1.

Major reasons why a company may become involved in leasing to other

companies is (are)
a. interest revenue.
b. high residual values.
c. tax incentives.
d. all of these.

2. Which of the following is an advantage of leasing?

a. Off-balance-sheet financing
b. Less costly financing
c. 100% financing at fixed rates
d. All of these

3. Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.

4. While only certain leases are currently accounted for as a sale or purchase, there
is theoretic justification for considering all leases to be sales or purchases. The
principal reason that supports this idea is that
a. all leases are generally for the economic life of the property and the residual
value of the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of
property.
d. during the life of the lease the lessee can effectively treat the property as if it
were owned by the lessee.
5. An essential element of a lease conveyance is that the
a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement must be held for sale by the
lessor prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased
property.

6. What impact does a bargain purchase option have on the present value of the
minimum lease payments computed by the lessee?
a. No impact as the option does not enter into the transaction until the end of the
lease term.
b. The lessee must increase the present value of the minimum lease
payments by the present value of the option price.
c. The lessee must decrease the present value of the minimum lease payments
by the present value of the option price.
d. The minimum lease payments would be increased by the present value of the
option price if, at the time of the lease agreement, it appeared certain that the
lessee would exercise the option at the end of the lease and purchase the asset
at the option price.

7. The amount to be recorded as the cost of an asset under capital lease is equal to
the
a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the
asset, whichever is lower.
c. present value of the minimum lease payments plus the present value of any
unguaranteed residual value.
d. carrying value of the asset on the lessor's books.
8. The methods of accounting for a lease by the lessee are
a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.

9. Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic
life of the leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed
90% of the fair value of the leased property.

10. Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.

11. Executory costs include

a. maintenance.
b. property taxes.
c. insurance.
d. all of these.

12. In computing the present value of the minimum lease payments, the lessee
should
 a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor,
whichever is higher, assuming that the implicit rate is known to the lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor,
whichever is lower, assuming that the implicit rate is known to the lessee.
d. none of these.

13. In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.

14. In the earlier years of a lease, from the lessee's perspective, the use of the
a. capital method will enable the lessee to report higher income, compared to the
operating method.
b. capital method will cause debt to increase, compared to the operating
method.
c. operating method will cause income to decrease, compared to the capital
method.
d. operating method will cause debt to increase, compared to the capital method.

15. A lessee with a capital lease containing a bargain purchase option should
depreciate the leased asset over the
a. asset's remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of the asset or the term of the lease, whichever is longer.
16. Based solely upon the following sets of circumstances indicated below, which set
gives rise to a sales-type or direct-financing lease of a lessor?
Transfers Ownership Contains Bargain Collectibility of Lease Any Important
By End Of Lease? Purchase Option? Payments Assured? Uncertainties?
a. No Yes Yes No
b. Yes No No No
c. Yes No No Yes
d. No Yes Yes Yes

17. Which of the following would not be included in the Lease Receivable account?
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included

18. 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 effective
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.

19. In order to properly record a direct-financing lease, the lessor needs to know how
to calculate the lease receivable. The lease receivable in a direct-financing lease
is best defined as
a. the amount of funds the lessor has tied up in the asset which is the subject of
the direct-financing lease.
 b. the difference between the lease payments receivable and the fair market
value of the leased property.
c. the present value of minimum lease payments.
d. the total book value of the asset less any accumulated depreciation recorded
by the lessor prior to the lease agreement.

20. 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.

21. When lessors account for residual values related to leased assets, they
a. always include the residual value because they always assume the
residual value will be realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more gross profit on a sales-type lease with a guaranteed residual
value than on a sales-type lease with an unguaranteed residual value.
d. All of the above are true with regard to lessors and residual values.

22. The initial direct costs of leasing

a. are generally borne by the lessee.
b. include incremental costs related to internal activities of leasing, and internal
costs related to costs paid to external third parties for originating a lease
arrangement.
c. are expensed in the period of the sale under a sales-type lease.
d. All of the above are true with regard to the initial direct costs of leasing.
23. The primary difference between a direct-financing lease and a sales-type lease
is the
a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer's or dealer's profit at the inception of the
lease.
d. allocation of initial direct costs by the lessor to periods benefited by the lease
arrangements.

24. A lessor with a sales-type lease involving an unguaranteed residual value

available to the lessor at the end of the lease term will report sales revenue in the
period of inception of the lease at which of the following amounts?
a. The minimum lease payments plus the unguaranteed residual value.
b. The present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed
residual value.
d. The present value of the minimum lease payments plus the present value of
the
unguaranteed residual value.

25. For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine
the cost of goods sold.
c. the gross profit will be the same whether the residual value is
guaranteed or unguaranteed.
d. none of these.

26. 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.

27. The Lease Liability account should be disclosed as

a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent
liabilities.
d. deferred credits.

28. To avoid leased asset capitalization, companies can devise lease agreements
that fail to satisfy any of the four leasing criteria. Which of the following is not one
of the ways to accomplish this goal?
a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of
the
property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset’s residual value.

29. If the lease in a sale-leaseback transaction meets one of the four leasing criteria
and is therefore accounted for as a capital lease, who records the asset on its
books and which party records interest expense during the lease period?
Party recording the Party recording
asset on its books interest expense
 a. Seller-lessee Purchaser-lessor
b. Purchaser-lessor Seller-lessee
c. Purchaser-lessor Purchaser-lessor
d. Seller-lessee Seller-lessee

30. In a sale-leaseback transaction where none of the four leasing criteria are
satisfied, which of the following is false?
a. The seller-lessee removes the asset from its books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the lease as an operating lease.
d. All of the above are false statements.

31. 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.

32. On December 1, 2011, Goetz Corporation leased office space for 10 years at a
monthly rental of $90,000. On that date Perez paid the landlord the following
amounts:
Rent deposit $ 90,000
First month's rent 90,000
Last month's rent 90,000
Installation of new walls and offices 495,000
$765,000
The entire amount of $765,000 was charged to rent expense in 2011. What amount
should Goetz have charged to expense for the year ended December 31, 2011?
a. $90,000
b. $94,125
c. $184,125
d. $495,000

33. On January 1, 2011, Dean Corporation signed a ten-year noncancelable lease

for certain machinery. The terms of the lease called for Dean to make annual
payments of $100,000 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 $671,008 at an effective interest rate of 8%. With respect to this capitalized
lease, Dean should record for 2011
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.
On January 1, 2011, 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.
(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is $3,000,000; however, the book
value to Holt is $2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value.
Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the
lessee.
(e) 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.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on
the
property.

34. What is the amount of the minimum annual lease payment? (Rounded to the
nearest dollar.)
a. $188,237
b. $478,236
c. $488,236
d. $498,236

35. What is the amount of the total annual lease payment?

a. $188,237
b. $478,237
c. $488,237
d. $498,237

36. From the lessee's viewpoint, what type of lease exists in this case?
a. Sales-type lease
b. Sale-leaseback
c. Capital lease
d. Operating lease

37. 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

38. Yancey, Inc. would record depreciation expense on this storage building in 2011
of (Rounded to the nearest dollar.)
a. $0.
b. $250,000.
c. $300,000.
d. $488,237.

39. If the lease were nonrenewable, there was no purchase option, title to the
building does not pass to the lessee at termination of the lease and the lease
were only for eight years, what type of lease would this be for the lessee?
a. Sales-type lease
b. Direct-financing lease
c. Operating lease
d. Capital lease

40. Metcalf Company leases a machine from Vollmer Corp. under an agreement
which meets the criteria to be a capital lease for Metcalf. The six-year lease
requires payment of $102,000 at the beginning of each year, including $15,000
per year for maintenance, insurance, and taxes. The incremental borrowing rate
for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee.
The present value of an annuity due of 1 for six years at 10% is 4.79079. The
present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf
should record the leased asset at
a. $509,256.
b. $488,661.
c. $434,366.
 d. $416,799.

41. On December 31, 2011, Lang Corporation leased a ship from Fort Company for
an eightyear period expiring December 30, 2019. Equal annual payments of
$200,000 are due on December 31 of each year, beginning with December 31,
2011. The lease is properly classified as a capital lease on Lang 's books. The
present value at December 31, 2011 of the eight lease payments over the lease
term discounted at 10% is $1,173,685. 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, 2012 balance sheet is
a. $1,091,054.
b. $1,000,159.
c. $871,054.
d. $1,200,000.

Use the following information for questions 42 and 43.

On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for
equipment. The terms of the lease called for Sauder to make annual payments of
$50,000 at the beginning of each year for five years with title to pass to Sauder at the
end of this period. The equipment has an estimated useful life of 7 years and no
salvage value. Sauder uses the straight-line method of depreciation for all of its fixed
assets. Sauder 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%.

42. In 2011, Sauder should record interest expense of

a. $15,849.
b. $29,151.
c. $20,849.
d. $34,151.

43. In 2012, Sauder should record interest expense of

 a. $10,849.
b. $12,434.
c. $15,849.
d. $17,434.

44. On December 31, 2011, Kuhn Corporation leased a plane from Bell Company for
an eight-year period expiring December 30, 2019. Equal annual payments of
$150,000 are due on December 31 of each year, beginning with December 31,
2011. The lease is properly classified as a capital lease on Kuhn’s books. The
present value at December 31, 2011 of the eight lease payments over the lease
term discounted at 10% is $880,264. Assuming the first payment is made on
time, the amount that should be reported by Kuhn Corporation as the lease
liability on its December 31, 2011 balance sheet is
a. $880,264.
b. $818,290.
c. $792,238.
d. $730,264.

Use the following information for questions 45 and 46.

On January 1, 2011, Ogleby Corporation signed a five-year noncancelable lease for
equipment. The terms of the lease called for Ogleby to make annual payments of
$60,000 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 $227,448 at an effective interest
rate of 10%.

45. With respect to this capitalized lease, for 2011 Ogleby should record
a. rent expense of $60,000.
b. interest expense of $22,745 and depreciation expense of $45,489.
c. interest expense of $22,745 and depreciation expense of $32,493.
 d. interest expense of $30,000 and depreciation expense of $45,489.

46. With respect to this capitalized lease, for 2012 Ogleby should record
a. interest expense of $22,745 and depreciation expense of $32,493.
b. interest expense of $20,469 and depreciation expense of $32,493.
c. interest expense of $19,019 and depreciation expense of $32,493.
d. interest expense of $14,469 and depreciation expense of $32,493.

47. Emporia Corporation is a lessee with a capital lease. The asset is recorded at
$450,000 and has an economic life of 8 years. The lease term is 5 years. The
asset is expected to have a market value of $150,000 at the end of 5 years, and
a market value of $50,000 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. $90,000
b. $80,000
c. $60,000
d. $50,000

48. Pisa, Inc. leased equipment from Tower Company under a four-year lease
requiring equal annual payments of $86,038, with the first payment due at lease
inception. The lease does not transfer ownership, nor is there a bargain purchase
option. The equipment has a 4-year useful life and no salvage value. If Pisa,
Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which
is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at
the lease inception? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710
3.31213 10%, 4 periods 3.48685 3.16986
a. $307,767
b. $272,728
c. $284,969
 d. $300,000

49. Pisa, Inc. leased equipment from Tower Company under a four-year lease
requiring equal annual payments of $86,038, with the first payment due at lease
inception. The lease does not transfer ownership, nor is there a bargain purchase
option. The equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s
incremental borrowing rate is 10% and the rate implicit in the lease (which is
known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a
capital lease, what is the amount of interest expense recorded by Pisa, Inc. in the
first year of the asset’s life? PV Annuity Due PV Ordinary Annuity 8%, 4 periods
3.57710 3.31213 0%, 4 periods 3.48685 3.16986
a. $0
b. $24,621
c. $17,738
d. $22,798

50. Pisa, Inc. leased equipment from Tower Company under a four-year lease
requiring equal annual payments of $86,038, with the first payment due at lease
inception. The lease does not transfer ownership, nor is there a bargain purchase
option. The equipment has a 4 year useful life and no salvage value. Pisa, Inc.’s
incremental borrowing rate is 10% and the rate implicit in the lease (which is
known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a
capital lease, what is the amount of principal reduction recorded when the
second lease payment is made in Year 2? PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986
a. $86,038
b. $61,417
c. $63,240
d. $68,300