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1. From the lessor's standpoint, all of the following statements are true regarding leasing except that (Points: 2)

        the lease may serve as a marketing tool and thereby increase sales

        if the residual value of the asset is not guaranteed, the lessor has transferred the risks of residual value decreases to the lessee

        for sales-type lease agreements, the lessor earns interest in addition to profit from the transfer of the asset

        the accounting procedures used by a lessor for a sales-type lease are similar to the accounting procedures used for a normal sale of merchandise under a perpetual inventory system

2. For a lease that contains a bargain purchase option, minimum lease payments include (Points: 2)

        any guarantee by the lessee of the residual value

        any payments on failure to renew or extend the lease

        executory costs

        minimum periodic rental payments required by the lease over the lease term

3. Which of the following criteria would not apply in determining if a lease is a capital lease if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased asset? (Points: 2)

        the lease is noncancelable

        the lease contains a bargain purchase option

        the lease transfers ownership of the property to the lessee by the end of the lease term

        the lease term is equal to 75% or more of the estimated economic life of the leased property

4. The lessee should classify a noncancelable long-term lease as a capital lease if (Points: 2)

        there is a purchase option at the end of the lease term

        the present value of the minimum lease payments is at least 75% of the fair value of the leased property

        the present value of the minimum lease payments is at least 90% of the fair market value of the leased property to the lessor

        the estimated residual value of the leased property at the termination of the lease is equal to 90% of the lessee's guaranteed residual value

5. On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2010. The lease qualifies as a capital lease. Victor's incremental borrowing rate was 9% and the lessor's implicit rate, known by Victor, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. The balance of the lease obligation on January 1, 2011, for financial reporting purposes after the lease payment would be (round answers to the nearest dollar) (Points: 2)

        $0

        $166,779

        $227,448

        $233,379

6. On January 1, 2010, Wally Company signed a four-year lease requiring annual payments of $45,000, with the first payment due on January 1, 2010. Wally's incremental borrowing rate was 6%. Actuarial information for 6% follows:

3 Periods 4 Periods 5 Periods

Present value of an annuity due of 1 @ 6% 2.83339 3.67301 4.46511

Present value of ordinary annuity of 1 @ 6% 2.67301 3.46511 4.21236

Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)? (Points: 2)

        $200,931

        $165,285

        $155,931

        $144,555

7. A direct financing lease differs from a sales-type lease in that (Points: 2)

        the direct financing lease does not have a dealer profit, although it may have a dealer loss

        the direct financing lease provisions cannot include a bargain purchase option

        the sales-type lease does not have unearned interest income at the inception of the lease

        the direct financing lease does not have a dealer profit or loss

8. Dillon Co., a lessor, signed a direct financing lease on January 1. The cost and fair value of the machine that was leased was $60,000. The implicit interest rate was 6%. The lease period was seven years, with the first payment due immediately. Actuarial information for 6% follows:

6 Years 7 Years 8 Years

Present value of ordinary annuity of $1 4.91732 5.58238 6.20979

What is the annual lease payment to be collected by Dillon? (Points: 2)

        $8,571.43

        $9,115.25

        $10,139.72

        $11,516.78

9. Which of the following facts would preclude a lessor from classifying a lease as a sales-type or direct financing lease? (Points: 2)

        The undiscounted sum of the minimum lease payments is 90% of the fair value of the leased property to the lessor.

        The collectability of the minimum lease payments is reasonably assured.

        The lease term is 75% of the estimated economic life of the leased property.

        No important uncertainties exist about unreimbursable costs yet to be incurred by the lessor.

10. Which of the following items should be included in the calculation of the lessor's gross receivable?

Periodic Lease

Rental Payments Executory Costs

Paid by Lessee Unguaranteed

Residual Value

(Points: 2)

        Yes                         Yes                         Yes

        Yes                         Yes                         No

        Yes                         No                          No

        Yes                         No                          Yes

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