EX 3

1. If a lease contains a residual value guarantee, the lessee must:

A. add the guaranteed amount to the present value of the minimum lease payments.

B. add the present value of the guaranteed amount to the present value of the minimum lease payments.

C. include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease.

D. ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.

2.If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, these leases are treated as _____ leases.

A. operating

B. capital

C. sales-type

D. direct-financing

3.On January 1, 2014, Lessee Corporation entered into a ten-year lease. The lease terms required annual year-end payments of $160,000. The lease agreement does not contain either a bargain purchase option or a transfer of title. The fair value of the equipment at the inception of the lease was $1,100,000; estimated life of the leased assets was fourteen years. Lessee Corporations incremental borrowing rate was 10%; the implicit rate of interest, known to the lessee, was 12%. Applicable time value of money values are as follows:

Ten-year, 10% ordinary annuity 6.144

Ten-year, 12 % ordinary annuity 5.650

Ten-year, 10% annuity due 6.759

Ten-year, 12% annuity due 6.328

Lessee Corporation should initially capitalize the lease at what amount?

A. $0, the lease should not be capitalized

B. $983,040

C. $1,081,440

D. $904,000

4. Under IFRS, which of the following is an indicator of a situation (individually or in combination) that could lead to a lease being classified as a finance lease?

A. If the lessor can cancel the lease, the lessees losses associated with the cancellation are borne by the lessor.

B. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

C. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessor.

D. All of the choices are indicators.

5. Under IFRS, a lessee may classify some assets held under leases as investment property, which allows the lessee to:

A. avoid recording depreciation expense for the assets.

B. account for the assets using either historical cost or fair value.

C. use the higher of the implicit or the incremental borrowing rate when computing the present value of the minimum lease payments.

D. All of the choices are correct.

6.Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessors implicit lease rate, known to the lessee, is 10%.

Present value interest factors are:

10% 12%

PVIF $1 10 periods 0.38554 0.32197

PVIF Annuity 10 periods 6.14457 5.65022

The entry to record this lease on Peppers books is: (Round all calculations to the nearest whole dollar amount.)

A.

DR Leased equipmentCapital lease 144,475

CR Obligation under capital lease 144,475

B.

DR Leased equipmentCapital lease 157,469

CR Obligation under capital lease 157,469

C.

DR Leased equipmentCapital lease 157,469

DR Discount on lease obligation 92,531

CR Obligation under capital lease 250,000

D.

DR Leased equipmentCapital lease 167,469

DR Discount on lease obligation 82,531

CR Obligation under capital lease 250,000

7. A lessor mistakenly treated a direct financing lease as an operating lease. How does this mistake impact the following at the end of the

first year of the lease term?

A.

Rent/Lease Revenue Interest Revenue

Overstated Understated

B.

Rent/Lease Revenue Interest Revenue

Understated Understated

C.

Rent/Lease Revenue Interest Revenue

Overstated Overstated

D.

Rent/Lease Revenue Interest Revenue

Understated Overstated

8.Under IFRS:

A. disclosure of lessee future minimum lease payments for the periods within one year, within years two through five, and after five years are required.

B. lessees can classify some assets held under leases as investment property.

C. the two additional lessor criteria provided under U.S. GAAP for lease revenue recognition are absent.

D. All of the choices are correct.

9. Over the life of a lease, the amount charged to expense is:

A. greater for an operating lease.

B. greater for a capital lease.

C. the same for a capital or operating lease.

D. less for a capital lease.

10.The most straightforward method for making lessees balance sheet data comparable is to treat all leases as if they were _____ leases.

A. operating

B. capital

C. direct financing capital

D. sales-type capital

11. Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessors implicit lease rate, known to the lessee, is 10%.

Present value interest factors are:

10% 12%

PVIF $1 10 periods 0.38554 0.32197

PVIF Annuity 10 periods 6.14457 5.65022

How much straight-line depreciation expense will Pepper record for Year 1? (Round all calculations to the nearest whole dollar amount.)

A. $14,747

B. $15,362

C. $15,747

D. $17,500

12. Goff Industries has applied for a loan, and as the bank loan officer, youve been assigned to evaluate Goffs financial statements. Your evaluation reveals that Goff has no capital leases recorded on its financial statements while most other companies in its industry do have such leases. To effectively evaluate Goffs financial position and compare it to industry standards, youve decided to constructively capitalize Goffs operating leases. The following information is available from Goffs financial statements for the year ended December 31, 2015: (Round all intermediate calculations to the nearest whole dollar.)

Minimum operating lease payments:

2016 $1,000

2017 $900

2018 $820

2019 $760

2020 $700

2020 2024 $2,500

Assuming Goffs long-term debt rate is 10%, what amount would you constructively capitalize in order to effectively analyze Goffs financial position?

A. $ - 0 since the company has no capital leases

B. $6,680

C. $11,504

D. $3,223

13. If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease, the gain is recognized:

A. immediately as an ordinary gain.

B. immediately as an extraordinary gain.

C. over the life of the lease in proportion to the rental payment.

D. over the life of the lease using the same rate and life used to amortize the leased asset.

14. The lessor of a building with an operating lease will present on its balance sheet an asset equal to:

A. zero.

B. the present value of future lease receipts.

C. the depreciated historical cost of the asset.

D. the fair value of the leased asset.

15. Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessors implicit lease rate, known to the lessee, is 10%.

Present value interest factors are:

10% 12%

PVIF $1 10 periods 0.38554 0.32197

PVIF Annuity 10 periods 6.14457 5.65022

To value the lease asset, Pepper should use a discount rate of:

A. 10%.

B. 11%.

C. 12%.

D. prime rate

16. Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessors implicit lease rate, known to the lessee, is 10%.

Present value interest factors are:

10% 12%

PVIF $1 10 periods 0.38554 0.32197

PVIF Annuity 10 periods 6.14457 5.65022

Upon acquisition, the leased equipment will be valued on Peppers balance sheet at: (Round all calculations to the nearest whole dollar amount.)

A. $144,475.

B. $157,469.

C. $175,000.

D. $250,000.

17. A lease is legally a/an ___________ contract.

A. mutually performed

B. executed

C. executory

D. unilateral

18. GAAP defines lessors treatment of leases according to Type I and Type II characteristics. Type I characteristics are linked to:

A. the critical event criteria for expense recognition.

B. the critical event criteria for revenue recognition.

C. measurement of collectibility for revenue recognition.

D. measurement of historical cost.

19. Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessors implicit lease rate, known to the lessee, is 10%.

Present value interest factors are:

10% 12%

PVIF $1 10 periods 0.38554 0.32197

PVIF Annuity 10 periods 6.14457 5.65022

If the equipment is worth $7,500 at the end of the lease, Pepper will make which one of the following journal entries?

A.

DR Obligation under capital lease 7,500

CR Leased equipmentCapital lease 7,500

B.

DR Obligation under capital lease 12,500

CR Leased equipmentCapital lease 10,000

CR Cash 2,500

C.

DR Obligation under capital lease 10,000

DR Loss on residual value guarantee 2,500

CR Leased equipmentCapital lease 10,000

CR Cash 2,500

D.

No entry required

20. When a lessee has a capital lease, the amount shown for the asset and the amount shown for the related liability are equal:

A. only at the lease inception.

B. throughout the life of the lease.

C. only at the termination of the lease.

D. throughout the life of the lease, but only when there is an unguaranteed residual value.