• On February 1, 2016, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $640,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

$578,015.

$640,000.

$576,000.

$512,000.

• Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2016. The manufacturing cost of the computers was $20 million.

This non-cancelable lease had the following terms:

?	Lease payments: $3,430,901 semiannually; first payment at January 1, 2016; remaining payments at June 30 and December 31 each year through June 30, 2020.
?	Lease term: 5 years (10 semi-annual payments).
?	No residual value; no bargain purchase option.
?	Economic life of equipment: 5 years.
?	Implicit interest rate and lessee's incremental borrowing rate: 9% semi-annually.
?	Fair value of the computers at January 1, 2016: $24 million.
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
What is the net book value of the lease liability in Lone Star's June 30, 2016, balance sheet? (Round your answer to the nearest dollar.)

$18,989,417.

$19,289,426.

$24,000,000.

None of these answer choices is correct.

• Crystal Corporation recorded a lease payment as follows:

Rent expense	3,500
Cash		3,500

Crystal must have a(n):

Leveraged lease.

Capital lease.

Operating lease.

Direct financing lease.

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

	Payment	Cash Payment	Effective Interest	Decrease in balance	Balance
					84,982
	1	13,000		13,000	71,982
	2	13,000	7,918	5,082	66,900
	3	13,000	7,359	5,641	61,259
	4	13,000	6,738	6,262	54,997
	5	13,000	6,050	6,950	48,047
	6	13,000	5,285	7,715	40,332
	7	13,000	4,436	8,564	31,768
	8	13,000	3,495	9,505	22,263
	9	13,000	?	?	?
	10	13,000	?	?	?
What would the lessee record as annual depreciation on the asset using the straight-line method? (Round your answer to the nearest dollar.)

$13,000.

$8,562.

$7,198.

$8,498.

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.
	Payment	Cash Payment	Effective Interest	Decrease in balance	Balance
					86,963
	1	12,000		12,000	74,963
	2	12,000	5,997	6,003	68,960
	3	12,000	5,517	6,483	62,476
	4	12,000	4,998	7,002	55,475
	5	12,000	4,438	7,562	47,913
	6	12,000	3,833	8,167	39,746
	7	12,000	3,180	8,820	30,925
	8	12,000	2,474	9,526	21,399
	9	12,000	?	?	?
	10	12,000	?	?	?
What is the outstanding balance after payment #9? (Round your answer to the nearest dollar.)

$10,288.

$11,111.

$6,000.

$21,399.

Top of FormOn January 1, 2016, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing lease. Calloway paid $280,000 for the machine and is leasing it to Zone for $30,000 per year, an amount that will return 12% to Calloway. The present value of the minimum lease payments is $280,000. The lease payments are due each January 1, beginning in 2016. What is the appropriate interest entry on December 31, 2016?

Interest receivable

30,000

Interest revenue

30,000

• XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $620,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation?

$0.

$62,000.

$125,185.

$124,000.

• ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $126,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $3,000 at the end of 10 years. Using the straight-line method, what would Best record as annual depreciation?

$12,900.

$12,300.

$12,600.

$24,600.

• N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2016. Lease payments of $28,000, which includes real estate taxes of $1,600, are due annually, beginning on December 31, 2017, and every December 31 thereafter. N Corp. does not know the interest rate implicit in the lease; N's incremental borrowing rate is 13%. The rounded present value of an ordinary annuity for nine years at 13% is 5. What amount should N report as capitalized lease liability at December 31, 2016?

$132,000.

$237,600.

$140,000.

$252,000.

• On December 31, 2016, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows:

Sales price	$765,000
Book value	690,000
Present value of lease rentals	84,413
($7,500 for 12 months at 12%)
Estimated remaining useful life	12 years

In B's December 31, 2016, balance sheet, the deferred revenue from the sale of this machine should be:

$675,000.

$90,700.

$15,700.

$0.

Bottom of Form

1. On February 1, 2016, Pearson Corporation became the lessee of equipment under a fiveyear, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $640,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least $578,015. $640,000. $576,000. $512,000. 2. Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2016. The manufacturing cost of the computers was $20 million. This non-cancelable lease had the following terms: Lease payments: $3,430,901 semiannually; first payment at January 1, 2016; remaining payments at June 30 and December 31 each year through June 30, 2020. Lease term: 5 years (10 semi-annual payments). No residual value; no bargain purchase option. Economic life of equipment: 5 years. Implicit interest rate and lessee's incremental borrowing rate: 9% semi-annually. Fair value of the computers at January 1, 2016: $24 million. Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. What is the net book value of the lease liability in Lone Star's June 30, 2016, balance sheet? (Round your answer to the nearest dollar.) $18,989,417. $19,289,426. $24,000,000. None of these answer choices is correct. 3. Crystal Corporation recorded a lease payment as follows: Rent expense Cash Crystal must have a(n): Leveraged lease. Capital lease. Operating lease. Direct financing lease. 3,500 3,500 4. Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Payment Cash Payment Effective Interest Decrease in balance Balance 84,982 1 13,000 13,000 71,982 2 13,000 7,918 5,082 66,900 3 13,000 7,359 5,641 61,259 4 13,000 6,738 6,262 54,997 5 13,000 6,050 6,950 48,047 6 13,000 5,285 7,715 40,332 7 13,000 4,436 8,564 31,768 8 13,000 3,495 9,505 22,263 9 13,000 ? ? ? 10 13,000 ? ? ? What would the lessee record as annual depreciation on the asset using the straight-line method? (Round your answer to the nearest dollar.) $13,000. $8,562. $7,198. $8,498. 5. Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Payment Cash Payment Effective Interest Decrease in balance Balance 86,963 1 12,000 12,000 74,963 2 12,000 5,997 6,003 68,960 3 12,000 5,517 6,483 62,476 4 12,000 4,998 7,002 55,475 5 12,000 4,438 7,562 47,913 6 12,000 3,833 8,167 39,746 7 12,000 3,180 8,820 30,925 8 12,000 2,474 9,526 21,399 9 12,000 ? ? ? 10 12,000 ? ? ? What is the outstanding balance after payment #9? (Round your answer to the nearest dollar.) $10,288. $11,111. $6,000. $21,399. 6. On January 1, 2016, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing lease. Calloway paid $280,000 for the machine and is leasing it to Zone for $30,000 per year, an amount that will return 12% to Calloway. The present value of the minimum lease payments is $280,000. The lease payments are due each January 1, beginning in 2016. What is the appropriate interest entry on December 31, 2016? Interest receivable Interest revenue Cash Interest receivable Interest receivable Interest revenue Cash Interest revenue 30,000 30,000 30,000 30,000 33,600 33,600 33,600 33,600 7. XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $620,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation? $0. $62,000. $125,185. $124,000. 8. ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $126,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $3,000 at the end of 10 years. Using the straight-line method, what would Best record as annual depreciation? $12,900. $12,300. $12,600. $24,600. 9. N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2016. Lease payments of $28,000, which includes real estate taxes of $1,600, are due annually, beginning on December 31, 2017, and every December 31 thereafter. N Corp. does not know the interest rate implicit in the lease; N's incremental borrowing rate is 13%. The rounded present value of an ordinary annuity for nine years at 13% is 5. What amount should N report as capitalized lease liability at December 31, 2016? $132,000. $237,600. $140,000. $252,000. 10. On December 31, 2016, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price $765,000 Book value 690,000 Present value of lease rentals 84,413 ($7,500 for 12 months at 12%) Estimated remaining useful life 12 years In B's December 31, 2016, balance sheet, the deferred revenue from the sale of this machine should be: $675,000. $90,700. $15,700. $0