1.

On January 1, 2008, CPA Corp. entered into a 10-year lease agreement with CMA, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. CPA knows that the lessor expects a 10 percent return on the lease. CPA has a 12 percent incremental borrowing rate. The equipment is expected to have an estimated useful life of 10 years. In addition, a third party has guaranteed to pay CMA a residual value of $5,000 at the end of the lease.

The present value of an ordinary annuity of $1 at	12% for 10 years is 5.6502
	10% for 10 years is 6.1446
The present value of $1 at	12% for 10 years is 0.3220
	10% for 10 years is 0.3855

On CPA's October 31, 2008, balance sheet, the principal amount of the lease obligation was

$63,374

$61,446

$58,112

None of the above

2.

A lease requires a payment at the beginning of each year for 12 years. The initial asset value is $80,000 with no residual value at the end of the lease. If the lessors implicit interest rate is 10 percent and the lessees incremental borrowing rate is 12 percent, the annual lease payment would be

		$6,666.
		$10,674
		$11,531
		$11,741

3.

Assume that on March 1, 2009, CPA Company issues, at 103 plus accrued interest, 10-year bonds with a face value of $100,000 and a face interest rate of 6 percent. Interest is paid semiannually on June 30 and December 31. The bond is dated January 1, 2009, and will be due on January 1, 2019. How much accrued interest will there be at the time the bond is issued?

		$500
		$833
		$1,000
		None of the above

4.

QUESTION 20

Consider the following: A company issued $10,000,000 in bonds on January 1, 2011. The terms are: 10 year with interest paid semiannually. Refer to the following schedule.

Payment Cash Effective Interest Decrease in Balance Outstanding Balance

11,487,747

1 400,000 344,632 55,368 11,432,379

2 400,000 342,971 57,029 11,375,350

3 400,000 341,261 58,739 11,316,611

What is the interest expense on the bonds in 2012?

		$800,000.
		$680,759.
		$342,961.
		None of the above

5.

CPA Company manufactures equipment that it sells or leases. On December 31, 2009 CPA leased equipment to CMA for six years. At the end of the lease, title transfers to CMA. The lease requires equal annual payments of $40,000, with the first payment due December 31, 2009. CMA could have purchased the equipment for $210,000. The equipment cost CPA $166,000 to manufacture. How much income should CPA report for 2009?

		$30,000
		$40,000
		$44,000
		None of the above

6.

Compute the effective interest rate on a 7 percent, $500,000 loan that requires a $50,000 compensating balance. The compensating balance will earn 2 percent

		7.56 percent
		7.00 percent
		5.33 percent
		5.00 percent

7.

On January 2, 2005, CPA Inc. signed a 10-year noncancelable lease for a heavy-duty drill press. The lease stipulated annual payments of $30,000 starting at the end of the first year, with title passing to CPA at the expiration of the lease. CPA treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no residual value. CPA uses straight-line depreciation for all of its fixed assets. Aggregate lease payments were determined to have a present value of $180,000, based on implicit interest of 10 percent.

On its 2005 income statement, what amount of interest expense should CPA report from this lease transaction?

		$0
		$12,000
		$15,000
		$18,000