provide an explanation why is that correct answer you can use the same file

7. On 1/31/Y1, Clay Company leased a new machine from Saxe Corp. The following data relate to the lease transaction at its inception:

Lease term 10 years

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Annual rental payable at beginning of each lease year $50,000

Useful life of machine 15 years

Implicit interest rate 10%

Present value of an annuity of 1 in advance for 10 periods at 10% 6.76

Present value of annuity of 1 in arrears for 10 periods at 10% 6.15

Fair value of the machine $400,000

The lease has no renewal option, and the possession of the machine reverts to Saxe when the lease terminates. At the inception of the lease, Clay should record a lease liability of

  1. $400,000.
  2. $338,000.
  3. $307,500
  4. $0

8. Marnie Company enters into a two-year lease. The terms of the lease do not transfer ownership and do not contain a bargain purchase option. The lease is for 60% of the asset’s economic life and represents 80% of its fair value. The asset is not a specialized asset and does have alternative uses. How should Marnie classify and record the lease?

a. The lease is classified as an operating lease, and no lease liability is recorded at the inception because it does not meet finance lease criteria.

b. The lease should be classified as a short-term lease because it is for only two years.

c. The lease should be classified as an operating lease, and a lease liability should be recorded at the inception of the lease.

d. The lease should be classified as a finance lease, and a lease liability should be recorded at the inception of the lease.

9. Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a finance lease. The present value of the minimum lease payments at lease inception was $1,000,000. The executory costs to be paid by Bolton were $50,000, and the fair value of the equipment at lease inception was $900,000. What amount should Arena report as the lease liability at the lease’s inception?

a. $900,000

b. $950,000

c. $1,000,000

d. $1,050,000

10. Koby Co. entered into a finance lease with a vendor for equipment on January 2 for 7 years. The equipment has no guaranteed residual value. The lease required Koby to pay $500,000 annually on January 2, beginning with the current year. The present value of an annuity due for 7 years was 5.35 at the inception of the lease.

What amount should Koby capitalize as leased equipment?

  1. $500,000
  2. $825,000
  3. $2,675,000
  4. $3,500,000

11. On January 1, 20X4, Harrow Co. as lessee signed a 5-year noncancelable equipment lease with annual payments of $100,000 beginning December 31, 20X4. Harrow treated this transaction as a finance lease. The five lease payments have a present value of $379,000 at January 1, 20X4 based on interest of 10%.

What amount should Harrow report as interest expense for the year ending December 31, 20X4?

  1. $37,900
  2. $27,900
  3. $24,200
  4. $0

12. In a lease that is recorded as a sales-type lease by the lessor, interest revenue

  1. Should be recognized in full as revenue at the lease’s inception.
  2. Should be recognized over the period of the lease using the straight-line method.
  3. Should be recognized over the period of the lease using the effective interest method.
  4. Does not arise

13. On January 1, Year 1, Bear Company leased an asset to Cub Company and appropriately accounted for the lease as a direct financing lease. The asset has a fair value of $36,000 and a carrying amount of $30,000. The lease has an implicit rate of 6% and a third-party guaranteed residual value of $5,000. The lease term is three years, and the asset has a five-year useful life. Lease payments of $11,897 are due at the end of the year, and the present value factor of an ordinary annuity at 6% for three years is 2.67301. The present value of a single sum at 6% and three years is .83962. Assume a rate of 15.85% amortizes the net lease receivable to zero over the lease term.

What amount should Bear record as the amortization of deferred gross profit associated with the first lease payment made December 31, Year 1?

  1. $2,595
  2. $2,160
  3. $4,755
  4. $0; there is no deferred gross profit

14. The interest rate applied to the net lease receivable is

  1. The rate that amortizes the gross lease receivable to zero at the end of the lease term.
  2. the rate that amortizes the net lease receivable to zero at the end of the lease term.
  3. The implicit interest rate.
  4. The incremental borrowing rate.

15. In a sale-leaseback transaction, the seller-lessee has leased back the asset and has retained physical possession of the property. The gain on the sale should be recognized at the time of the sale-leaseback when the lease is classified as a(n)

Finance Lease Operating Lease

A. Yes Yes

B. No No

C. No Yes

D. Yes No

16. The following information pertains to a sale and leaseback of equipment by Mega Co. on December 31, Year 1:

Sales price $400,000

Carrying amount $300,000

Monthly lease payment $3,250

Present value of lease payments $36,900

Estimated remaining life 25 years

Lease term 1 year

Implicit rate 12%

What amount of gain on the sale should Mega report at December 31, Year 1?

  1. $0
  2. $36,900
  3. $39,000
  4. $100,000

17. Louie the lessee leased an asset for a three-year lease term. Louie appropriately accounted for the lease as a finance lease and recorded a right-of-use asset for $45,000. The asset has a useful life of four years. How much amortization expense should Louie record each year?

a.$15,000

b.$11,250

c. $0, for a finance lease, the lessor will record amortization expense for the right-of-use. asset

d. $0, Louie will record depreciation expense, not amortization expense.

18. When accounting for an initial direct cost, the lessee will

a. Calculate the present value of the initial direct cost using the present value factor of a single sum associated with the lease term and include this amount in the lease liability.

b. Include the initial direct cost at its cost in the calculation of the right-of-use asset.

c. Include the initial direct cost at its cost in the calculation of the lease liability.

d. Calculate the present value of the initial direct cost using the present value factor of a single sum associated with the lease term and include this amount in the right-of-use asset.

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