1. On January 1, 2011, Princess Corporation leased equipment to King Company. The lease term is 8 years. The first payment of $675,000 was made on January 1, 2011. The equipment cost Princess Corporation $3,600,000. The present value of the minimum lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2012 on this lease? A. $261,000. B. $325,350. C. $293,850. D. $328,500. 2. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Payment Cash Effective Decrease in Outstanding Interest Balance 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 4 400,000 What is the interest expense on the bonds in 2012? A. $800,000 B. $119,241 C. $680,759 D. $342,961 3. Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2011. The bonds sold for $739,816 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2011, the fair value of the bonds was $730,000. Pierce's earnings for the year will include a A. gain from change in the fair value of debt of $10,204. B. loss from change in the fair value of debt of $10,204. C. loss from change in the fair value of debt of $10,617. D. gain from change in the fair value of debt of $10,617. 4. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million. This non-cancelable lease had the following terms: * Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015. * Lease term: 5 years (10 semiannual payments) * No residual value; no bargain purchase option * Economic life of equipment: 5 years * Implicit interest rate and lessees incremental borrowing rate: 5% semiannually * Fair value of the computers at January 1, 2011: $20 million Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. What is the interest revenue that Technoid would report on this lease in its 2011 income statement? A. $2,466,754 B. $1,673,820 C. $0 D. $876,662 5. S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an) Return on Assets Debt/Equity Ratio a.increase increase b.decrease decrease c.increase decrease d.decrease increase A. Option b B. Option c C. Option d D. Option d 6. LPC calls the bonds at 103 immediately after the interest payment on 12/31/2012 and retires them. What gain or loss, if any, would LPC record on this date? A. No gain or loss B. $2,283 loss C. $6,000 loss D. $3,717 gain