Chapter 21 CPA
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1. C: 100. Lease A does not contain a bargain purchase option, but the lease term
is equal to 90
percent of the estimated economic life of the leased property. Lease B does not
transfer ownership of the property to the lessee by the end of the lease term, but
the lease term is equal to 75 percent of the estimated economic life of the leased
property. How should the lessee classify these leases?
2. A: 101. On December 31, 2018, Burton, Inc. leased machinery with a fair value of
$1,575,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease
requiring annual payments of $300,000 beginning December 31, 2018. The lease
is appropriately accounted for by Burton as a capital lease. Burton's incremental
borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments
is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2018 balance sheet, Burton should report a lease liability of
a. $1,137,240.
b. $1,275,000.
c. $1,408,770.
d. $1,437,240.
3. D: 102. On December 31, 2018, Harris Co. leased a machine from Catt, Inc. for a
five-year period. Equal annual payments under the lease are $2,100,000 (including
$100,000 annual executory costs) and are due on December 31 of each year. The
first payment was made on December 31, 2018, and the second payment was
made on December 31, 2019. The five lease payments are discounted at 10% over
the lease term. The present value of minimum lease payments at the inception
of the lease and before the first annual payment was $8,340,000. The lease is
appropriately accounted for as a capital lease by Harris. In its December 31, 2019
balance sheet, Harris should report a lease liability of
a. $6,340,000.
b. $6,240,000.
c. $5,706,000.
d. $4,974,000.
4. A: 103. A lessee had a ten-year capital lease requiring equal annual payments.
The reduction of the lease liability in year 2 should equal
a. the current liability shown for the lease at the end of year 1.
b. the current liability shown for the lease at the end of year 2.
c. the reduction of the lease liability in year 1.
d. one-tenth of the original lease liability.
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Study online at https://quizlet.com/_4gp7ix
1. C: 100. Lease A does not contain a bargain purchase option, but the lease term
is equal to 90
percent of the estimated economic life of the leased property. Lease B does not
transfer ownership of the property to the lessee by the end of the lease term, but
the lease term is equal to 75 percent of the estimated economic life of the leased
property. How should the lessee classify these leases?
2. A: 101. On December 31, 2018, Burton, Inc. leased machinery with a fair value of
$1,575,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease
requiring annual payments of $300,000 beginning December 31, 2018. The lease
is appropriately accounted for by Burton as a capital lease. Burton's incremental
borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments
is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2018 balance sheet, Burton should report a lease liability of
a. $1,137,240.
b. $1,275,000.
c. $1,408,770.
d. $1,437,240.
3. D: 102. On December 31, 2018, Harris Co. leased a machine from Catt, Inc. for a
five-year period. Equal annual payments under the lease are $2,100,000 (including
$100,000 annual executory costs) and are due on December 31 of each year. The
first payment was made on December 31, 2018, and the second payment was
made on December 31, 2019. The five lease payments are discounted at 10% over
the lease term. The present value of minimum lease payments at the inception
of the lease and before the first annual payment was $8,340,000. The lease is
appropriately accounted for as a capital lease by Harris. In its December 31, 2019
balance sheet, Harris should report a lease liability of
a. $6,340,000.
b. $6,240,000.
c. $5,706,000.
d. $4,974,000.
4. A: 103. A lessee had a ten-year capital lease requiring equal annual payments.
The reduction of the lease liability in year 2 should equal
a. the current liability shown for the lease at the end of year 1.
b. the current liability shown for the lease at the end of year 2.
c. the reduction of the lease liability in year 1.
d. one-tenth of the original lease liability.
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