 31, 2012 with respect to Conroy Company's lease.

Q: Fischer Corporation leased new equipment to Swix Company on January 1, 2011. The lease is for an eight-year period and requires equal annual payments of $35,000 due on January 1 of each year. The first payment was made at the inception of the lease. The fair value of the equipment and the present value of the payments was $217,223. The implicit interest rate is 8%. The equipment cost Fischer Corporation $160,000, has an estimated eight-year life, and a residual value of zero. Fischer Corporation uses straight-line depreciation. Fischer Corporation should have recorded the lease as a sales-type lease but mistakenly recorded the lease as an operating lease. Required: Determine the amount of the lease classification error on the following financial statement elements of Fischer Corporation, and whether the amount is overstated or understated: Total assets as of 12/31/12 ____________ Net Income for the year ended 12/31/11 ____________

Q: On October 1, 2011, Kelly Company leased a boat from Grant Company. The lease is noncancelable and requires five equal annual payments of $50,000 each. The lease payments are due each October 1, beginning October 1, 2011. The boat is recorded on Grant's books at $180,000, but its fair value is $207,542. Grant expects that the boat's residual value at the end of the lease term will be $10,000, but it is not guaranteed by Kelly. However, Kelly has an option to purchase the boat for $10,000 at the end of the lease term. At the inception of the lease, the boat has a remaining economic life of six years with a $2,500 estimated salvage value at the end of its life. Both firms use the straight-line method of depreciation and have December 31 year-ends for financial reporting purposes. The interest rate used by Grant Company to calculate the annual lease payment is 12%, and known by Kelly. Collection of the lease payments is reasonably predictable by Grant. Required: 1. Complete the following table for Grant's and Kelly's December 31, 2011 income statements: Grant (Lessor) Kelly (Lessee) Sales Interest income Rent revenue Cost of goods sold Depreciation expense Rent expense Interest expense Be sure to show and clearly label all calculations.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Goff Industries has applied for a loan, and as the bank loan officer, you've been assigned to evaluate Goff's financial statements. Your evaluation reveals that Goff has no capital leases recorded on its financial statements while most other companies in its industry do have such leases. To effectively evaluate Goff's financial position and compare it to industry standards, you've decided to constructively capitalize Goff's operating leases. The following information is available from Goff's financial statements for the year ended December 31, 2012: (Round all intermediate calculations to the nearest whole dollar.) Assuming Goff's long-term debt rate is 10%, what amount would you constructively capitalize in order to effectively analyze Goff's financial position? A. $ - 0 - since the company has no capital leases. B. $6,680. C. $11,504. D. $3,223.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. All of the following are true of constructive capitalization except A. It's a method for making balance sheet data historically correct. B. It treats all leases as if they were capital leases. C. The liability is the discounted present value of the stream of minimum operating lease payments. D. The method makes use of a discount rate that is the weighted average rate implicit in all leases, or the weighted average rate on interest-bearing long-term debt.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Under IFRS, a lessee may classify some assets held under leases as investment property which allows the lessee to A. Avoid recording depreciation expense for the assets. B. Account for the assets using either historical cost or fair value. C. Use the higher of the implicit or the incremental borrowing rate when computing the present value of the minimum lease payments. D. All of the choices are correct.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. In August 2010, the FASB and the IASB issued a jointly developed leasing exposure draft which A. Takes a property rights approach and would require lessees to record a "right-of-use" asset and the associated liability. B. Takes a performance obligation approach for lessees and removes the asset from the balance sheet rather than establishing a lease liability. C. Takes a derecognition approach for lessees and establishes a lease asset and a lease liability for the present value of the expected rental payments. D. All of the choices are correct.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Under IFRS A. Disclosure of lessee future minimum lease payments for the periods within one year, within years two through five, and after five years are required. B. Lessees can classify some assets held under leases as investment property. C. The two additional lessor criteria provided under U.S. GAAP for lease revenue recognition are absent. D. All of the choices are correct.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Under IFRS, which of the following is an indicator of a situation (individually or in combination) that could lead to a lease being classified as a finance lease? A. If the lessor can cancel the lease, the lessee's losses associated with the cancellation are borne by the lessor. B. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. C. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessor. D. All of the choices are indicators.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Which of the following is a reason why lease accounting under GAAP should be reconsidered? A. It is too easy for firms to circumvent lease capitalization criteria. B. The SEC has stated that the FASB should reexamine lease accounting. C. Operating leases are a popular means of off-balance sheet financing. D. Each of the above are substantiated reasons.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. The most straightforward method for making lessees' balance sheet data comparable is to treat all leases as if they were A. operating leases. B. capital leases. C. direct financing capital leases. D. sales-type capital leases.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. With a leveraged lease, the lessor must treat the lease as a/n A. operating lease. B. ordinary capital lease. C. direct financing capital lease. D. sales-type capital lease.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease, the gain is recognized A. immediately as an ordinary gain. B. immediately as an extraordinary gain. C. over the life of the lease in proportion to the rental payment. D. over the life of the lease using the same rate and life used to amortize the leased asset.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Which of the following statements pertaining to lease accounting is not correct? A. For a particular lease agreement, the amount of interest expense recorded by the lessee can be different than the amount of interest revenue recorded by the lessor during the same time period. B. The current ratio will be decreased over the lease term if a lessor treats a lease as a capital lease rather than an operating lease. C. It is very challenging for different firms to treat virtually identical leases dissimilarly due to the fact that the required lease capitalization criteria are difficult to circumvent. D. The required disclosures pertaining to operating leases require the lessee to disclose what the impact on the financial statements would have been if the lease would have been treated as a capital lease.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Which of the following statements pertaining to lease accounting is not correct? A. The lessee will depreciate a leased asset either over the lease term or the leased asset's useful life dependent upon which of the required lease capitalization criteria is (are) met. B. The lessee ignores a guaranteed salvage value when calculating depreciation expense associated with a capital lease. C. The lessor's annual income will decrease over time regardless of whether the lease is a sales-type lease or a direct financing lease. D. The gross profit recorded by the lessor is the same whether or not the residual value is guaranteed by the lessee.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. The difference in the lessor's income recognition over the life of the lease, between an operating lease and a capital lease is A. zero. B. the amount of the interest revenue. C. the financing revenue minus the depreciation. D. the depreciation expense.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. On January 1, 2012, Lessor Corporation entered into a lease which was treated as a sales-type lease by Lessor Corporation; the leased asset's book value within Lessor Corporation's financial statements was $350,000 as of January 1, 2012. The lease required the lessee to make ten annual payments of $50,000; the first payment was due at the beginning of the lease term and each January 1 thereafter. The present value of the minimum lease payments was $362,345. The implicit rate of interest, known to the lessee, was 8%, while the lessee's incremental borrowing rate was 10%. The increase in Lessor Corporation's net income for the year ended December 31, 2012 was approximately A. $12,345. B. $37,333. C. $41,333. D. $24,988.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. On January 1, 2011, Lessee Corporation entered into a ten-year lease. The lease terms required annual year-end payments of $160,000. The lease agreement does not contain either a bargain purchase option or a transfer of title. The fair value of the equipment at the inception of the lease was $1,100,000; estimated life of the leased assets was fourteen years. Lessee Corporation's incremental borrowing rate was 10%; the implicit rate of interest, known to the lessee, was 12%. Applicable time value of money values are as follows: Lessee Corporation should initially capitalize the lease at what amount? A. $0, the lease should not be capitalized B. $983,040 C. $1,081,440 D. $904,000

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. On January 1, 2011, Lessee Company entered into a five-year lease which required annual payments of $120,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to initially record the lease was $500,384; the applicable discount rate was 10%. Lessee Company treated the lease as a capital lease. What is the balance of Lessee Company's lease liability immediately after the January 1, 2012 payment was made? A. $430,422 B. $260,384 C. $298,422 D. $380,384

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. On January 1, 2011 Lessee Company entered into a five-year lease which required annual payments of $60,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to record the lease was $250,192; the applicable discount rate was 10%. Lessee Company treated the lease as a capital lease. What is the balance of Lessee Company's lease liability as of December 31, 2011? A. $209,211 B. $275,211 C. $190,192 D. $149,211

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. With which one of the following entries will Hatfield prepare to record the payment on December 31, 2011? A. Option a B. Option b C. Option c D. Option d

Q: 1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. 2. The fair value of the tractor is $100,000. 3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term. 4. The tractor has a six-year economic life. 5. Hatfield has an excellent credit rating. 6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. If Hatfield's incremental borrowing rate is 11% and the implicit rate is not known to the lessee, what interest rate will Hatfield use to account for this lease? A. 9% B. 10% C. 11% D. Cannot be determined from information given.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. With which of the following entries will Equity Leasing prepare to record the revenue earned on December 31, 2011? A. Option a B. Option b C. Option c D. Option d

Q: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. With which of the following entries will Equity Leasing prepare to record the receipt of the first payment on December 31, 2011? A. Option a B. Option b C. Option c D. Option d

Q: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. With which one of the following entries will Morey prepare to record the lease of the tractor on January 1, 2011? A. Option a B. Option b C. Option c D. Option d

Q: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Equity records this lease with which one of the following journal entries? A. Option a B. Option b C. Option c D. Option d

Q: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. For Morey, this lease is treated as a/an A. operating lease. B. capital lease. C. direct financing capital lease. D. sales-type capital lease.

Q: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. For Equity Leasing, this is treated as a/an A. operating lease. B. ordinary capital lease. C. direct financing capital lease. D. sales-type capital lease.

Q: Present value interest factors are: Assuming that the lease is a capital lease for Ray, which one of the following interest rates will Ray use to record this lease? A. Use 8.5% because it is the lessor's incremental borrowing rate. B. Use 9.0% because it is the lessee's incremental borrowing rate. C. Use 10.0% because it is the implicit lease rate of return to the lessor. D. Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate.

Q: Present value interest factors are: Ford uses which one of the following interest rates to record this lease? A. Use 9.0% because it is the lessee's incremental borrowing rate. B. Use 10.0% because it is the implicit lease rate of return to the lessor. C. Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate. D. Use 9.0% because it is the lesser of the implicit rate and Ford's incremental borrowing rate.

Q: Present value interest factors are: On Ford's books, this lease is treated as a/an A. operating lease. B. capital lease. C. direct financing capital lease. D. sales-type capital lease.

Q: Present value interest factors are: On Ray's books, this lease is treated as a/an A. operating lease. B. ordinary capital lease. C. direct financing capital lease. D. sales-type capital lease.

Q: Present value interest factors are: GAAP defines lessors' treatment of leases according to Type I and Type II characteristics. Type II characteristics are linked to A. the critical event criteria for expense recognition. B. the critical event criteria for revenue recognition. C. measurement of collectibility for revenue recognition. D. measurement of historical cost.

Q: Present value interest factors are: What is the financing profit of Blue Manufacturing on a leased lathe? A. $7,000 B. $8,500 C. $10,500 D. $17,500

Q: Present value interest factors are: What is the manufacturing profit of Blue Manufacturing on a leased lathe? A. $7,000 B. $8,500 C. $10,500 D. $17,500

Q: Present value interest factors are: Blue Manufacturing treats a lathe lease as a/an A. operating lease. B. ordinary capital lease. C. sales-type lease. D. direct-financing lease.

Q: Present value interest factors are: If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, these leases are treated as A. operating leases. B. capital leases. C. sales-type leases. D. direct-financing leases.

Q: Present value interest factors are: Which one of the following ratios deteriorates with the lessee's capitalization of a lease? A. Current ratio B. Return on equity C. Inventory turnover D. Common earnings leverage

Q: Present value interest factors are: To adjust for distortions that arise from off-balance sheet leases when comparing among firms, analysts rely on A. the balance sheet. B. the income statement. C. the statement of stockholders' equity. D. required note disclosures.

Q: Present value interest factors are: The difference between the expense charged with a capital lease and an operating lease is A. the amount of total expense, with a capital lease higher than an operating lease. B. the amount of total expense, with an operating lease higher than a capital lease. C. the number of years that recognize expense. D. the timing of the expense recognition.

Q: Present value interest factors are: Over the life of a lease, the amount charged to expense is A. greater for an operating lease. B. greater for a capital lease. C. the same for a capital or operating lease. D. less for a capital lease.

Q: Present value interest factors are: If the equipment is worth $7,500 at the end of the lease, Pepper will make which one of the following journal entries? A. Option a B. Option b C. Option c D. Option d

Q: Present value interest factors are: How much straight-line depreciation expense will Pepper record for Year 1? A. $14,747 B. $15,362 C. $15,747 D. $17,500

Q: Present value interest factors are: At the end of Year 1, Pepper will make a payment of $30,000. Which one of the following entries will properly record this payment? A. Option a B. Option b C. Option c D. Option d

Q: Present value interest factors are: The entry to record this lease on Pepper's books is A. Option a B. Option b C. Option c D. Option d

Q: Present value interest factors are: The lease liability will be valued on Pepper's balance sheet at A. $144,475. B. $157,469. C. $175,000. D. $250,000.

Q: Present value interest factors are: Upon acquisition, the leased equipment will be valued on Pepper's balance sheet at A. $144,475. B. $157,469. C. $175,000. D. $250,000.

Q: Present value interest factors are: The Pepper lease is a/an A. operating lease because the lease value is less than 90% of the fair value of the asset. B. capital lease because the lease value is 90% of the fair value of the asset. C. operating lease because the asset reverts to Blue at the end of the lease. D. capital lease because the lease term is more than 75% of the life of the asset.

Q: Present value interest factors are: To value the lease asset, Pepper should use a discount rate of A. 10%. B. 11%. C. 12%. D. prime rate.

Q: All the following statements about residual value guarantees are correct except residual value guarantees A. protect lessors against lessees who abuse leased assets. B. protect lessees against lessors who abuse leased assets. C. protects lessors against technological changes. D. protects lessors against marketplace changes.

Q: If a lease contains a residual value guarantee, the lessee must A. add the guaranteed amount to the present value of the minimum lease payments. B. add the present value of the guaranteed amount to the present value of the minimum lease payments. C. include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease. D. ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.

Q: Executory costs of a lease are treated by the lessee as A. capitalized costs of the lease. B. additional interest expense. C. operating expenses. D. deferred revenue.

Q: When accounting for a capital lease, depreciation expense is equal to the A. lease payments. B. principal portion of the lease payments. C. normal depreciation computed on the depreciable base of the asset. D. straight-line depreciation only on the full amount of the leased asset.

Q: A lessee must use which one of the following discount rates to value a capital lease? A. Prime rate B. Implicit lease rate C. Lessee's incremental borrowing rate D. Lower of implicit lease rate or lessee's incremental borrowing rate

Q: A lessor mistakenly treated a direct financing lease as an operating lease (the lessor uses straight-line depreciation). How does this mistake impact the following at the end of the first year of the lease term? A. Option a B. Option b C. Option c D. Option d

Q: A lessee mistakenly treated an operating lease as a capital lease. How does this mistake impact the following at the inception of the lease? A. Option a B. Option b C. Option c D. Option d

Q: When a lessee has a capital lease for its primary premises it would initially record a leased asset on the balance sheet equal to A. zero. B. the present value of future lease payments. C. the sum of future lease payments. D. the lesser of the fair value of the asset or the present value of the future lease payments.

Q: GAAP establishes specific criteria for the treatment of leases. Which of the following does not accurately describe the criteria applicable to a lessee? A. The lease agreement contains a bargain purchase option. B. The lease term is equal to or exceeds 75% of the leased asset's useful life. C. The lease agreement transfers title of the leased asset to the lessee at the end of the lease term. D. The present value of the minimum lease payments is equal to or greater than 75% of the leased asset's fair value.

Q: GAAP establishes specific criteria for the treatment of leases. If any of the criteria are met, the lessee A. must treat the lease as an operating lease. B. must treat the lease as a capital lease. C. may choose the treatment if two or less criteria are met. D. may elect to treat the lease as an operating lease if only one criterion is met.

Q: If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a capital lease if the A. fair value of the building is $1,000,000. B. remaining useful life of the building is 20 years. C. lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000. D. building reverts back to the lessor at the end of the lease.

Q: Compared to a firm with a capital lease, operating leases help the lessee firm earn A. higher asset turnover ratio. B. lower return on assets. C. higher debt-to-equity ratio. D. lower NOPAT.

Q: To remain in accordance with GAAP, operating leases require note disclosure of the A. amount of annual rental payments. B. discounted present value of future lease payments. C. undiscounted present value of future lease payments. D. future cash outflows arising from operating leases.

Q: The lessor of a building with an operating lease will present on its balance sheet an asset equal to A. zero. B. the present value of future lease receipts. C. the depreciated historical cost of the asset. D. the fair value of the leased asset.

Q: When accounting for an operating lease, which one of the following accounts are charged with the expense on the lessee's income statement? A. Depreciation Expense B. Amortization Expense C. Rent Expense D. Lease Operating Expense

Q: A lease is legally a/an ___________ contract. A. mutually performed B. executed C. executory D. unilateral

Q: Constructive capitalization provides a preview of how the FASB/IASB proposals will affect lessee financial statements.

Q: Constructive capitalization occurs when analysts treat capital leases as operating leases and approximate what balance sheet numbers would have been had the leases not been capitalized.

Q: Under IFRS the two additional lessor criteria provided under U.S. GAAP, regarding revenue recognition, are absent.