1.
2.
On January 1, 2014, Dean Corporation signed a ten-year
noncancelable lease for certain machinery. The terms of
the lease called for Dean to make annual payments of
$200,000 at the end of each year for ten years with title to
pass to Dean at the end of this period. The machinery has
an estimated useful life of 15 years and no salvage value.
Dean uses the straight-line method of depreciation for
all of its fixed assets. Dean accordingly accounted for
this lease transaction as a capital lease. The lease
payments were determined to have a present value of
$1,342,016 at an effective interest rate of 8%. With
respect to this capitalized lease, Dean should record for
2015
a. lease expense of $200,000.
b. interest expense of $89,468 and depreciation
expense of $76,136.
c. interest expense of $107,361 and depreciation
expense of $89,468.
d. interest expense of $91,362 and depreciation
expense of $134,202.
e. None of the above
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•
•
•
The agreement requires equal rental payments at
the end of each year.
The fair value of the building on January 1, 2013 is
$4,000,000; however, the book value to Holt is
$3,300,000.
The building has an estimated economic life of 10
years, with no residual value. Yancey depreciates
similar buildings on the straight-line method.
At the termination of the lease, the title to the
building will be transferred to the lessee.
Yancey's incremental borrowing rate is 11% per
year. Holt Warehouse Co. set the annual rental to
insure a 10% rate of return. The implicit rate of the
lessor is known by Yancey, Inc.
The yearly rental payment includes $10,000 of
executory costs related to taxes on the property.
3.
What is the amount of the minimum annual lease
payment? (Rounded to the nearest dollar.)
a. $250,981
b. $640,981
c. $650,981
d. $660,981
4.
What is the amount of the total annual lease payment?
a. $250,981
b. $640,981
c. $650,981
d. $660,981
From the lessee's viewpoint, what type of lease exists in
this case?
a. Sales-type lease
b. Sale-leaseback
c. Capital lease
Operating lease
6.
From the lessor's viewpoint, what type of lease is
involved?
a. Sales-type lease
b. Sale-leaseback
c. Direct-financing lease
d. Operating lease
7.
Yancey, Inc. would record depreciation expense on this
storage building in 2013 of (Rounded to the nearest peso)
a. $0.
b. $330,000.
c. $400,000.
d. $650,981.
8.
On December 31, 2013, Lang Corporation leased a ship
from Fort Company for an eight- year period expiring
December 30, 2021. Equal annual payments of $400,000
are due on December 31 of each year, beginning with
December 31, 2013. The lease is properly classified as a
capital lease on Lang 's books. The present value at
December 31, 2013 of the eight lease payments over the
lease term discounted at 10% is $2,347,370. Assuming all
payments are made on time, the amount that should be
reported by Lang Corporation as the total obligation under
capital leases on its December 31, 2014 balance sheet is
a. $2,182,108.
b. $2,000,318.
c. $1,742,107.
d. $2,400,000.
9.
When should a lessor recognize in income a
nonrefundable lease bonus paid by a lessee on signing an
operating lease?
a. When received
b. At the inception of the lease
c. At the lease expiration
d. Over the lease term
On January 1, 2013, Yancey, Inc. signs a 10-year
noncancelable lease agreement to lease a storage building
from Holt Warehouse Company. Collectibility of lease
payments is reasonably predictable and no important
uncertainties surround the amount of costs yet to be
incurred by the lessor. The following information pertains
to this lease agreement.
•
5.
d.
10. Due to extreme financial difficulties, Art Company has
negotiated a restructuring of its 10% P5,000,000 note
payable due on December 31, 2008. The unpaid interest
on the note on such date is P500,000. The creditor has
agreed to reduce the face value to P4,000,000, forgive the
unpaid interest, reduce the interest rate to 8% and extend
the due date three years from December 31, 2008. Art
should report gain on extinguishment of debt in its 2008
income statement at:
a. P1,703,200
b. P1,203,200
c. P2,000,000
d. P540,000
11. A lease transaction that involves the sale of an asset that
is then leased back to the seller for all or part of its
remaining economic life is known as:
a. sale and leaseback
b. a novated lease;
c. an operating lease
d. leveraged lease
12. Bend Company, having experienced financial difficulties
in 2007, negotiated with a major creditor and arrived at
an agreement to restructure its notes payable on
December 31, 2007. The creditor was owed principal of
P3,600,000 and interest of P400,000 but agreed to
accept equipment worth P700,000 and note receivable
from a Bend Company’s customer with carrying amount
of P2,700,000. The equipment had an original cost of
P900,000 and accumulated depreciation of P300,000.
How much should be recognized as gain from debt
restructuring on December 31, 2007?
a. P700,000
b. P600,000
c. P400,000
d. 0
13. Due to adverse economic circumstances and poor
management, Compostella Company has negotiated a
restructuring of its ₱5,000,000 note payable to Valley
Bank. Valley Bank has agreed to reduce the face value of
the note from ₱5,000,000 to ₱4,000,000, reduce the
interest rate from 15% to 10%, and extend the due date
three years from the date of restructuring. The
restructuring will occur on December 31, 2012, the last
day of Compostella’s annual reporting period. The unpaid
interest on the restructured loan at this time is ₱750,000
which is forgiven. The tax rate is 35%. How much is the
gain on extinguishment of debt for the year 2012? (Round
off present value factors to four decimal places)
a. ₱ 550,000
b. ₱1,750,040
c. ₱2,206,720
d. ₱
0
14. On June 30, 2009, Lee Company sold equipment to an
affiliated company for P5,500,000. The equipment had a
book value of P5,000,000 and a remaining life of 10 years.
That same day, Lee leased back the equipment at P15,000
per month for 2 years with no option to renew the lease
or repurchase the equipment. The present value of the
lease payments using the appropriate interest rate was
P318,650 on June 30. Lee’s equipment rent expense for
the year ended December 31, 2009 should be:
a. P110,000
b. P90,000
c. P50,000
d. 0
(15 and 16) On January 1, 2013, Ogleby Corporation signed a
five-year noncancelable lease for equipment. The terms of the
lease called for Ogleby to make annual payments of $120,000
at the end of each year for five years with title to pass to
Ogleby at the end of this period. The equipment has an
estimated useful life of 7 years and no salvage value. Ogleby
uses the straight-line method of depreciation for all of its fixed
assets. Ogleby accordingly accounts for this lease transaction
as a capital lease. The minimum lease payments were
determined to have a present value of $454,896 at an
effective interest rate of 10%.
15. With respect to this capitalized lease, for 2013 Ogleby
should record
a. rent expense of $120,000.
b. interest expense of $45,490 and depreciation
expense of $90,978.
c. interest expense of $45,490 and depreciation
expense of $64,985.
d.
interest expense of $60,000 and depreciation
expense of $90,978.
16. With respect to this capitalized lease, for
should record
a. interest expense of $45,490 and
expense of $64,985.
b. interest expense of $40,938 and
expense of $64,985.
c. interest expense of $38,039 and
expense of $64,985.
d. interest expense of $28,938 and
expense of $64,985.
2014 Ogleby
depreciation
depreciation
depreciation
depreciation
17. Emporia Corporation is a lessee with a capital lease. The
asset is recorded at $630,000 and has an economic life of
8 years. The lease term is 5 years. The asset is expected to
have a fair value of $210,000 at the end of 5 years, and a
fair value of $70,000 at the end of 8 years. The lease
agreement provides for the transfer of title of the asset to
the lessee at the end of the lease term. What amount of
depreciation expense would the lessee record for the first
year of the lease?
a. $126,000
b. $112,000
c. $84,000
d. $70,000
18. Under a sales type lease, what is the meaning of “gross
investment in the lease” on the part of the lessor?
a. Present value of minimum lease payments
b. Present value of minimum lease payments and
present value of unguaranteed residual value.
c. Absolute amount of the minimum lease payments
d. Aggregate of minimum lease payments and
unguaranteed residual value
19. Net investment in the lease is equal to the
a. Gross investment in the lease less unearned finance
income
b. Gross investment in the lease less dealer’s profit
c. Minimum lease payments
d. Minimum lease payments less unguaranteed residual
value.