WGU D105 OA #2 EXAM
COMPREHENSIVE QUESTIONS &
VERIFIED ANSWERS RATED 100%
CORRECT
What is a major reason why a company may become involved in leasing to other
companies? - Correct Answer ✔✔ Tax incentives
Which of the following best describes current practice in accounting for leases? -
Correct Answer ✔✔ All long-term leases are capitalized
What single lease expense is recognized on the income statement? - Correct Answer
✔✔ An operating lease
In computing present value of the lease payments, what rate should the lessee use? -
Correct Answer ✔✔ Use the implicit rate of the lessor, assuming that the implicit rate is
known to the lessee
Which of the following is an advantage of captive leasing companies over the other
players in the leasing market? - Correct Answer ✔✔ The have the point-of-sales
advantage in finding leasing customers
What is included in the present value for the lease receivable amount? - Correct Answer
✔✔ Rental payments plus the present value of guaranteed and unguaranteed residual
values
Which of the following is a correct statement of on e of the classification tests? - Correct
Answer ✔✔ The lease term is equal to or more than 75% of the estimated economic life
of the leased property
A lessee had a ten-year finance lease requiring equal annual payments. What should
the reduction of the lease lability in year 2 be equal to? - Correct Answer ✔✔ The
current liability shown for the lease at the end of year 1
What is the amount to be recorded as the cost of an asset under a finance lease is
equal to? - Correct Answer ✔✔ Present value of the lease payments
In computing amortization of a leased asset where there is no bargain purchase option,
what should the lessee subtract? - Correct Answer ✔✔ No residual value and
depreciate over the term of the lease
,In order to be an operating lease, the lease must fail all five of the classification tests.
Which of the following describes the lease term test? - Correct Answer ✔✔ If the lease
term is 75% or more of the economic life, it is a finance lease
In an operating lease, what does the lessee record? - Correct Answer ✔✔ Lease
expense
Hull Co bought equipment and immediately leased it to Riggs company on May 1, 2021.
At that time, the collectibility of the lease payments was not probable. The lease expires
on May 1, 2022. Riggs could have bough the equipment from Hull for $5,600,000
instead of leasing it. Hull's accounting records showed a book value for the equipment
on May 1, 2021, of $4,900,000. Hull's depreciation on the equipment in 2021 was
$630,000. During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8 month period.
Hull incurred maintenance and other related costs under the terms of lease of $112,000
in 2021. After the lease with Riggs expires, Hull will lease the equipment to another
company for two years. What is Hull's income before taxes related to this lease for the
year ended December 31, 2021? - Correct Answer ✔✔ $518,000
Correct. This is an operating lease because the lease does not pass any of the
classification tests. (1) The ownership of the asset remains with Hull, (2) there is no
purchase option, (3) the lease term is less than 75% of the economic life of the asset,
(4) the total payments (and therefore the present value of the payments) of $1,260,000
is less than the fair value of the asset of $5,600,000, and (5) the asset is not specialized
and is expected to have an alternate use after the end of Riggs' lease term. Therefore,
the Hulls' revenue related to the lease with Riggs is the number of lease payments less
any expenses related to the leased asset. $1,260,000 - $112,000 - $630,000 =
$518,000.
Which of the following would be included in the Lease Receivable account? I.
Guaranteed residual value. II. Unguaranteed residual value. III. Executory costs IV.
Rental payments. - Correct Answer ✔✔ I, II, and IV
A lessor with a sales-type lease involving an unguaranteed residual value at the end of
the lease term will report sales revenue in the period of inception of the lease at which
of the following amounts? - Correct Answer ✔✔ The sales price less the present value
of the residual value.
How should the Lease Liability account should be disclosed as? - Correct Answer ✔✔
Current portions in current liabilities and the remainder in noncurrent liabilities
Metcalf Company leases a machine from Vollmer Corp. under an agreement that meets
the criteria to be a finance lease for Metcalf. The six-year lease requires payment of
$170,000 at the beginning of each year, including $25,000 per year for maintenance,
insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's
implicit rate is 8% and is known by the lessee. The present value of an annuity due of
$170,000 for six years at 8% is $848,761. The present value of an annuity due of
, $170,000 for six years at 10% is $814,435. The present value of an annuity due of
$145,000 for six years at 8% is $723,943. The present value of an annuity due of
$145,000 for six years at 10% is $694,664. At which value should Metcalf record the
leased asset? - Correct Answer ✔✔ $848,761
Correct. The lessor sets the terms of the lease and, therefore, the lessor's rate of 8% is
used. Metcalf's lease payable will include amounts associated with maintenance,
insurance, and taxes. Those amounts would be expenses in the period the payment is
made. Therefore, Metcalf should report the leased asset on its balance sheet at
$848,761.
Haystack, Inc. manufactures machinery used in the mining industry. On January 2,
2021, it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease
calls for a 10% down payment and equal annual payments of $175,820 at the end of
each year. The equipment has an expected useful life of 5 years. Silver Point's
incremental borrowing rate is 10%, and it depreciates similar equipment using the
double-declining balance method. The selling price of the equipment is $780,000, and
the rate implicit in the lease is 8%, which is known to Silver Point Co. What is Silver
Point's book value of the leased asset at December 31, 2021? - Correct Answer ✔✔
$468,000
Correct. Because the lease term is equal to the expected economic life of the asset, this
is a finance lease. Silver Point record the asset at the sales price of $780,000 less
depreciation in 2021. 100% divided by 5 years is 20% per year or 40% using a double-
declining balance method. Therefore, Silver Point's book value is: [$780,000 - (780,000
x 40%)] = $468,000.
For a lessee with a finance lease containing a bargain purchase option, what is the
lease asset depreciated over? - Correct Answer ✔✔ The asset's remaining economic
life
What is an advantage of leasing? - Correct Answer ✔✔ Leases offer protection against
obsolescence
In a finance lease, what does the lessee record? - Correct Answer ✔✔ Amortization
expense and interest expense
Company A has agreed to lease a full body scanner from Company B. The lease has
the following information:
- The lease is for three years, requiring annual payments at the beginning of the year for
$6,352
- At the end of the lease, Company B may purchase the scanner for $4,000, and the
company feels certain it will exercise this right
- The scanner has a fair value oat the beginning of the lease of $25,000; and estimated
economic life of five years; and a guaranteed residual value of $7,800
- Present value of the scanner is $18,333
Which test does the lease pass in order to be classified as a finance lease? - Correct
Answer ✔✔ Purchase option
COMPREHENSIVE QUESTIONS &
VERIFIED ANSWERS RATED 100%
CORRECT
What is a major reason why a company may become involved in leasing to other
companies? - Correct Answer ✔✔ Tax incentives
Which of the following best describes current practice in accounting for leases? -
Correct Answer ✔✔ All long-term leases are capitalized
What single lease expense is recognized on the income statement? - Correct Answer
✔✔ An operating lease
In computing present value of the lease payments, what rate should the lessee use? -
Correct Answer ✔✔ Use the implicit rate of the lessor, assuming that the implicit rate is
known to the lessee
Which of the following is an advantage of captive leasing companies over the other
players in the leasing market? - Correct Answer ✔✔ The have the point-of-sales
advantage in finding leasing customers
What is included in the present value for the lease receivable amount? - Correct Answer
✔✔ Rental payments plus the present value of guaranteed and unguaranteed residual
values
Which of the following is a correct statement of on e of the classification tests? - Correct
Answer ✔✔ The lease term is equal to or more than 75% of the estimated economic life
of the leased property
A lessee had a ten-year finance lease requiring equal annual payments. What should
the reduction of the lease lability in year 2 be equal to? - Correct Answer ✔✔ The
current liability shown for the lease at the end of year 1
What is the amount to be recorded as the cost of an asset under a finance lease is
equal to? - Correct Answer ✔✔ Present value of the lease payments
In computing amortization of a leased asset where there is no bargain purchase option,
what should the lessee subtract? - Correct Answer ✔✔ No residual value and
depreciate over the term of the lease
,In order to be an operating lease, the lease must fail all five of the classification tests.
Which of the following describes the lease term test? - Correct Answer ✔✔ If the lease
term is 75% or more of the economic life, it is a finance lease
In an operating lease, what does the lessee record? - Correct Answer ✔✔ Lease
expense
Hull Co bought equipment and immediately leased it to Riggs company on May 1, 2021.
At that time, the collectibility of the lease payments was not probable. The lease expires
on May 1, 2022. Riggs could have bough the equipment from Hull for $5,600,000
instead of leasing it. Hull's accounting records showed a book value for the equipment
on May 1, 2021, of $4,900,000. Hull's depreciation on the equipment in 2021 was
$630,000. During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8 month period.
Hull incurred maintenance and other related costs under the terms of lease of $112,000
in 2021. After the lease with Riggs expires, Hull will lease the equipment to another
company for two years. What is Hull's income before taxes related to this lease for the
year ended December 31, 2021? - Correct Answer ✔✔ $518,000
Correct. This is an operating lease because the lease does not pass any of the
classification tests. (1) The ownership of the asset remains with Hull, (2) there is no
purchase option, (3) the lease term is less than 75% of the economic life of the asset,
(4) the total payments (and therefore the present value of the payments) of $1,260,000
is less than the fair value of the asset of $5,600,000, and (5) the asset is not specialized
and is expected to have an alternate use after the end of Riggs' lease term. Therefore,
the Hulls' revenue related to the lease with Riggs is the number of lease payments less
any expenses related to the leased asset. $1,260,000 - $112,000 - $630,000 =
$518,000.
Which of the following would be included in the Lease Receivable account? I.
Guaranteed residual value. II. Unguaranteed residual value. III. Executory costs IV.
Rental payments. - Correct Answer ✔✔ I, II, and IV
A lessor with a sales-type lease involving an unguaranteed residual value at the end of
the lease term will report sales revenue in the period of inception of the lease at which
of the following amounts? - Correct Answer ✔✔ The sales price less the present value
of the residual value.
How should the Lease Liability account should be disclosed as? - Correct Answer ✔✔
Current portions in current liabilities and the remainder in noncurrent liabilities
Metcalf Company leases a machine from Vollmer Corp. under an agreement that meets
the criteria to be a finance lease for Metcalf. The six-year lease requires payment of
$170,000 at the beginning of each year, including $25,000 per year for maintenance,
insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's
implicit rate is 8% and is known by the lessee. The present value of an annuity due of
$170,000 for six years at 8% is $848,761. The present value of an annuity due of
, $170,000 for six years at 10% is $814,435. The present value of an annuity due of
$145,000 for six years at 8% is $723,943. The present value of an annuity due of
$145,000 for six years at 10% is $694,664. At which value should Metcalf record the
leased asset? - Correct Answer ✔✔ $848,761
Correct. The lessor sets the terms of the lease and, therefore, the lessor's rate of 8% is
used. Metcalf's lease payable will include amounts associated with maintenance,
insurance, and taxes. Those amounts would be expenses in the period the payment is
made. Therefore, Metcalf should report the leased asset on its balance sheet at
$848,761.
Haystack, Inc. manufactures machinery used in the mining industry. On January 2,
2021, it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease
calls for a 10% down payment and equal annual payments of $175,820 at the end of
each year. The equipment has an expected useful life of 5 years. Silver Point's
incremental borrowing rate is 10%, and it depreciates similar equipment using the
double-declining balance method. The selling price of the equipment is $780,000, and
the rate implicit in the lease is 8%, which is known to Silver Point Co. What is Silver
Point's book value of the leased asset at December 31, 2021? - Correct Answer ✔✔
$468,000
Correct. Because the lease term is equal to the expected economic life of the asset, this
is a finance lease. Silver Point record the asset at the sales price of $780,000 less
depreciation in 2021. 100% divided by 5 years is 20% per year or 40% using a double-
declining balance method. Therefore, Silver Point's book value is: [$780,000 - (780,000
x 40%)] = $468,000.
For a lessee with a finance lease containing a bargain purchase option, what is the
lease asset depreciated over? - Correct Answer ✔✔ The asset's remaining economic
life
What is an advantage of leasing? - Correct Answer ✔✔ Leases offer protection against
obsolescence
In a finance lease, what does the lessee record? - Correct Answer ✔✔ Amortization
expense and interest expense
Company A has agreed to lease a full body scanner from Company B. The lease has
the following information:
- The lease is for three years, requiring annual payments at the beginning of the year for
$6,352
- At the end of the lease, Company B may purchase the scanner for $4,000, and the
company feels certain it will exercise this right
- The scanner has a fair value oat the beginning of the lease of $25,000; and estimated
economic life of five years; and a guaranteed residual value of $7,800
- Present value of the scanner is $18,333
Which test does the lease pass in order to be classified as a finance lease? - Correct
Answer ✔✔ Purchase option
