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Exam 15: Leases

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Question 1

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Hydra Company entered into a direct-financing lease with Bridges Company for the use of an asset which cost Hydra $195,000.The lease agreement contained a bargain purchase option effective immediately after the fifth rental,which provided that Bridges could purchase the asset at that time.The estimated life of the asset was 10 years with an estimated residual value of $500.Assuming that Bridges uses straight-line depreciation,Bridges's annual depreciation expense would be

A) $19,500
B) $19,450
C) $19,550
D) $19,000

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

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Question 2

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Which of the following would be considered an executory cost?

A) Minimum lease payments
B) Interest expense incurred
C) Bargain purchase option
D) Maintenance costs

E) B) and C)
F) B) and D)

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Question 3

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In a lease that is recorded as an operating lease by the lessee,the equal monthly rental payments should be

On December 31,2014,Behring Enterprises leased equipment from R & R Equipment Rental.Pertinent lease transaction data are as follows: Behring should record the equipment on the books at

On January 1,Landau Company signed a ten-year noncancelable lease for a new machine,requiring $45,000 annual payments at the beginning of each year.The machine has a useful life of 15 years,with no salvage value.Title passes to Landau at the lease expiration date.Landau uses straight-line depreciation for all of its plant assets.Aggregate lease payments have a present value on January 1 of $352,000,based on an appropriate rate of interest.For the first year,Landau should record depreciation (amortization) expense for the leased machine at

Initial direct costs incurred by a lessor in consummating a sales-type lease are

On January 1,Blalock Company as lessee signed a ten-year noncancelable lease for a machine with annual payments of $60,000.The first payment was also made on January 1.Blalock appropriately treated this transaction as a capital lease.The ten lease payments have a present value of $405,000 at January 1,based on implicit interest of 10 percent.For the first year,Blalock should record interest expense of

The inception of a lease is January 1,2014.A third party guarantees the residual value of the asset under the lease,estimated to be $12,000 at January 1,2019,the end of the lease term.Annual lease payments are $10,000 due each December 31,beginning December 31,2014.The last payment is due December 31,2018.Both the lessor and lessee use 10% as the interest rate.The remaining useful life of the asset was six years at the inception of the lease. What is the net asset balance for the lessor,and net liability balance for the lessee,at the date of the inception of the lease? Net Asset (Lessor) Net Liability (lessee)

Security Inc.manufactures equipment that is sold or leased.On December 31,2014,Security leased equipment to Quirky for a five-year period expiring December 31,2019,at which date ownership of the leased asset will be transferred to Quirky.Equal $40,000 payments under the lease are due on December 31 of each year.The first payment was made on December 31,2014.Collectibility of the remaining lease payments is reasonably assured,and Security has no material cost uncertainties.The normal sales price of the equipment is $144,000 and cost is $110,000.For the year ended December 31,2014,how much income should Security recognize from the lease transaction?

On January 1,2014,Bullitt Corporation sold a machine to Sting Corporation and simultaneously leased it back for ten years.The following information is available regarding the lease: How much profit should Bullitt recognize on January 1,2014,on the sale of the machine?

In a lease that is recorded as a direct financing lease by the lessor,unearned revenue

Soundesign Company entered into a lease of special equipment to LabCorp Company.The lease term was six years.The equipment cost Soundesign $40,000 and Soundesign plans to earn a $4,000 dealer profit.Soundesign's implicit rate on the lease is 12 percent. As a result of this agreement,Soundesign will receive year-end lease payments of

Canarsie Company leased equipment to Fulton Inc.on January 1,2014.The lease is for an eight-year period expiring December 31,2021.The first of eight equal annual payments of $900,000 was made on January 1,2014.Canarsie had purchased the equipment on December 29,2013,for $4,800,000.The lease is appropriately accounted for as a sales-type lease by Canarsie.Assume that the present value at January 1,2014,of all rent payments over the lease term discounted at a 10 percent interest rate was $5,280,000.What amount of interest revenue should Canarsie record in 2015 (the second year of the lease period) as a result of the lease?

Celestion,Inc. ,leased equipment to Speaker Company on January 1,2014.The lease is for a five-year period ending January 1,2019.The first equal annual payment of $1,200,000 was made on January 1,2014.The cash selling price of the equipment is $5,174,552,which is equal to the present value of the lease payments at 8%.Celestion purchased the equipment for $4,300,000. -Celestion should account for this lease as

The lessor capitalizes and amortizes initial direct costs for all types of leases except

Generally accepted accounting principles require that certain lease agreements be accounted for as purchases.The theoretical basis for this treatment is that a lease of this type

For a capital lease,the amount recorded initially by the lessee as a liability should

A lease agreement included the following provisions: How much interest revenue is recognized in 2014 by the lessor,assuming a calendar-year fiscal year?

Which of the following statements characterizes lessor accounting for residual values?

Neils Company leased an asset for use in its factory.The lease agreement specifies that Neils is to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct-financing lease since Neils was allowed to lease the asset at its cost of $14,000 (the present value of the lease payments) .The lessor receives a 12 percent rate of return on the lease.The estimated residual value at the end of the lease term is zero. If the lease was classified as a capital lease by Neils,how much annual depreciation would Neils record using the straight-line method?