1. On December 31, 2011, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B's December 31, 2011, balance sheet, the deferred revenue from the sale of this machine should be
Sales price $720,000
Carrying amount 660,000
Present value of lease rentals 68,200 ($6,000 for 12 months at 12% Estimated remaining useful life 12 years
A. $60,000.
B. $68,200.
C. $8,200.
D. $0
2. C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings, the rate of return on assets is immediately increased when C records
A Capital Lease An Operating Lease
a. yes yes b. no no c. yes no d. no yes
A. Option b
B. Option c
C. Option a
D. Option d
Operating leases don't affect assets, liabilities, or equity. A capital lease increases assets and liabilities the same amount and thus has no effect of equity, which is A - L = Equity. Because assets, the denominator, increase and earnings remain the same, the rate of return decreases.
3. If the lessor retains title to leased property under the terms of the lease,
A. the amount to be recovered through periodic lease payments is increased by the present value of the residual amount.
B. the amount to be recovered through periodic lease payments is reduced by the present value of the residual amount.
C. the amount to be recovered will be the same as if there were no residual value.
D. the lessor will record a greater amount of depreciation due to the residual value.
4. Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
|
Payment
|
Cash
|
Effective Interest
|
Decrease on balance
|
Outstanding balance
|
|
|
|
|
|
$8,640,967
|
|
1
|
$300, 000
|
345,639
|
345,639
|
8,686,606
|
|
2
|
300,000
|
347,464
|
347,464
|
8,734,070
|
|
3
|
300,00
|
349,363
|
349,363
|
8,783,433
|
|
4
|
300,000
|
|
|
|
What would be the total interest cost of the bonds over their full term?
A. $7,359,033
B. $1,359,033
C. $6,000,000
D. $4,640,967
5. On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2016. There's no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.
Reagan's lease amortization schedule appears below:
Dec. 31 Payments Interest decrease balance Balance
2010 $519,115
2010 $90,000 $90,000 429,115
2011 90,000 $17,165 72,835 356,280
2012 90,000 14,251 75,749 280,531
2013 90,000 11,221 78,779 201,752
2014 90,000 8,070 81,930 119,822
2015 90,000 4,793 85,207 34,615
2016 36,000 1,385 34,615 0
At what amount would Reagan record the leased asset at inception of the agreement?
A. $429,115
B. $540,000
C. $576,000
D. $519,115
6. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What is the carrying value of the bonds as of December 31, 2012?
A. $11,432,379
B. $11,256,109
C. $11,316,611
D. $11,375,350
7. When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes is
A. credited to sales revenue at the exchange date.
B. treated as a current liability at the exchange date.
C. recorded as interest revenue at the exchange date.
D. recorded as interest receivable at the exchange date.
8. On June 30, 2011, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2011, and mature on June 30, 2018. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2011?
A. $60,000
B. $32,000
C. $46,000
D. $40,000
9. On January 1, 2011, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2021. Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying value reported in the December 31, 2011, balance sheet?
A. $1,040,000
B. $1,045,000
C. $982,000
D. $987,000
10. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms: * Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015. * Lease term: 5 years (10 semiannual payments)
* No residual value; no bargain purchase option
* Economic life of equipment: 5 years
* Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually
* Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
What is the net carrying value of the lease liability in Lone Star's June 30, 2011 balance sheet? Round your answer to the nearest dollar.
A. $21,000,000
B. $2,466,754
C. $17,533,246
D. $15,943,154
11. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What is the stated annual rate of interest on the bonds?
A. 4%
B. 8%
C. 6%
D. 3%
12. MSG Corporation has $100,000 of 10-year, 6% bonds outstanding on December 31, 2010. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000.
MSG uses straight-line amortization. On May 1, 2011, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement?
A. $667 ordinary gain
B. $667 extraordinary loss
C. $667 ordinary loss
D. $667 extraordinary gain
13. If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the
A. lessee will reduce the last year's depreciation.
B. lessee must pay the lessor the amount of the excess.
C. lessor must compensate the lessee for the excess.
D. lessor isn't obligated to compensate the lessee for the excess.
14. On January 1, 2011, Packard Corporation leased equipment to Hewlitt Company. The lease term is 8 years. The first payment of $450,000 was made on January 1, 2011. Remaining payments are made on December 31 each year, beginning with December 31, 2011. The equipment cost Packard Corporation $2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2012, balance sheet?
A. $1,509,000
B. $1,950,000
C. $1,704,900
D. $1,959,000
15. On January 1, 2011, Princess Corporation leased equipment to King Company. The lease term is 8 years. The first payment of $675,000 was made on January 1, 2011. The equipment cost Princess Corporation $3,600,000. The present value of the minimum lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2012 on this lease?
A. $328,500.
B. $293,850.
C. $261,000.
D. $325,350.
16. S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an) Return on Assets Debt/Equity Ratio
a. increase increase
b. decrease decrease
c. increase decrease
d. decrease increase
A. Option a
B. Option d
C. Option c
D. Option b
17. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015.
Lease term: 5 years (10 semiannual payments)
No residual value; no bargain purchase option
Economic life of equipment: 5 years
Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually
Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Lone Star Company would account for this as a(an)
A. capital lease.
B. sales-type lease.
C. direct financing lease.
D. operating lease.
18. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015.
Lease term: 5 years (10 semi-annual payments)
No residual value; no bargain purchase option
Economic life of equipment: 5 years
Implicit interest rate and lessee's incremental borrowing rate: 5% semi-annually
Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Technoid would account for this as a(an)
A. capital lease.
B. direct financing lease.
C. sales-type lease.
D. operating lease.
19. On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2016.
There's no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.
Reagan's lease amortization schedule appears below:
What is the carrying value of the lease liability on Reagan's December 31, 2012 balance sheet (after the third lease payment is made)?
A. $266,280
B. $356,280
C. $280,531
D. $190,530
20. Francisco leased equipment from Julio on December 31, 2011. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year. The present value of the lease is $1,020,000.
Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2012?
A. $824,400.
B. $792,000.
C. $807,000.
D. $806,400.