Question

Please answer 1-5!

1.On 1/1/17 CherryCoke from Corp., to

$40,000 at the end of each year (beginning 12/31/17) for 10 years. The lease is cancelable at any time and is designated as an operating lease. Cherry Coke Zero reports on an annual basis every December 31.

Which of the following accounts will Cherry Coke Zero (the lessee) debit at the time of the first interest payment (12/31/17)?

Leased equipment

b.      Cash

c.       Rent Expense

d.      Depreciation Expense

e.       Interest Expense

2.Astros Corporation owns pitching machine equipment which it agrees to lease to Dodgers Company. The following information pertains to the non-caccalable lease agreement:

Lease term	5 years
Estimated useful life of equipment	9 years
Present value of minimum lease payments	$40,000
Fair value of the asset at lease initiation	$50,000
Cost of the asset (to Cubbies)	$28,000

At the end of the lease, Dodgers Company must return the equipment to Astros, and there is no option to purchase the asset. Collectibility on this lease is reasonably assured, and there are no uncertainties regarding the amount of reimbursable costs. How should Astros (the lessor) classify this lease?

Operating lease

b.      Sales-type lease

c.       Direct-financing lease

d.      Indirect-financing lease

e.       None of the above

3. Mitchell Corp. is an equipment manufacturer. On January 1, 2017, Mitchell Corp. leases equipment to Gobert Company under a non-cancelable, sales-type lease agreement with the following terms:

Lease term 6 years

present value of min. lease payments $500,000

Estimated useful life of equipment 6 years

unguaranteed residual value 10,000

unguaranteed residual value 10,000

annual lease payments $98,884

implicit interest rate 8%

cost to manufacture $450,000

When Mitchell Corp. (the lessor) records the lease initiation on 1/1/17, what amount (if any) will be debited to ‘Cost of Goods Sold’?

a. $450,000

b. $443,698

c. $442,376

d.   $444,716

e. There will not be a debit to ‘Cost of Goods Sold’

f. None of the above

4.On January1, 2018 Slow Build Corp. leases a new machine to Providence Company under the following non-cancelable lease terms:

Lease term / machine useful life	5 years
Incremental borrowing rate (Providence)	14%
Implicit return (Slow Build, known to Providence)	12%
Guaranteed residual value	3,000
Annual lease payments (each 1/1)	$55,000

What is the present value of the minimum lease payments on this lease?

a.	222,054
b.	198,263
c.	199,965
d.	223,756
e.	None of the above

5.

During 2017, Veridian Dynamics changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Income information under both methods for 2015-2017 appears below:

Completed-contract method     Percentage-completion method

	2015	2016	2017	2015	2016	2017
Pre-tax financial income	475,000	625,000	700,000	900,000	950,000	1,050,000
Income tax expense, 40%	190,000	250,000	280,000	360,000	380,000	420,000
Net Income	285,000	375,000	420,000	540,000	570,000	630,000

Assuming an income tax rate of 40% for all years, which of the following should be debited during 2017 as part of the journal entry required for the change in accounting principle?

$450,000 debited to the (beginning) retained earnings balance

b.      $660,000 debited to ‘net loss’ on the 2017 income statement

c.       $300,000 debited to ‘deferred tax asset’

d.      $750,000 debited to ‘Construction-in-process’ (CIP)

e.       None of the above

Answer 1

Answer 1

e. Interest expenses will be debited.

Answer 2

a. Operating Lease

Answer 3

e. There will not be a debit to ‘Cost of Goods Sold’

Answer 4

c.

199,965

Statement of calculation of present value of minimum lease payment

Year	M.L.P inclusive GRV	PVF@12%*	Present Value
1	$ 55,000	0.8929	$ 49,109
2	$ 55,000	0.7972	$ 43,846
3	$ 55,000	0.7118	$ 39,149
4.	$ 55,000	0.6355	$ 34,952
5	$ 58,000	0.5674	$ 32,909
	Total		$ 199,965

*It is required that the lessee will use their own incremental borrowing rate as a discount rate when calculating the present value of the minimum lease payments at the beginning of the lease term unless the lessee is aware of the lessor's implicit rate of return and the lessor's rate of return is less than the lessee's incremental borrowing rate.