Leases
In a lease that is recorded as an operating lease by the lessee, the equal monthly rental payments should be
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a.
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allocated between interest expense and depreciation expense.
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b.
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allocated between a reduction in the liability for leased assets and interest expense.
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c.
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recorded as a reduction in the liability for leased assets.
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d.
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recorded as rental expense.
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Johnson Institute leased a new machine having an expected useful life of 12 years. The noncancelable lease term is 10 years, and Johnson may exercise a purchase option at the end of the noncancelable term. The machine should be capitalized by Johnson and depreciated over
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a.
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9 years.
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b.
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12 years.
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c.
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10 years.
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d.
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10 or 12 years at Johnson's option.
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The lessee's balance sheet liability for a capital lease would be periodically reduced by the
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a.
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minimum lease payment.
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b.
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minimum lease payment plus the amortization of the related asset.
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c.
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minimum lease payment less the amortization of the related asset.
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d.
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minimum lease payment less the portion of the minimum lease payment allocable to interest.
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A lease contains a bargain purchase option. In determining the lessee's capitalizable cost at the beginning of the lease term, the payment called for by the bargain purchase option would be
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a.
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subtracted at its present value.
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b.
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added at its exercise value.
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c.
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added at its present value.
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d.
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subtracted at its exercise price.
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Which of the following statements characterizes a sales-type lease?
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a.
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The lessor recognizes only interest revenue over the life of the asset.
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b.
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The lessor recognizes only interest revenue over the lease term.
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c.
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The lessor recognizes a dealer's profit at lease inception and interest revenue over the lease term.
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d.
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The lessor recognizes a dealer's profit at lease inception and interest revenue over the asset life.
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On January 1, Twix Company as lessee signed a ten-year noncancelable lease for a machine with annual payments of $60,000. The first payment was also made on January 1. Twix appropriately treated this transaction as a capital lease. The ten lease payments have a present value of $405,000 at January 1, based on implicit interest of 10 percent. For the first year, Twix should record interest expense of
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a.
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$0.
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b.
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$6,000.
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c.
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$34,500.
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d.
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$40,500.
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Allied Package Express Service properly capitalized at $93,598 a large truck it had leased on January 1, 2011. The truck has a 14-year useful life. Title to the truck passes to Allied at the end of the 12-year lease term. Allied depreciates other similar trucks on the straight-line method with no salvage value. The lease agreement calls for annual payments of $11,500 at the beginning of each year of the lease term. The interest rate implicit in the lease (which is known by the lessee) is 8%.
How much depreciation and interest expense should Allied record for 2012?
Depreciation Interest
Expense Expense
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a.
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$7,803 $6,568
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b.
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$6,686 $6,568
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c.
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$7,830 $6,173
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d.
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$6,686 $6,173
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