QUIZ #5 - CHAPTER 21
Name: __________________________ Date: _____________
1. A lessee had a ten-year capital lease requiring equal annual payments. The reduction of
the lease liability in year 2 should equal
A) the current liability shown for the lease at the end of year 1.
B) the current liability shown for the lease at the end of year 2.
C) the reduction of the lease liability in year 1.
D) one-tenth of the original lease liability.
2. Mayer Company leased equipment from Lennon Company on July 1, 2008, for an eightyear period expiring June 30, 2016. Equal annual payments under the lease are
$300,000 and are due on July 1 of each year. The first payment was made on July 1,
2008. The rate of interest contemplated by Mayer and Lennon is 8%. The cash selling
price of the equipment is $1,861,875 and the cost of the equipment on Lennon's
accounting records was $1,650,000. Assuming that the lease is appropriately recorded
as a sale for accounting purposes by Lennon, what is the amount of profit on the sale
and the interest income that Lennon would record for the year ended December 31,
2008?
A) $0 and $0
B) $0 and $62,475
C) $211,875 and $62,475
D) $211,875 and $74,475
3. Hite Company has a machine with a cost of $400,000 which also is its fair market value
on the date the machine is leased to Rich Company. The lease is for 6 years and the
machine is estimated to have an unguaranteed residual value of $40,000. If the lessor's
interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments
would be
A) $92,361.
B) $82,465.
C) $78,180.
D) $66,667.
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4. 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?
A)
B)
C)
D)
a
b
c
d
5. When a company sells property and then leases it back, any gain on the sale should
usually be
A) recognized in the current year.
B) recognized as a prior period adjustment.
C) recognized at the end of the lease.
D) deferred and recognized as income over the term of the lease.
Use the following to answer question 6:
On January 1, 2008, Dalton Corporation signed a five-year noncancelable lease for equipment.
The terms of the lease called for Dalton to make annual payments of $50,000 at the beginning of
each year for five years with title to pass to Dalton at the end of this period. The equipment has
an estimated useful life of 7 years and no salvage value. Dalton uses the straight-line method of
depreciation for all of its fixed assets. Dalton accordingly accounts for this lease transaction as a
capital lease. The minimum lease payments were determined to have a present value of $208,493
at an effective interest rate of 10%.
6. In 2008, Dalton should record interest expense of
A) $15,849.
B) $29,151.
C) $20,849.
D) $34,151.
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Use the following to answer question 7:
On January 2, 2008, Martinez, Inc. signed a ten-year noncancelable lease for a heavy duty drill
press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with
title passing to Martinez at the expiration of the lease. Martinez treated this transaction as a
capital lease. The drill press has an estimated useful life of 15 years, with no salvage value.
Martinez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were
determined to have a present value of $900,000, based on implicit interest of 10%.
7. In its 2008 income statement, what amount of depreciation expense should Martinez
report from this lease transaction?
A) $150,000
B) $100,000
C) $90,000
D) $60,000
Use the following to answer question 8:
Eddy leased equipment to Hoyle Company on May 1, 2008. At that time the collectibility of the
minimum lease payments was not reasonably predictable. The lease expires on May 1, 2009.
Hoyle could have bought the equipment from Eddy for $3,200,000 instead of leasing it. Eddy's
accounting records showed a book value for the equipment on May 1, 2008, of $2,800,000.
Eddy's depreciation on the equipment in 2008 was $360,000. During 2008, Hoyle paid $720,000
in rentals to Eddy for the 8-month period. Eddy incurred maintenance and other related costs
under the terms of the lease of $64,000 in 2008. After the lease with Hoyle expires, Eddy will
lease the equipment to another company for two years.
8. IGNORING INCOME TAXES, the amount of expense incurred by Hoyle from this
lease for the year ended December 31, 2008, should be
A) $296,000.
B) $360,000.
C) $656,000.
D) $720,000.
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9. On January 1, 2008, Penn Corporation signed a ten-year noncancelable lease for certain
machinery. The terms of the lease called for Penn to make annual payments of $100,000
at the end of each year for ten years with title to pass to Penn at the end of this period.
The machinery has an estimated useful life of 15 years and no salvage value. Penn uses
the straight-line method of depreciation for all of its fixed assets. Penn accordingly
accounted for this lease transaction as a capital lease. The lease payments were
determined to have a present value of $671,008 at an effective interest rate of 8%. With
respect to this capitalized lease, Penn should record for 2008
A) lease expense of $100,000.
B) interest expense of $44,734 and depreciation expense of $38,068.
C) interest expense of $53,681 and depreciation expense of $44,734.
D) interest expense of $45,681 and depreciation expense of $67,101.
10. If the residual value of a leased asset is guaranteed by a third party
A) it is treated by the lessee as no residual value.
B) the third party is also liable for any lease payments not paid by the lessee.
C) the net investment to be recovered by the lessor is reduced.
D) it is treated by the lessee as an additional payment and by the lessor as realized at
the end of the lease term.
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