ACCT 311 Homework Assignment #7
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Homework Assignment #7
- On December 31, Year One, Ace signs a lease to use a
truck for four years. The truck has a current value of $58,600. Four
annual payments of $10,000 are to be paid with the first made on December
31, Year One. After that time, the truck (with an expected life of eight
years) will be returned to the lessor. Ace has an incremental borrowing
rate of 6 percent. The lessor has an implicit annual interest rate of 8
percent built into the contract. Ace is aware of this implicit rate. The
present value of a four-year annuity due of $10,000 at a 6 percent annual
rate is $36,700. The present value of a four-year annuity due of $10,000
at an 8 percent annual rate is $35,770. What liability should Ace report
on its December 31, Year One, balance sheet?
- $0
- $10,000
- $25,770
- $26,700
- A company leases a machine on January 1, Year One for
five years which call for annual payments of $4,000 for the first year and
then $10,000 per year after that. The present value of these payments
based on a reasonable interest rate of 10 percent is assumed to be
$38,000. This lease is an operating lease. How much expense will the
company recognize for Year One?
- $4,000
- $7,600
- $8,800
- $11,400
- On January 1, Year One, Owens buys a large warehouse
for $700,000 which it immediately sells to National Financing for
$800,000. The warehouse has an expected life of 10 years. Owens
immediately signs a contract to lease the warehouse back for its own use.
This lease is for 10 years with payments of $120,000 per year. The first
payment is made immediately. Assume that these payments were computed
using a 10 percent annual interest rate. Which of the following statements
is true?
- The $100,000 gain on the original sale must be
recognized by Owens immediately.
- The $100,000 gain on the original sale will be
recorded by Owens as other comprehensive income.
- The $100,000 gain on the original sale will be
deferred until the end of the lease and then recognized as a gain.
- The $100,000 gain on the original sale will be
deferred and then written off each year as a reduction in the
depreciation expense on the leased warehouse.
- The Turpen Company buys a machine for $30,000.
Normally, the machine would be sold to a customer for $42,000. However, in
hopes of expanding the number of available customers, Turpen leases the
machine for 4 years to the Royal Corporation. The accountants for the
Turpen Company are currently studying how this lease should be recorded
for financial reporting purposes. Which of the following statements is
true?
- Because this property is normally sold, the lease
contract must be recorded as a capital lease by Turpen.
- Because this property is normally sold, the lessee
(Royal) must report it as a sales-type lease.
- If the machine has an expected life of five years,
then both parties must report the transaction as a capital lease.
- If the lease contract gives Royal the option to buy
the machine at the end of four years, then both parties must report the
transaction as a capital lease
- On January 1, Year One, Green Company leases a machine
for four years. Because Green is a relatively new business and is
struggling with its cash flows, the lessor sets the payments as $10,000
per year for the first two years and $20,000 for the last two years. These
payments were computed based on an implicit interest rate of 10 percent
per year. The contract does not meet any of the four criteria to be
reported as a capital lease. What amount of expense should Green recognize
in Year Two?
- $5,000
- $6,000
- $10,000
- $15,000
- Boeing builds a plane for $10 million that it normally
sells for $15 million. However, on January 1, Year One, Boeing leases this
plane to Delta for $3 million per year for 7 years (the entire expected
life of the plane). Which of the following answers is correct?
- To Boeing, this lease qualifies as a direct financing
lease.
- To Delta, this lease qualifies as a sales type lease.
- Boeing will recognize a $5 million profit when the
lease is signed.
- Delta recognizes rent expense of $3 million in Year
One.
- A lessor leases property to a lessee. This contract
meets the requirements for being recorded as a capital lease. The lessor
is trying to determine whether this lease should be accounted for as a
direct financing lease or a sales-type lease. Which of the following
statements is not true?
- The total amount of profit will be more if it is a
sales-type lease than if it is a direct financing lease.
- If the lessor is either a manufacturer or a dealer in
this particular item, the lease is recorded as a sales-type lease.
- In a direct financing lease, all profit is recognized
as interest revenue over the life of the lease.
- In a sales-type lease, a normal amount of profit is
recognized at the time that the contract begins.
- The Jones Company only buys and then leases assets. It
is neither a manufacturer nor a dealer of any items. On January 1, Year
One, Jones buys equipment for $34,000 in cash. This asset is immediately
leased for 8 years, its entire life. Annual payments are $5,800 to be made
each January 1 beginning on January 1, Year One. Assume that the implicit
interest rate profit built into the contract by Jones was 10 percent.
However, the lessee’s incremental borrowing rate was only 8 percent per
year. What amount of income should Jones recognize for Year One?
- $2,256
- $2,820
- $3,400
- $4,060
- Danville Corporation buys a truck for $52,000 and
leases it to Viceroy for 8 years. At the end of that time, Viceroy can buy
the truck for $7,000 in cash. Which of the following is not true?
- If this purchase option is viewed as a bargain,
Danville should record the $7,000 as a future cash flow in accounting for
the lease even though it is not guaranteed.
- Unless the purchase option is viewed as a bargain,
Danville cannot account for this lease as a capital lease.
- The purchase option cannot be viewed as a bargain
unless it is significantly below the expected fair value of the truck on
that date.
- If this purchase option is viewed as a bargain,
Danville’s profit to be recognized in the first year will be increased.
- On January 1, Year One, AnnaLee Company buys a
warehouse for $800,000 and is in the process of leasing it to Ziton
Company for four out of its five year life. AnnaLee normally has an
implicit rate of 10 percent whereas Ziton has an incremental borrowing
rate of 8 percent. Assume the payment amounts have been computed
appropriately. For these computations assume that the present value of $1
in four years at 8 percent annual interest is .72 and at 10 percent is
.66. Assume that the present value of an ordinary annuity of $1 for four
years at 8 percent annual interest is 3.27 and at 10 percent is 3.10.
Assume that the present value of annuity due of $1 for four years at 8
percent annual interest is 3.55 and at 10 percent is 3.46. Payments are
set to be $210,000 per year with the payments to begin immediately. The
lessee has an option to buy the asset at the end of the lease for $70,000
which is viewed as a bargain. It is a direct financing lease. What is the
total increase in net income that AnnaLee will report in Year One?
- $59,000
- $62,000
- $67,000
- $70,000
- The Ace Company buys cars and sells them at 20 percent
above cost. On January 1, Year One, the company buys a car for $40,000 and
immediately leases it for its entire six year life. Assume that annual
payments for this lease will be $10,000 per year starting on January 1,
Year One. This payment amount was based on an implicit interest rate of 10
percent. How much interest revenue will Ace recognize for Year One?
- $3,000
- $3,800
- $4,000
- $4,800
- On December 31, Year One, the Reinhardt Company owns a
tractor and leases it to the Smith Company. The tractor has a life
of five years but the lease is only for four years. Which of the
following statements is NOT true for the Reinhardt Company?
- If this is a sales-type lease, profit will be
recognized immediately with interest revenue then recognized over the
next four years.
- If this is a direct financing lease, no profit is
recognized immediately but interest revenue is recognized over the next
four years.
- Based on the information, this might be an operating
lease or it might be a capital lease.
- Reinhardt must base the computation of interest
revenue on the imputed interest rate built into the contract.
- Jones buys widgets and marks them up 20 percent and
sells them. On January 1, Year One, Jones buys a widget for $30,000
but this time Jones leases the item to another company for its entire 10
year life. Jones sets the annual payments (which begin immediately)
at $5,300 in order to earn an annual interest rate of 10 percent.
How much will net income increase for Jones during Year One because of
this lease?
- $2,470
- $3,000
- $6,000
- $9,070
- On December 31, Year One, a company leases equipment
for 8 years, its entire life. Payments are $10,000 per year on December 31
with the first one made immediately. The present value of these payments
at the lessee’s incremental borrowing rate of 10 percent per year is
assumed to be $58,000. On the December 31, Year One balance sheet, what
should this lessee report as its current liability for this lease?
- $0
- $5,200
- $6,000
- $10,000
- On January 1, Year One, a company leases equipment for
8 years although the equipment has a life of 10 years. At the end of that
time, title to this property will be conveyed to the lessee. Payments are
$10,000 per year on January 1 with the first one made immediately. The
present value of these payments at the lessee’s incremental borrowing rate
of 10 percent per year is assumed to be $58,000. What amount of
depreciation expense should the lessee recognize for Year One?
- $0
- $5,800
- $6,000
- $7,250
- On January 1, Year One, the Lenoir Company leases
equipment from Burke Corporation for eight years which is the entire life
of the asset. It will be discarded at the end of that period. For Burke,
this transaction is a direct financing leases using an implicit interest
rate of 10 percent. Based on that rate, the annual payments are $12,000
beginning immediately. Lenoir is unaware of Burke’s implicit but has an
incremental borrowing rate of 8 percent. Assume that the present value of
an ordinary annuity for eight years at an annual interest rate of 8
percent is 5.75 and at 10 percent is 5.33 whereas the present value of an
annuity due for eight years at an annual interest rate of 8 percent is
6.21 and at 10 percent is 5.87. If the effective rate method is applied, what
amount of interest expense should Lenoir report for Year Two? (Round to
the nearest dollar.)
- $4,089
- $4,442
- $4,516
- $5,070
- On January 1, Year One, Alexander Company buys a
warehouse for $800,000 and is in the process of leasing it to Zebra
Company for four out of its five year life. It has no expected residual
value after five years. Alexander normally has an implicit rate of 10
percent whereas Zebra has an incremental borrowing rate of 8 percent.
Assume the payment amounts have been computed appropriately. For these
computations assume that the present value of $1 in four years at 8
percent annual interest is .72 and at 10 percent is .66. Assume that the
present value of an ordinary annuity of $1 for four years at 8 percent
annual interest is 3.27 and at 10 percent is 3.10. Assume that the present
value of annuity due of $1 for four years at 8 percent annual interest is
3.55 and at 10 percent is 3.46. Payments are set to be $300,000 per year
with the payments to begin immediately. No residual value is assumed at
the end of the lease and there is no option to buy the warehouse. It is a
sales type lease. What is the total decrease in net income that Zebra will
report in Year One?
- $287,510
- $296,570
- $315,620
- $327,450
- The Wasala Corporation leases an airplane on January 1,
Year One for eight years for payments of $20,000 per year beginning
immediately. The plane has an expected life of 10 years. The
prime rate of interest is 6 percent but Wasala has an incremental borrowing
rate of 8 percent. The present value of an ordinary annuity of $1 at
6 percent for 8 years is 6.22 and the present value of an ordinary annuity
of $1 at 8 percent for 8 years is 5.75. The present value of an
annuity due of $1 at 6 percent for 8 years is 6.58 and the present value
of an annuity due of $1 at 8 percent for 8 years is 6.19. At the end
of 8 years, title to the airplane will be conveyed to Wasala. How
much expense should Wasala recognize in Year Two? (round to the
nearest dollar)
- $17,880
- $18,108
- $19,058
- $19,748
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