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Intermediate Accounting, 2/e
Thomas Beechy, York University
Joan E. Conrod, Dalhousie University
OLC Content Author: Clifton Philpott, Kwantlen University College

Accounting for Leases by Lessors

Multiple Choice Quiz



1

Which of the following statements characterizes an operating lease?
(CGA FA3-Dec 99)
A)The lessor records amortization expense and lease revenue.
B)The lessee records amortization expense and lease liability.
C)The lessee records amortization expense and interest expense.
D)The lessor transfers title of the leased property to the lessee only for the duration of the lease term.
2

How are initial direct costs incurred by a lessor in negotiating a sales-type lease treated?
(CGA FA3-Mar 00)
A)They are expensed in the first period of the lease term.
B)They are deferred and expensed over the lease term on a straight-line basis.
C)They are debited to unearned interest revenue in the first period of the lease term.
D)They are deferred and expensed over the lease term using the effective interest method.
3

Which of the following statements characterizes a sales-type lease?
(CGA FA3-June 01)
A)The lessor recognizes only interest revenue over the lease term.
B)The lessor recognizes a dealer's profit and interest revenue, both over the lease term.
C)The lessor recognizes a dealer's profit at inception and interest revenue over the lease term.
D)The lessor recognizes a dealer's profit at inception and interest revenue over the asset life.
4

Which of the following statements characterizes lessor accounting for residual values?
(CGA FA3-June 01)
A)Guaranteed residual values and unguaranteed residual values are included in the gross receivable.
B)Guaranteed residual values and unguaranteed residual values are excluded in the gross receivable.
C)Guaranteed residual values are included in the gross receivable but unguaranteed residual values are excluded from the gross receivable.
D)Unguaranteed residual values are included in the gross receivable but guaranteed residual values are excluded from the gross receivable.
5

The excess of the fair value of lease property at the inception of the lease over its cost or carrying amount should be considered by the lessor as:
A)unearned income from a sales-type lease.
B)unearned income from a direct financing lease.
C)manufacturer's or dealer's profit from a sales-type lease.
D)manufacturer's or dealer's profit from a direct financing lease.
6

A lease is recorded as a sales-type lease by the lessor. The difference between the gross investment in the lease and the net receivable should be:
A)amortized over the period of lease as interest revenue by the interest method.
B)amortized over the period of lease as interest revenue by the straight-line method.
C)recognized in full as interest revenue at the lease's inception.
D)recognized in full as manufacturer's or dealer's profit at the lease's inception.
7

In a lease recorded as a sales-type lease by the lessor, interest revenue:
A)does not arise.
B)should be recognized over the life of the lease by the interest method.
C)should be recognized over the life of the lease by the straight-line method.
D)should be recognized in full as revenue at the leases inception.
8

On January 1, 2003, Mill Corporation leased a machine to Ott Corporation for a 5-year term at an annual rental of $50,000. The lease is an operating lease. At the inception of the lease, Mill received $100,000, covering the first year's rent of $50,000 and a security deposit of $50,000. This deposit will not be returned to Ott upon expiration of the lease but will instead be applied to payment of rent for the last year of the lease. Mill properly reported rental revenue of $100,000 in its 2003 income tax return. Mill's tax rate was 30%. In Mill's December 31, 2003, balance sheet, what portion of the $100,000 should be reported as a liability?
A)$50,000
B)$40,000
C)$35,000
D)$28,000
9

Beal, Inc., intends to lease a machine from Paul Corporation. Beal's incremental borrowing rate is 14%. The prime rate of interest is 8%. Paul's implicit rate in the lease is 10%, which is known to Beal. What interest rate will be used to calculate the minimum lease payments?
A)8%
B)10%
C)14%
D)12%
10

When a company sells property and then leases it back, any gain on the sale should usually be:
A)recognized in the current year.
B)recognized as a prior period adjustment.
C)recognized at the end of the lease.
D)deferred and recognized as income over the term of the lease.
11

In a lease that is recorded as a sales-type lease by the lessor, interest revenue
A)should be recognized in full as revenue at the lease's inception.
B)should be recognized over the period of the lease using the straight-line method.
C)should be recognized over the period of the lease using the effective interest method.
D)does not arise.
12

Conrod Co. manufactures equipment that is sold or leased. On December 31, 2002, Conrod leased equipment to Beechy for a five-year period ending December 31, 2007, at which date ownership of the leased asset will be transferred to Beechy. Equal payments under the lease are $66,000 (including $6,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2002. Collectibility of the remaining lease payments is reasonably assured, and Conrod has no material cost uncertainties. The normal sales price of the equipment is $231,000, and cost is $180,000. For the year ended December 31, 2002, what amount of income should Conrod realize from the lease transaction?
A)$51,000.
B)$66,000.
C)$69,000.
D)$99,000.
13

Lee sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported as:
A)operating income.
B)an extraordinary item, net of income tax.
C)a separate component of shareholders' equity.
D)a deferred gain.
14

On December 31, 2002, Rosen Corp. sold a machine to Carter and simultaneously leased it back for one year. Pertinent information at this date follows:

Sales price     $360,000
Carrying amount330,000
Present value of reasonable lease rentals 
     ($3,000 for 12 months @ 12%)34,000
Estimated remaining useful life12 years

In Rosen's December 31, 2002 balance sheet, the deferred profit from the sale of this machine should be:

A)$34,000.
B)$30,000.
C)$4,000.
D)$0.
15

Beresford Company leased equipment from Fisher Company on July 1, 2002, for an eight-year period expiring June 30, 2010. Equal annual payments under the lease are $100,000 and are due on July 1 of each year. The first payment was made on July 1, 2002. The rate of interest contemplated by Beresford and Fisher is 8%. The cash-selling price of the equipment is $620,625 and the cost of the equipment on Fisher's accounting records was $550,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Fisher, what is the amount of profit on the sale and the interest income that Fisher would record for the year ended December 31, 2002?
A)$0 and $0.
B)$0 and $20,825.
C)$70,625 and $20,825.
D)$70,625 and $24,825.




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