1. One criterion for a capital lease is that the term of the lease must equal a minimum percentage of the leased property's estimated economic life at the inception of the lease. What is this minimum percentage?

a.75%

b.51%

c.80%

d.90%

2. On January 3, 20X4, Salas Company leased a piece of equipment that cost Salas $23,500, to Merlin’s Haberdashery over a 6-year period, which is equal to the useful life of the equipment. The lease calls for annual payments of $6,000, beginning on January 3, 20X4. The rate implicit in the lease, which is not known to the lessee, is 7%. The lessee’s incremental borrowing rate is 8%. The present value of an annuity in advance of $1 per period for 6 periods is:

5.100 at 7%

4.993 at 8%

How much will Salas recognize on its 20X4 income statement as gain on sale of equipment and as interest income?

a. Gain on sale of $7,100 and interest income of $2,142

b. Gain on sale of $6,458 and interest income of $2,397

c. Gain on sale of $6,458 and interest income of $1,917

d. Gain on sale of $7,100 and interest income of $1,722

3. Garrett Co. recorded goods in transit purchased f.o.b. shipping point at year-end as purchases. The good were excluded from ending inventory. What effect does this omission have on Garrett’s assets and net income at year-end?

a. Assets are not affected and net income is understated.

b. Assets are not affected and net income is overstated.

c. Assets are understated and net income is not affected.

d. Assets are understated and net income is understated.