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Exam 15: Leases

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Question 61

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M Corp. recorded a capital lease in February. The company's December 31 statement of cash flows using the direct method will report

A) a cash inflow from investing activities.
B) a cash outflow from financing activities.
C) a cash outflow from investing activities.
D) a cash inflow from operating activities.The company would report the acquisition of an asset and its financing with a capital lease as a significant noncash investing and financing activity in the disclosure notes to the financial statements.

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

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Question 62

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Northwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2009. Hi-Tech manufactured the equipment at a cost of $90,000. There is no expected residual value. Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2009 and 2010. Assume a December 31 year-end. $\begin{array}{l}\text { Other information: }\\\begin{array} { l l } \text { Lease term } & 3 \text { years } \\\text { Annual payments } & \$ 40,000 \text { on January } 1 \text { each year } \\\text { Life of asset } & 3 \text { years } \\\text { Implicit interest rate } & 8 \% \\\text { Incremental rate } & 8 \% \\\text { PV, annuity due, } 3 \text { periods, } 8 \% & 2.7833 \\\text { PV, ordinary annuity, } 3 \text { periods, } 8 \% & 2.5771\end{array}\end{array}$

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Question 63

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Differentiate between guaranteed and unguaranteed residual value of leased property. Does the difference affect the lessor's accounting for the lease?

On a sale-leaseback transaction, any gain on the "sale" portion of the transaction is recognized immediately.

P Corp. leased an asset to L Corp. using an operating lease in February. P Corp.'s December 31 statement of cash flows will report

What is a bargain purchase option and when do the parties to a lease know if it exists?

Discuss the financial statement disclosure requirements for all leases entered into by the lessee.

Technoid would account for this as:

Distinguishing between operating and non-operating leases is due in large part to the accounting concept of:

Discuss the economic advantages of leasing.

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West. The cost of the asset is $600,000. The expected economic life of the asset is ten years. The lease term is 5 years. Using the straight-line method, what would West record as annual depreciation?

What is the effective annual interest rate charged to Reagan on this lease?

A noncancelable lease contains a bargain purchase option. The fair value of the asset exceeds the lessor's cost of the asset. Collectibility of the lease payments is assured and there are no material cost uncertainties surrounding the lease. Therefore, the lease will be accounted for by the lessor as a(n) :

ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $120,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is ten years. The lease term is 5 years. The asset is expected to have a residual value of $2,000 at the end of ten years. Using the straight-line method, what would Best record as annual depreciation?

On December 31, 2009, Perry Corporation leased equipment to Admiral Company for a 5-year period. The annual lease payment, excluding executory costs is $40,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2009. The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2009, by what amount will Perry's pretax earnings increase from this lease?

Of the four criteria for a capital lease, the one that most often is the decisive criteria is: