Pretest Chapter 21
1. In a lease that is appropriately recorded as a direct financing lease by the
lessor, unearned income
a. should be amortized over the period of the lease using the interest
method
b. should be amortized over the period of the lease using the straight-line
method.
c. does not arise.
d. should be recognized at the lease's expiration.
2. Which of the following statements is correct?
a. In a direct financing lease, initial direct costs are added to the net
investment in the lease.
b. In a sales-type lease, initial direct costs are expensed in the year of
incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the
lease term.
d. All of these.
3. The Lease Liability account should be disclosed as
a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainders in noncurrent
liabilities.
d. deferred credits.
Pretest Chapter 21
4. In a lease that is recorded as a sales-type lease by the lessor, interest
revenue
a.
should be recognized in full as revenue at the lease's inception.
b.
should be recognized over the period of the lease using the
straight-line method.
c.
should be recognized over the period of the lease using the
effective interest method.
d.
does not arise.
5. Nixon Company leased equipment from Korman Company on July 1, 2004,
for an eight-year period expiring June 30, 2012. Equal annual payments
under the lease are $ 200,000 and are due on July 1 of each year. The first
payment was made on July 1, 2004. The rate of interest contemplated by
Nixon and Korman is 8 %. The cash selling price of the equipment is $
1,241,250 and the cost of the equipment on Korman's accounting records
was $ 1,100,000. Assuming that the lease is appropriately recorded as a
sale for accounting purposes by Korman, what is the amount of profit on
the sale and the interest income that Korman would record for the year
ended December 31, 2004 ?
a. $ 0 and $ 0.
b. $ 0 and $ 41,650.
c. $ 141,250 and $ 41,650.
d. $ 141,250 and $ 49,650.