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Grading Summary These are the automatically computed results of your exam.

Grades for essay questions, and comments from your instructor, are in the "Details" section below. Question Type: Multiple Choice Essay Grade Details - All Questions 1. Question : Student Answer: Date Taken: Time Spent: Points Received: # Of Questions: 5 1 4/7/2013 58 min , 12 secs 34 / 40 (85%) # Correct: 4 N/A

(TCO D) With a capital lease, the cost of the asset to be recorded is equal to the present value of the fair value of asset or minimum lease payments, whichever is less. the lessors asset book carrying value. the present value of minimum lease payments. the present value of unguaranteed residual value and present value of minimum lease payments. See Chapter 21.
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Instructor Explanation: Points Received: Comments:

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Question : Student Answer:

(TCO D) Advantage(s) of leasing versus buying equipment is (are) 100% financing at fixed rates. off-balance-sheet financing. less costly financing. All of the above See Chapter 21.
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Instructor Explanation: Points Received: Comments:

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Question :

(TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a fouryear lease requiring equal annual payments of $180,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the assets life? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.5771 3.31213 10%, 4 periods 3.48685 3.16986

Student Answer:

$37,110 $47,695 $0 $51,510

Instructor Explanation: Points Received: Comments:

See Chapter 21. ((180000 * 3.5771) - 180000) * 0.08


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Question :

(TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry's Leasing Company with five equal annual payments of $240000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the $20000 residual value of the asset at the end of the lease term. Bentleys incremental borrowing rate is 10%, however it knows that Harrys implicit interest rate is 8%. What journal entry would Harry's Leasing Company make at January 2, 2013 assuming this is a directfinancing lease? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 0.68508 10%, 5 periods 4.16986 3.79079 0.62092 Lease Receivable $971,952 Equipment $971,952 Lease Receivable $922,208 Equipment $922,208 Lease Receivable $1,220,000 Equipment $1,220,000 Lease Receivable $958,250 Loss $261,750 Equipment $1,220,000 See Chapter 21. (240000 * 3.99271) + (20000 * 0.68508)
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Student Answer:

Instructor Explanation: Points Received: Comments:

5.

Question :

(TCO D) Lease A 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% of the estimated economic life of the leased property. Lease B does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. How should the lessee classify these leases? (Lease A) Capital lease (Lease B) Capital lease (Lease A) Operating lease (Lease B) Operating lease (Lease A) Operating lease (Lease B) Capital lease (Lease A) Capital lease (Lease B) Operating lease See Chapter 21.
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Student Answer:

Instructor Explanation: Points Received: Comments:

6.

Question :

(TCO D) Carl Leasing, Inc. agrees to lease medical equipment to Sally, Inc. on January 1, 2012. They agree on the following terms. 1) The normal selling price of the medical equipment is $410,000 and the cost of the asset to Carl Leasing, Inc. was $255,000. 2) Sally, Inc. will pay all maintenance, insurance, and tax costs directly and annual payments of $55,000 on January 1 each year. 3) The lease begins on January 1, 2012 and payments will be in equal annual

installments. 4) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life). 5) At the end of the lease, the medical equipment will revert to Carl Leasing, Inc. and have an unguaranteed residual value of $35,000. Their implicit interest rate is 10%. 6) Carl Leasing, Inc. incurred costs of $4,600 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable. Required: a) Determine what type of lease this would be for the lessee and calculate the initial obligation. b) Prepare Sally, Inc.'s amortization schedule for the lease terms. c) Prepare all the journal entries for Sally, Inc. for 2012. Assume a calendar year fiscal year.
Student Answer: a) It is the finance lease and initial obligation is to pay $55,000. b) Present Value of Minimum Lease Payment Year MLP Discounted Rate Present Value 1to 10 $55,000.00 6.14 $337,700.00 $337,700.00 Amortization schedule Year Liability MLP Finance Charge Principal amount of reduction 0 $337,700.00 - - - 1 $316,470.00 $55,000.00 $33,770.00 $21,230.00 2 $293,117.00 $55,000.00 $31,647.00 $23,353.00 3 $267,428.70 $55,000.00 $29,311.70 $25,688.30 4 $239,171.57 $55,000.00 $26,742.87 $28,257.13 5 $208,088.73 $55,000.00 $23,917.16 $31,082.84 6 $173,897.60 $55,000.00 $20,808.87 $34,191.13 7 $136,287.36 $55,000.00 $17,389.76 $37,610.24 8 $94,916.10 $55,000.00 $13,628.74 $41,371.26 9 $49,407.71 $55,000.00 $9,491.61 $45,508.39 10 -$651.52 $55,000.00 $4,940.77 $50,059.23 c) Journal Entries Particulars Amount Amount Assets under finance lease $337,700.00 Carl Leasing Inc. $337,700.00 Lease Rent $21,230.00 Finance Charge $33,770.00 Carl Leasing Inc. $55,000.00 Carl Leasing Inc. $55,000.00 Bank $55,000.00 Carl Leasing Inc. $21,230.00 Lease Rent $21,230.00

Instructor Explanation:

a) Lease is a capital lease because: (1) the lease term exceeds 75% of the assets economic life and (2) the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset. Initial Obligation Under Capital Leases: Minimum lease payments ($55,000) X PV of an annuity due for 10 periods at 10% (6.75902) $371,746 b) Lessees journal entries: Leased Equipment $371,746 Lease Liability $371,746 (To record the lease of computer equipment using capital lease method) Lease Liability $55,000 Cash $55,000 (To record the first rental payment) 31-Dec-12 Interest Expense $31,675 Interest Payable $31,675 (To record accrual of annual interest on lease obligation) Depreciation Expense $37,175 Accum DeprCapital Leases $37,175 (To record depreciation expense for first year)

Points Received: Comments:

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