acct557 week 5 quiz-solutions

Student Answer:  operating and sales leaseback methods.   operating and capital lease methods.   leveraged and operating lease methods.   None of the above Instructor Explanation:See Chapter 21.

  Points Received: 5 of 5

  Comments:

(TCO D) Current GAAP requires

Student Answer:  that leases are not capitalized.   that all long-term leases should be capitalized.   that all leases are capitalized.   that installment sale-type leases are capitalized. Instructor Explanation:See Chapter 21.

  Points Received: 5 of 5

  Comments:

(TCO D) Pirate, Inc. leased equipment from Sho

reline Enterprises under a four-year lease requiring e

qual annual payments of $320,000, with the first payme

nt due at lease inception. The lease does not transfer

ownership, nor is there a bargain purchase option. Th

e equipment has a 4-year useful life and no salvage va

lue. Pirate, Inc.’s incremental borrowing rate is 10%

and the rate implicit in the lease (which is known by

Pisa, Inc.) is 8%. Assuming that this lease is properl

y classified as a capital lease, what is the amount of

interest expense recorded by Pirate, Inc. in the firs

t year of the asset’s life?                                       

                         PV Annuity Due PV Ordinary An

nuity

            8%, 4 periods               3.5771  

            3.31213

            10%, 4 periods             3.4868

5            3.16986

Student Answer:  0   $91,574   $65,974   $84,791 Instructor Explanation:See Chapter 21.  ((320000 * 3.5771) - 320000) * 0.08

  Points Received: 5 of 5

  Comments:

(TCO D) On January

2, 2013, Bentley Co. leases equipment from Harry's Lea

sing Company with five equal annual payments of $24000

0 each, payable beginning December 31, 2013. Bentley C

o. agrees to guarantee the $20000 residual value of th

e asset at the end of the lease term. Bentley’s increm

ental borrowing rate is 10%, however it knows that Har

ry’s implicit interest rate is 8%. What journal entry

would Harry's Leasing Company make at January 2, 2013

assuming this is a direct–financing lease?

                                     PV Annuity Due PV

Ordinary Annuity    PV Single Sum

            8%, 5 p

eriods                 4.31213                 3.99271       

                 0.68508

            10%, 5 periods               4.16986

                 3.79079                        0.62092

Student Answer:  Lease Receivable                 $971,952                      Equipment                                $971,952   Lease Receivable                  $922,208                      Equipment                                $922,208   Lease Receivable                  $1,220,000                   Equipment                               $1,220,000   Lease Receivable                 

$958,250                      Loss                                     $261,750            Equipment                              $1,220,000 Instructor Explanation:See Chapter 21. (240000 * 3.99271) + (20000 * 0.68508)

  Points Received: 5 of 5

  Comments:

(TCO D) Lease A does not contain a bargai

n purchase option, but the lease term is equal to 90%

of the estimated economic life of the leased property.

Lease B does not transfer ownership of the property t

o the lessee by the end of the lease term, but the lea

se term is equal to 75% of the estimated economic life

of the leased property. How should the lessee classif

y these leases?

Student Answer:  (Lease A) Capital lease      (Lease B) Capital lease   (Lease A) Operating lease      (Lease B) Operating lease   (Lease A) Operating lease      (Lease B) Capital lease   (Lease A) Capital lease      (Lease B) Operating lease Instructor Explanation:See Chapter 21.

  Points Received: 5 of 5

  Comments:

(TCO D) Carl Leasing,

Inc. agrees to lease medical equipment to Sally, Inc.

on January 1, 2012. They agree on the following terms.

1) The normal selling price

of the medical equipment is $410,000 and the cost of t

he asset to Carl Leasing, Inc. was $255,000.          

2) Sally, Inc. will pay all maintenance, insurance,

and tax costs directly and annual payments of $55,000

on January 1 each year.     

3) The lease begins on J

anuary 1, 2012 and payments will be in equal annual in

stallments.           

4) The lease is noncancelable w

ith no renewal option. The lease term is 10 years (the

same as the estimated economic life).            

5)

At the end of the lease, the medical equipment will re

vert to Carl Leasing, Inc. and have an unguaranteed re

sidual value of $35,000. Their implicit interest rate

is 10%.          

6) Carl Leasing, Inc. incurred costs

of $4,600 in negotiating and closing the lease. There

are no uncertainties regarding additional costs yet t

o be incurred and the collectability of the lease paym

ents is reasonably predictable. 

Required

:          

a) Determine what type of lease this would

be for the lessee and calculate the initial obligatio

n.   

b) Prepare Sally, Inc.'s amortization schedule f

or the lease terms.           

c) Prepare all the jour

nal entries for Sally, Inc. for 2012. Assume a calenda

r year fiscal year.

Student Answer: 0 Instructor Explanation:a) Lease is a capital lease because: (1) the lease term exceeds 75% of the asset’s economic life and (2) the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset.             Initial Obligation Under Capital Leases:   Minimum lease payments ($55,000) X PV of an annuity due for 10 periods at 10% (6.75902)          $371,746           b) Lessee’s journal entries:                                                                    Leased Equipment         $371,746                                   Lease Liability  $371,746                           (To record the lease of computer equipment using capital lease method)

                                    Lease Liability    $55,000                                     Cash     $55,000                             (To record the first rental payment)                                                    31-Dec-12                                 Interest Expense           $31,675                                     Interest Payable            $31,675                            (To record accrual of annual interest on lease obligation)                                                         Depreciation Expense   $37,175                                    Accum Depr—Capital Leases                 $37,175                 (To record depreciation expense for first year) 

  Points Received: 0 of 15

  Comments: