Acct 557 Quiz 4

ACCT 557 Quiz 4

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1. (TCO D) Capitalization of lease requires which of the following?

2. (TCO D) Advantage(s) of leasing versus buying equipment is (are)

3. (TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $425,000, 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 Pisa, 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 asset’s life?

PV Annuity Due PV Ordinary Annuity

8%, 4 periods 3.5771 3.31213

10%, 4 periods 3.48685 3.16986

4. (TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry's Leasing Company with five equal annual payments of $30,000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the $60,000 residual value of the asset at the end of the lease term. Bentley’s incremental borrowing rate is 10%; however, it knows that Harry’s implicit interest rate is 8%. What journal entry would Harry's Leasing Company make at January 2, 2013 assuming this is a direct–financing 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

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