Question 9. 9. (TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $180,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pirate, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the assets life? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.5771 3.31213 10%, 4 periods 3.48685 3.16986 (Points : 5)

$37,110 $47,695 $0 $51,510

Question 10. 10. (TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry's Leasing Company with five equal annual payments of $120,000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the $20,000 residual value of the asset at the end of the lease term. Bentleys incremental borrowing rate is 10%; however, the company knows that Harrys implicit interest rate is 8%. What journal entry would Harry's Leasing Company make at January 2, 2013, assuming this is a directfinancing lease? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 0.68058 10%, 5 periods 4.16986 3.79079 0.62092 (Points : 5)

Lease Receivable $479,125 Loss $140,875 Equipment $620,000 Lease Receivable $492,737 Equipment $492,737 Lease Receivable $620,000 Equipment $620,000 Lease Receivable $467,313 Equipment $467,313

Question 11. 11. (TCO D) Lease A does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. Lease B does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. How should the lessee classify these leases? (Points : 5)

(Lease A) Capital lease (Lease B) Capital lease (Lease A) Operating lease (Lease B) Operating lease (Lease A) Operating lease (Lease B) Capital lease (Lease A) Capital lease (Lease B) Operating lease