1.

A lessor leases property to a lessee. This contract meets the requirements for being
recorded as a capital lease. The lessor is trying to determine whether this lease
should be accounted for as a direct financing lease or a sales-type lease. Which of
the following statements is not true?
A The total amount of profit will be more if it is a sales-type lease than if it is a direct
financing lease.
B If the lessor is either a manufacturer or a dealer in this particular item, the lease is
recorded as a sales-type lease.
C In a direct financing lease, all profit is recognized as interest revenue over the life
of the lease.
D In a sales-type lease, a normal amount of profit is recognized at the time that the
contract begins.

2.

The Jones Company only buys and then leases assets. It is neither a manufacturer
nor a dealer of any items. On January 1, Year One, Jones buys equipment for $34,000
in cash. This asset is immediately leased for 8 years, its entire life. Annual payments
are $5,800 to be made each January 1 beginning on January 1, Year One. Assume
that the implicit interest rate profit built into the contract by Jones was 10 percent.
However, the lessee's incremental borrowing rate was only 8 percent per year. What
amount of income should Jones recognize for Year One?
A $2,256
B $2,820
C $3,400
D $4,060

3.

On December 31, Year One, the Master Company buys a truck for $42,000 and
leases it to another company for its entire six year life. This is to be properly reported
as a direct financing lease. The implicit rate is 10 percent per year and payments are
assumed to be $8,800 each with the first payment made immediately. On the
December 31, Year Two, balance sheet, what is reported by Master as the net
receivable balance?
A $27,720
B $28,600
C $31,400
D $36,520

4.

On January 1, Year One, Carter Company buys machinery for $23,000 and leases it
to Wilson for the entire five-year life of the asset for annual payments of $5,500 each.
The first payment is made immediately. The implicit interest rate built into the
contract is 10 percent per year. The contract is properly recorded as a direct
financing lease. What amount of interest revenue will Carter recognize for Year Two?
A $1,375
B $1,390
C $1,405
D $1,430

5.

Danville Corporation buys a truck for $52,000 and leases it to Viceroy for 8 years. At
the end of that time, Viceroy can buy the truck for $7,000 in cash. Which of the
following is not true?

A If this purchase option is viewed as a bargain, Danville should record the $7,000 as
a future cash flow in accounting for the lease even though it is not guaranteed.
B Unless the purchase option is viewed as a bargain, Danville cannot account for this
lease as a capital lease.
C The purchase option cannot be viewed as a bargain unless it is significantly below
the expected fair value of the truck on that date.
D If this purchase option is viewed as a bargain, Danvilles profit to be recognized in
the first year will be increased.
6.

The Wake Corporation buys assets based on the requirements of its clients which it
then leases to them. It never sells any of these items. The leases are always for the
entire life of the asset with title passing automatically to the lessee at that time.
Wake always determines its payments to earn an annual interest rate of 10 percent.
On January 1, Year One, one of these clients requested a particular type of machine
with a ten year life. It was bought for $67,600 by Wake and leased to this client for
annual payments of $10,000 each with the first payment made immediately. The
second payment will be made on January 1, Year Two. What is the net receivable that
Wake will report on its December 31, Year One balance sheet?
A $57,600
B $60,900
C $63,360
D $64,360

7.

On January 1, Year One, AnnaLee Company buys a warehouse for $800,000 and is in
the process of leasing it to Ziton Company for four out of its five year life. AnnaLee
normally has an implicit rate of 10 percent whereas Ziton has an incremental
borrowing rate of 8 percent. Assume the payment amounts have been computed
appropriately. For these computations assume that the present value of $1 in four
years at 8 percent annual interest is .72 and at 10 percent is .66. Assume that the
present value of an ordinary annuity of $1 for four years at 8 percent annual interest
is 3.27 and at 10 percent is 3.10. Assume that the present value of annuity due of $1
for four years at 8 percent annual interest is 3.55 and at 10 percent is 3.46. Payments
are set to be $210,000 per year with the payments to begin immediately. The lessee
has an option to buy the asset at the end of the lease for $70,000 which is viewed as
a bargain. It is a direct financing lease. What is the total increase in net income that
AnnaLee will report in Year One?
A $59,000
B $62,000
C $67,000
D $70,000

8.

On January 1, Year One, Company A agrees to lease a truck from Ford for five years,
the truck's entire life. This arrangement is viewed as a capital lease. Payments will be
exactly $10,000 per year with the first payment made immediately and the second
on January 1, Year Two and so on. A reasonable interest rate is 10 percent. The
present value of a single amount of $1 in five years at an annual rate of 10 percent is
.630. The present value of an annuity due of $1 for five years at an annual rate of 10
percent is 3.81. What liability is reported by Company A on its December 31, Year
One balance sheet?

A $28,100
B $30,910
C $31,740
D $40,000