The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course used to study lease accounting while preparing for the CPA examination. Determine the response that best completes the statements or questions.

1. A company leases the following asset:

• Fair value of $200,000.

• Useful life of 5 years with no salvage value.

• Lease term is 4 years.

• Annual lease payment is $30,000 and the lease rate is 11%.

• The company’s overall borrowing rate is 9.5%.

• The firm can purchase the equipment at the end of the lease period for $45,000. What type of lease is this?

a. Operating.

b. Capital.

c. Financing.

d. Long term.

2. On January 1, 2013, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, 2013, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 2013, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh’s December 31, 2013, balance sheet, the capital lease liability should be

a. $102,500

b. $111,500

c. $112,500

d. $290,000

3. Glade Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

a. $ 51,600

b. $ 75,000

c. $129,360

d. $139,450

4. Peg Co. leased equipment from Howe Corp. on July 1, 2013, for an eight-year period expiring June 30, 2021. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe’s accounting records is $2,800,000.

The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, 2013?

Profit on Sale . Interest Revenue

a. $ 45,000 . $146,000

b. $ 45,000 . $176,000

c. $720,000 . $146,000

d. $720,000 . $176,000

5. On January 2, 2013, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a capital lease for $240,000, which includes a $10,000 bargain purchase option. At the end of the lease, Nori expects to exercise the bargain purchase option. Nori estimates that the equipment’s fair value will be $20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 2013, what amount should Nori recognize as depreciation expense on the leased asset?

a. $27,500

b. $30,000

c. $48,000

d. $46,000

6. At the inception of a capital lease, the guaranteed residual value should be

a. Included as part of minimum lease payments at present value.

b. Included as part of minimum lease payments at future value.

c. Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

d. Excluded from minimum lease payments.

7. Neal Corp. entered into a nine-year capital lease on a warehouse on December 31, 2013. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2014, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal’s incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Neal report as capitalized lease liability at December 31, 2013?

a. $300,000

b. $312,000

c. $450,000

d. $468,000

8. On December 31, 2013, Bain Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows:

Sales price . $360,000

Carrying amount . 330,000

Present value of lease payments . 34,100

($3,000 for 12 months at 12%)

Estimated remaining useful life . 12 years

In Bain’s December 31, 2013, balance sheet, the deferred revenue from the sale of this machine should be

a. $ 0

b. $ 4,100

c. $34,100

d. $30,000

Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS in accounting for leases.

9. For companies that prepare their financial statements in accordance with both U.S. GAAP and IFRS, a lease is deemed to be a capital lease (usually called a finance lease under IFRS) if substantially all risks and rewards of ownership are transferred. In making this distinction, less judgment, more specificity is applied using

a. IFRS.

b. U.S. GAAP.

c. Either U.S. GAAP or IFRS.

d. Neither U.S. GAAP nor IFRS.

10. Blue Company is recording a capital lease (usually called a finance lease under IFRS) and is aware that the implicit interest rate used by the lessor to calculate lease payments is 8%. Blue’s incremental borrowing rate is 7%. Blue should record the leased asset and lease liability at the present value of the lease payments discounted at

a. 7% if using either U.S. GAAP or IFRS.

b. 7% if using IFRS.

c. 8% if using U.S. GAAP.

d. 8% if using IFRS.

11. When a sale-leaseback transaction occurs, if the leaseback is considered to be an operating lease, and the lease payments and sales price are at fair value, any gain on the sale

a. Is amortized over the lease term by a company using IFRS.

b. Is recognized immediately by a company using IFRS.

c. Is amortized over the lease term by a company using either U.S. GAAP or IFRS.

d. Is not recorded by a company using IFRS.