WGU D105 OA #2

WGU D105 OA #2

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D080 P

70 terms JAD What is a major reason why a company may become involved in leasing to other companies?Tax incentives Which of the following best describes current practice in accounting for leases?All long-term leases are capitalized What single lease expense is recognized on the income statement?An operating lease In computing present value of the lease payments, what rate should the lessee use?Use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee Which of the following is an advantage of captive leasing companies over the other players in the leasing market?The have the point-of-sales advantage in finding leasing customers What is included in the present value for the lease receivable amount?Rental payments plus the present value of guaranteed and unguaranteed residual values Which of the following is a correct statement of on e of the classification tests?The lease term is equal to or more than 75% of the estimated economic life of the leased property A lessee had a ten-year finance lease requiring equal annual payments. What should the reduction of the lease lability in year 2 be equal to?The current liability shown for the lease at the end of year 1 What is the amount to be recorded as the cost of an asset under a finance lease is equal to?Present value of the lease payments

In computing amortization of a leased asset where there is no bargain purchase option, what should the lessee subtract?No residual value and depreciate over the term of the lease In order to be an operating lease, the lease must fail all five of the classification tests. Which of the following describes the lease term test?If the lease term is 75% or more of the economic life, it is a finance lease In an operating lease, what does the lessee record? Lease expense Hull Co bought equipment and immediately leased it to Riggs company on May 1, 2021. At that time, the collectibility of the lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bough the equipment from Hull for $5,600,000 instead of leasing it.Hull's accounting records showed a book value for the equipment on May 1, 2021, of $4,900,000. Hull's depreciation on the equipment in 2021 was $630,000.During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8 month period. Hull incurred maintenance and other related costs under the terms of lease of $112,000 in 2021.After the lease with Riggs expires, Hull will lease the equipment to another company for two years. What is Hull's income before taxes related to this lease for the year ended December 31, 2021?

$518,000

Correct. This is an operating lease because the lease does not pass any of the classification tests. (1) The ownership of the asset remains with Hull, (2) there is no purchase option, (3) the lease term is less than 75% of the economic life of the asset, (4) the total payments (and therefore the present value of the payments) of $1,260,000 is less than the fair value of the asset of $5,600,000, and (5) the asset is not specialized and is expected to have an alternate use after the end of Riggs' lease term. Therefore, the Hulls' revenue related to the lease with Riggs is the number of lease payments less any expenses related to the leased asset.

$1,260,000 - $112,000 - $630,000 = $518,000.

Which of the following would be included in the Lease Receivable account? I. Guaranteed residual value. II.Unguaranteed residual value. III. Executory costs IV.Rental payments.I, II, and IV A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?The sales price less the present value of the residual value.How should the Lease Liability account should be disclosed as?Current portions in current liabilities and the remainder in noncurrent liabilities Metcalf Company leases a machine from Vollmer Corp.under an agreement that meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of $170,000 for six years at 8% is $848,761. The present value of an annuity due of $170,000 for six years at 10% is $814,435.The present value of an annuity due of $145,000 for six years at 8% is $723,943. The present value of an annuity due of $145,000 for six years at 10% is $694,664. At which value should Metcalf record the leased asset?

$848,761

Correct. The lessor sets the terms of the lease and, therefore, the lessor's rate of 8% is used. Metcalf's lease payable will include amounts associated with maintenance, insurance, and taxes. Those amounts would be expenses in the period the payment is made. Therefore, Metcalf should report the leased asset on its balance sheet at $848,761.

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021, it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $175,820 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method.The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is Silver Point's book value of the leased asset at December 31, 2021?

$468,000

Correct. Because the lease term is equal to the expected economic life of the asset, this is a finance lease. Silver Point record the asset at the sales price of $780,000 less depreciation in 2021. 100% divided by 5 years is 20% per year or 40% using a double-declining balance method. Therefore, Silver Point's book

value is: [$780,000 - (780,000 x 40%)] = $468,000.

For a lessee with a finance lease containing a bargain purchase option, what is the lease asset depreciated over?The asset's remaining economic life What is an advantage of leasing?Leases offer protection against obsolescence In a finance lease, what does the lessee record? Amortization expense and interest expense Company A has agreed to lease a full body scanner from

Company B. The lease has the following information:

• The lease is for three years, requiring annual payments

at the beginning of the year for $6,352

• At the end of the lease, Company B may purchase the

scanner for $4,000, and the company feels certain it will exercise this right

• The scanner has a fair value oat the beginning of the

lease of $25,000; and estimated economic life of five years; and a guaranteed residual value of $7,800

• Present value of the scanner is $18,333

Which test does the lease pass in order to be classified as a finance lease?Purchase option A start-up company is trying to decide if it should purchase or lease cellular phones for its 2,500 new employees. Which decision should the company make?Lease, because leasing can pass the risk of residual value to the lessor Company A leases cars from Company B for their salespeople. The leases are for three years. Company A paid a commission to a third party for helping to negotiate the leases from Company B. How should Company A account for this commission?Include the commission in the amount for the right-of-use asset but not in the lease liability

Company A leases computers from Company B with annual payments of $6,469. The leases are for two years, and the computers have an economic life of three years.At the end of the lease, the computers are expected to have a residual value of $5,000. Company A has an option to purchase the computers for $2,000 at the end of the lease agreement, which it expects to do. The fair value of the lease is $15,000, and the present value of the lease is $12,689. The present value of the option to purchase the computers is $1,849. How should Company A account for the amortization of the computers due to the bargain purchase option?It should amortize $14,538 using the economic life of the computers Which two finance lease elements are a part of each lease payment?A reduction of the lease liability and the financing cost (interest expense) Company A agrees to lease racks to Company B for five years. The expected economic life of the racks are five years. At the end of the lease, Company B has the right to purchase the racks for $5,000, but the company is not certain it will exercise the right. Which test does the lease pass to be classified as a finance lease?Lease term A lessor leases a piece of equipment to a lessee, under lease terms that qualify as an operating lease. The present value of required rental payments is $280,000; and the present value of the estimated residual value, which is unguaranteed, is $30,000. The lessor incurred total costs of $160,000 to build the leased asset. Which amount of lease receivable, if any, should the lessor record?$0 A company wishes to avoid classifying a lease as a finance lease. Which criterion will prevent the company from reaching this goal?There is a bargain price option.A company is looking for additional guidance on which equipment to lease. The company is using a lessor that has knowledge about the parent's product that can be passed on to the company. Which lessor is being used by the lessee?Captive leasing companies