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Exam 21: Accounting for Leases

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Question 21

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Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be

A) expensed in the same period that the expenditure is made
B) recorded as a prepaid asset and allocated to expense over the lease term
C) deferred and recognized as a reduction in the interest rate implicit in the lease
D) directly charged (debited) to Retained Earnings

E) A) and B)
F) A) and C)

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Question 22

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Depreciation expense will be recorded in the accounts of the

A) lessee for operating leases
B) lessor for operating leases
C) lessor for direct financing leases
D) lessor for sales-type leases

E) A) and B)
F) All of the above

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Question 23

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When a lessee makes periodic cash payments for a capital lease, which of the following accounts is decreased?

The lessee's footnote disclosures should include the future minimum rental payments as of the date of the latest balance sheet presented, in the aggregate and for a certain number of succeeding fiscal years.This number of years is

Which of the following items should be included in the calculation of the lessor's gross receivable? $\begin{array}{llll}&\text { Periodic Lease } & \text { ExecutoryCosts } & \text { Unguaranteed } \\&\text { Rental Payments } & \text { Paid by Lessee } & \text { Residual Value }\\\text { I. } & \text { Yes } & \text { Yes } & \text { Yes } \\\text { II. } & \text { Yes } & \text { Yes } & \text { No } \\\text { III. } & \text { Yes } & \text { No } & \text { No } \\\text { IV } & \text { Vees } & \text { No } & \text { Yes }\end{array}$

Ginnie, Inc.entered into a five-year capital lease on December 31, 2010.This lease requires five minimum annual lease payments due on December 31 of each year.The first minimum payment was paid on December 31, 2010.This payment included which of the following? $\begin{array}{ll}&\text { Interest Expense}&\text { Lease Liability}\\\text {I.}&\text { No } & \text { Yes } \\\text {II.}&\text { Yes } & \text { No } \\\text {III.}&\text { Yes } & \text { Yes } \\\text {IV.}&\text { No } & \text { No }\end{array}$

Which of the following is not a required disclosure by a lessee of an operating lease?

For a sales-type lease, cost of goods sold is valued by the lessor at

A lessor enters into a sales-type lease.Which of the following statements is true if the leased asset has an unguaranteed residual value?

In a sales-leaseback transaction

According to current GAAP, leased property recorded as a capital lease normally should be reported as a long-term or intangible asset on the balance sheet of the lessee and the lessor as follows: $\begin{array}{lll}&\text { Lessee}&\text { Lessor }\\\text { I. } & \text { included } & \text { included } \\\text { II. } & \text { included } & \text { not included } \\\text { III. } & \text { not included } & \text { not included }\\\text { IV. } & \text { not included } & \text { included }\end{array}$

Any initial direct costs incurred by the lessor for a sales-type lease should be

A six-year operating lease requires annual rent payments of $15, 000 for years 1, 2, and 3, and annual rent payments of $10, 000 for years 4, 5, and 6.The agreement also requires the lessor to pay a $1, 800 annual insurance premium for the leased property.Which of the following amounts should be recognized as the rental revenue in year 1 by the lessor?

Which of the following statements is true about initial direct costs?

Match each term to its definition by placing the appropriate letter in the space provided

When a lessor receives cash on an operating lease, which of the following accounts is increased?

Exhibit 21-2 On January 1, 2010, Maury Company leased equipment, signing a five-year lease that requires annual lease payments of $20, 000.The lease qualifies as a capital lease.The payments are made at year-end, and the first payment will be made at December 31, 2010.In addition, Maury guarantees the residual value to be $10, 000 at the end of the lease term.Maury correctly uses the lessor's implicit interest rate, which is 12%.The present value factors for five periods at 12% are as follows: $\begin{array}{llr} \text {Present value of \$ 1 } &0.567427\\ \text { Present value of ordinary annuity of \( \$ 1 \) } &3.604776\\\end{array}$ -Refer to Exhibit 21-2.If the Maury Company uses the straight-line method of depreciation for its assets, the depreciation expense for the leased equipment for the year ending December 31, 2010, is

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows: $\begin{array}{llr} \text { Present value of \$ 1 for \( n=1 \) } &0.934579\\ \text { Present value of \( \$ 1 \) for \( n=5 \) } &0.712986\\ \text { Present value of an ordinary annuity for \( n=5 \) } &4.100197\\ \text { Present value of an annuity due for \( n=5 \) } &4.387211\\\end{array}$ -Refer to Exhibit 21-5.If Chicago requires a 7% annual return, how much gross profit will Chicago record at the inception of the lease?

Which of the following items would not be included in the calculation of the capital lease obligation?

If a lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet, the lease relating to the accounts would be classified as a(n)