Question

1. The methods of accounting for a lease by a lessee are

a. operating and sales-type lease methods.

b. operating and finance lease methods.

c. operating and direct financing lease methods.

d. none of these answers are correct.

    2.     In computing the present value of the lease payments, the lessee should

a.   use its incremental borrowing rate in all cases.

b.   use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

c.   use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

d.   use the implicit rate in all cases.

    3.     For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.

b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold.

c. assets are depreciated by the lessor.

d. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.

    4.     On December 31, 2018, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2026. Equal annual payments of $500,000 are due on December 31 of each year, beginning with December 31, 2018. The lease is properly classified as a finance lease on Lang ‘s books. The present value at December 31, 2018 of the eight lease payments over the lease term discounted at 10% is $2,934,213. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total liability for finance leases on its December 31, 2019 balance sheet is

a.   $2,177,634.

b.   $2,500,397.

c.   $2,727,635.

d.   $3,000,000.

    5.     Harter Company leased machinery to Stine Company on July 1, 2018, for a ten-year period expiring June 30, 2028. Equal annual payments under the lease are $250,000 and are due on July 1 of each year. The first payment was made on July 1, 2018. The rate of interest used by Harter and Stine is 9%. The lease receivable before the first payment is $1,750,000 and the cost of the machinery on Harter’s accounting records was $1,550,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2018?

a. $157,500

b. $135,000

c. $67,500

d. $0

Answer 1

Answer:

1.)

Option (b) Operating and Finance lease methods

2.)

Option (b)  use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

3.)

Option (a) the sales price includes the present value of the unguaranteed residual value

4.)

$2,934,213 - $500,000 =$2,434,213
$2,434,213*10% =$243,421
$2,434,213-($500,000-$243,421) =$2,177,634

Option (a) $2,177,634

5.)

Amount of interest would Harter record for the year ended December 31, 2018 = Balance Outstanding after payment on January 1 2018 * interest
=(1,750,000 - 250,000)*9%
=$135,000

Option (b) $135,000