Use the following information for questions 37 through 42. (Annuity tables on page 21-13.)

Liu Corporation enters into an agreement with Olsen Rentals Co. on January 1, 2004 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $543,244 are due on December 31 of each year.

(b) The fair value of the machine on January 1, 2004, is $1,400,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.

(c) Liu depreciates all machinery it owns on a straight-line basis.

(d) Liu's incremental borrowing rate is 10% per year. Liu does not have knowledge of the 8% implicit rate used by Olsen.

(e) Immediately after signing the lease, Olsen finds out that Liu Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.

37. What type of lease is this from Liu Corporation's viewpoint?

a. Operating lease

b. Capital lease

c. Sales-type lease

d. Direct financing lease

38. From the viewpoint of Olsen, what type of lease agreement exists?

a. Operating lease

b. Capital lease

c. Sales-type lease

d. Direct financing lease

39. If Olsens records this lease as a direct financing lease, what amount would be recorded as Lease Receivable at the inception of the lease?

a. $543,244.

b. $1,350,966.

c. $1,400,000.

d. $1,629,732.

40. If Liu accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2004?

a. Depreciation Expense

b. Rent Expense

c. Interest Expense

d. Depreciation Expense and Interest Expense

41. Which of the following lease-related revenue and expense items would be recorded by Olsen if the lease is accounted for as an operating lease?

a. Rental Revenue

b. Interest Income

c. Depreciation Expense

d. Rental Revenue and Depreciation Expense

42. If the present value of the future lease payments is $1,400,000 at January 1, 2004, what is the amount of the reduction in the lease liability for Liu Corp. in the second full year of the lease if Liu Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.)

a. $403,244.

b. $431,244.

c. $443,568.

d. $465,746.