Question On February 1, 2016, Pearson Corporation
Question
On February 1, 2016, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $640,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least
$578,015.
$640,000.
$576,000.
$512,000.
Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2016. The manufacturing cost of the computers was $20 million.
This non-cancelable lease had the following terms:
•
Lease payments: $3,430,901 semiannually; first payment at January 1, 2016; remaining payments at June 30 and December 31 each year through June 30, 2020.
•
Lease term: 5 years (10 semi-annual payments).
•
No residual value; no bargain purchase option.
•
Economic life of equipment: 5 years.
•
Implicit interest rate and lessee’s incremental borrowing rate: 9% semi-annually.
•
Fair value of the computers at January 1, 2016: $24 million.
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
What is the net book value of the lease liability in Lone Star’s June 30, 2016, balance sheet? (Round your answer to the nearest dollar.)
$18,989,417.
$19,289,426.
$24,000,000.
None of these answer choices is correct.
Crystal Corporation recorded a lease payment as follows:
Rent expense
3,500
Cash
3,500
Crystal must have a(n):
Leveraged lease.
Capital lease.
Operating lease.
Direct financing lease.
Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.
Payment
Cash
Payment
Effective
Interest
Decrease
in balance
Balance
84,982
1
13,000
13,000
71,982
2
13,000
7,918
5,082
66,900
3
13,000
7,359
5,641
61,259
4
13,000
6,738
6,262
54,997
5
13,000
6,050
6,950
48,047
6
13,000
5,285
7,715
40,332
7
13,000
4,436
8,564
31,768
8
13,000
3,495
9,505
22,263
9
13,000
?
?
?
10
13,000
?
?
?
What would the lessee record as annual depreciation on the asset using the straight-line method? (Round your answer to the nearest dollar.)
$13,000.
$8,562.
$7,198.
$8,498.
Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.
Payment
Cash
Payment
Effective
Interest
Decrease
in balance
Balance
86,963
1
12,000
12,000
74,963
2
12,000
5,997
6,003
68,960
3
12,000
5,517
6,483
62,476
4
12,000
4,998
7,002
55,475
5
12,000
4,438
7,562
47,913
6
12,000
3,833
8,167
39,746
7
12,000
3,180
8,820
30,925
8
12,000
2,474
9,526
21,399
9
12,000
?
?
?
10
12,000
?
?
?
What is the outstanding balance after payment #9? (Round your answer to the nearest dollar.)
$10,288.
$11,111.
$6,000.
$21,399.
Top of FormOn January 1, 2016, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing lease. Calloway paid $280,000 for the machine and is leasing it to Zone for $30,000 per year, an amount that will return 12% to Calloway. The present value of the minimum lease payments is $280,000. The lease payments are due each January 1, beginning in 2016. What is the appropriate interest entry on December 31, 2016?
Interest receivable
30,000
Interest revenue
30,000
XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $620,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation?
$0.
$62,000.
$125,185.
$124,000.
ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $126,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $3,000 at the end of 10 years. Using the straight-line method, what would Best record as annual depreciation?
$12,900.
$12,300.
$12,600.
$24,600.
N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2016. Lease payments of $28,000, which includes real estate taxes of $1,600, are due annually, beginning on December 31, 2017, and every December 31 thereafter. N Corp. does not know the interest rate implicit in the lease; N’s incremental borrowing rate is 13%. The rounded present value of an ordinary annuity for nine years at 13% is 5. What amount should N report as capitalized lease liability at December 31, 2016?
$132,000.
$237,600.
$140,000.
$252,000.
On December 31, 2016, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows:
Sales price
$765,000
Book value
690,000
Present value of lease rentals
84,413
($7,500 for 12 months at 12%)
Estimated remaining useful life
12 years
In B’s December 31, 2016, balance sheet, the deferred revenue from the sale of this machine should be:
$675,000.
$90,700.
$15,700.
$0.
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1.On February 1, 2016, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years.The fair value of the equipment was $640,000. The lease does not meet the definition ofa capital lease in terms of a bargain purchase option, transfer of title, or the lease term.However, Pearson must classify this as a capital lease if the present value of theminimum lease payments is at least$578,015.$640,000.$576,000.$512,000.2.Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Companyon January 1, 2016. The manufacturing cost of the computers was $20 million.This non-cancelable lease had the following terms:•Lease payments: $3,430,901 semiannually; first payment at January 1, 2016; remainingpayments at June 30 and December 31 each year through June 30, 2020.•Lease term: 5 years (10 semi-annual payments).•No residual value; no bargain purchase option.•Economic life of equipment: 5 years.•Implicit interest rate and lessee’s incremental borrowing rate: 9% semi-annually.•Fair value of the computers at January 1, 2016: $24 million.
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Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to beincurred.What is the net book value of the lease liability in Lone Star’sJune 30, 2016, balance sheet?(Round your answer to the nearest dollar.)$18,989,417.$19,289,426.$24,000,000.None of these answer choices is correct.3.Crystal Corporation recorded a lease payment as follows:Rent expense3,500Cash3,500Crystal must have a(n):Leveraged lease.Capital lease.Operating lease.Direct financing lease.
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