Intermediate Accounting _ Chapter 7_Leases_part 2_quiz PDF

Preview

Summary

Chapter 8Leases Part 2 Lessor Co. entered into two contract leases. Lease #1 transfers substantially all the risks and rewards incidental to ownership of the leased asset. Lease #2 does not transfer substantially all the risks and rewards incidental to ownership of the leased asset. How should Lesso...

Description

Page |1

Chapter 8 Leases Part 2 1. Lessor Co. entered into two contract leases. Lease #1 transfers substantially all the risks and rewards incidental to ownership of the leased asset. Lease #2 does not transfer substantially all the risks and rewards incidental to ownership of the leased asset. How should Lessor Co. classify the leases? (Lease #1); (Lease #2) a. Finance, Operating c. Finance, Finance b. Operating, Finance d. Operating, Operating 2. A lessor’s gross investment in a finance lease is computed as a. lease payments plus unguaranteed residual value b. present value of (a) c. difference between (a) and (b) d. sum of (a) and (b) 3. A lessor’s unearned interest income in a finance lease is computed as a. lease payments plus unguaranteed residual value b. present value of (a) c. difference between (a) and (b) d. sum of (a) and (b) 4. Which of the following does not correctly relate to the accounting for leases? a. The underlying asset in a lease contract is recognized by the lessee in its financial statements. b. The lessor recognizes a finance lease receivable equal to the net investment in a finance lease. c. A manufacturer or dealer lessor recognizes gross profit or loss on commencement of a finance lease in accordance with its policy for outright sales. d. The lessor recognizes lease payments receivable from an operating lease as income in the period earned. e. The lessor continues to recognize an asset subject to a finance lease in its financial statements. 5. Regarding the accounting for the residual value of a leased asset, which of the following statements is incorrect? a. A lessee accounts for a residual value only if it is guaranteed. b. A lessor accounts for a residual value only if it is guaranteed. c. A lessor accounts for a residual value whether guaranteed or not. d. Both lessee and lessor will account for a residual value only if the leased asset reverts back to the lessor. 6. Under operating leases, lessors a. recognize rent income using a straight line basis, unless another method is more appropriate. b. recognize interest income using the effective interest method.

Page |2

c.

recognize different amounts of rent income each year depending on the contractual payments d. any of these

7. Security deposits that are refundable a. are treated as unearned income by lessors under an operating lease. b. are not discounted because they are normally of a short-term nature c. are treated as receivable by lessees and as payable by lessors. d. are discounted only by lessees but not by lessors 8. If the lessor recognizes rent income (lease income), then the lease must have been classified as a. finance lease c. a or b b. operating lease d. none of these 9. Which of the following statements is false regarding the accounting for leases? a. The lessor may not use the straight line basis for recognizing lease income under an operating lease if another systematic basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished. b. The amount of lease income recognized each year under an operating lease is typically constant even though the contractual payments increase every year by a certain amount specified in the contract. c. It is possible that the lessor does not depreciate the leased asset even if the lease is classified as an operating lease. d. Under an operating lease, the lessor capitalizes initial direct costs. These costs will increase the lease income each year. 10. Which of the following is correct regarding the accounting for operating leases? a. A lessor under an operating lease may classify the lease as either direct operating lease or sales type operating lease. b. A lessor includes a rent collected in advance as part of the cost of the leased asset. c. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the leased asset to be recognized in profit or loss on the same basis as rent income is recognized. d. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the leased asset to be recognized in profit or loss on the same basis as depreciation expense is recognized.

"Come to me, all you who are weary and burdened, and I will give you rest." - (Matthew 11:28-30) - END -

Use the following information for the next five questions: On January 1, 20x1, IMBROGLIO Co. leased equipment to COMPLICATION, Inc. Information on the lease is shown below:

Page |3

Cost of equipment ₱ 1,200,000 Useful life of equipment 5 years Lease term 4 years Annual rent payable at the start of each 400,000 year Interest rate implicit in the lease 10% Initial direct costs amounted to ₱80,000. The lease qualifies for sales type lease accounting. 1. How much is the gross investment in the lease on January 1, 20x1? a. 2,000,000 b. 1,600,000 d. 1,200,000 d. 1,800,000 2. How much is the net investment in the lease on January 1, 20x1? a. 1,200,000 b. 1,280,000 c. 1,394,740 d. 1,474,741 3. How much is the total interest income (finance income) to be recognized by IMBROGLIO over the lease term? a. 205,260 b. 235,260 c. 125,259 d. 525,259 4. How much is the gross profit from the sale? a. 114,740 b. 194,740 c. 125,259

d. 45,259

5. How much is the net profit from the sale? a. 125,259 b. 45,259 c. 194,740

d. 114,740

Use the following information for the next three questions: On January 1, 20x1, YATAGHAN Financing Co. leased equipment to LONG KNIFE, Inc. Information on the lease is shown below: Cost of equipment Useful life of equipment Lease term Annual rent payable at the end of each year Interest rate implicit in the lease Residual value

₱ 1,322,588 5 years 4 years 400,000 10% 80,000

The equipment will revert back to YATAGHAN at the end of the lease term. The lease is classified as direct financing lease. 6. Assuming the residual value is guaranteed, how much is the gross investment in the lease on January 1, 20x1? a. 1,600,000 b. 1,680,000 c. 1,520,000 d. 2,080,000

Page |4

7. Assuming the residual value is unguaranteed, how much is the net investment in the lease? a. 1,322,588 b. 1,267,948 c. 1,213,308 d. 1,345,981 8. How much is the total interest income to be recognized by YATAGHAN over the lease term if the residual value is unguaranteed and guaranteed, respectively? Unguaranteed Guaranteed a. 357,412 341,270 b. 341,270 357,412 c. 341,753 341,985 d. 357,412 357,412 9. Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, 20x9. Under the terms of the operating lease, rent for the first year is ₱8,000 and rent for years 2 through 5 is ₱12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease rent-free. In its December 31, 20x9, income statement, what amount should Wall report as rental income? a. 12,000 b. 11,600 c. 10,800 d. 8,000 10. As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, nine months of free rent under a five-year operating lease. The lease is effective on July 1, 20x5, and provides for monthly rental of ₱1,000 to begin April 1, 20x6. In Art's income statement for the year ended June 30, 20x6, rent income should be reported as a. 10,200 b. 9,000 c. 3,000 d. 2,550

“Rejoice always, pray continually, give thanks in all circumstances; for this is God’s will for you in Christ Jesus.” – (1 Thessalonians 5:16-18) - END -

Page |5

SOLUTIONS 1. B (400,000 x 4 years) = 1,600,000 2. C (400,000 x PV annuity due @10%, n=4) = 1,394,741 3. A (1,600,000 – 1,394,741) = 205,259 4. B (1,394,741 – 1,200,000 = 194,741 5. D (194,741 – 80,000 initial direct costs) = 114,741 6. B (400,000 x 4) + 80,000 = 1,680,000 7. A (400,000 x PV ordinary annuity @10%, n=4) + (80,000 X PV of 1 @10%, n=4) = (1,267,946 + 54,641) = 1,322,587 8. D (1,680,000 - 1,322,587) = 357,413 9. C Solution: Rent for the first year (8,000 x 6/12) Rent for the subsequent years (12,500 x 4) Total collection on rentals Divide by: Annual rent income

4,000 50,000 54,000 5 10,800

10. A Solution: Lease term in years Multiply by: No. of months in a year Lease term in months Nine months free rent Total Multiply by: Monthly rental Total rental payments on the lease Divide by: Lease term in years Annual rent income (July 1 to June 30)

5 12 60 (9) 51 1,000 51,000 5 10,200...